Don’t abolish Hong Kong as a financial center for now
Humans seem to be able to ignore many major crimes against each other, but woe to the individual who inflicts harm on a cute little animal. Hong Kong was plunged into turmoil after the city sentenced thousands of hamsters to death following three human cases of Covid-19 linked to a pet store, several of which also tested positive for rodents.
Harsh pursuit of Hong Kong Covid elimination, a three-week quarantine for returning residents, isolating the city from the rest of the world. Aside from the crackdown on the democratic opposition, this isolation has led to real concerns about the city’s survival as a financial hub.
But those who raise such doubts Hongkong it’s wrong. For hard economic reasons, the future of Chinese territory, which is at a distance from the mainland under the “one country, two systems” principle, is more secure than that of any global competitor except New York. That’s because China has capital controls.
China uses a series of volume-based restrictions to insulate its financial system from the rest of the world. For example, Chinese nationals need a license to exchange more than $50,000 per year into foreign currency. There is a huge pent-up appetite for mainland Chinese looking to diversify their savings into international markets, as well as foreign investors looking to buy assets that are the world’s biggest source of economic growth.
Meeting either of these requirements would have to go through Hong Kong, which retains a fully independent and fully convertible currency pegged to the U.S. dollar. A series of so-called connectivity schemes in the city allow foreigners to enter the Chinese market and Chinese investors can put their money abroad. With Chinese companies falling out of favor in the U.S. stock market, the Hong Kong exchange is a natural place for them to seek international capital.
It is an extraordinary structural source of financial operations, with few parallels anywhere in the world. As the de facto capital of global finance and home to the reserve currency, New York possesses similar structural power. But almost every other financial center must survive on its merits. London is in some ways the opposite of Hong Kong: While the EU intends to replace the British capital as Europe’s financial hub, officials in Beijing are sending more business to Hong Kong.
That could all change if China drops capital controls and makes the yuan fully convertible. But that day still has a long way to go. The classic trilemma in international finance is that you have to choose between independent monetary policy, controlled exchange rates, and free flow of capital. You can’t have all three at the same time.
Independent monetary policy is essential for managing an economy the size of China. The choice, therefore, is a dilemma: relinquish control and risk periods of disorderly capital flight, as began to happen during the Shanghai stock market mini-crash in 2015, or strictly control the exchange rate with controls in place. China may slowly open its capital account, which will benefit Hong Kong. But giving up all control would go against all the instincts of Beijing’s government.
What would happen if capital controls did happen? Before fully returning to Chinese control in 2047, Hong Kong will still have other advantages, such as low tax rates, critical mass and decades of legal expertise. The economic geography is very enduring, and its 200-year legacy as a trading center will not easily fade away. Most cities that are financial centers today were financial centers a century ago. It takes a lot to destroy a person.
That doesn’t mean Hong Kong has to be as pleasant or vibrant as it used to be. Without freedom, it is difficult to innovate. Banks will likely choose to park traders elsewhere, and if senior management believes there is a legal risk, they will follow up. In any undemocratic jurisdiction, if those in power corrupt or erode the rule of law, there is a risk of downright gangsterism. Certainty of contract and ownership is the foundation of capitalism. Its loss would be the death knell for any financial center.
For the foreseeable future, however, people looking to move money in and out of China are likely to find themselves doing so in Hong Kong. Covid-19 quarantines are oppressive, but when they are finally over, foreign bankers will find that China is still where all their money is. The Hong Kong government can graduate from a hamster to a golden retriever, and it won’t make much of a difference. liquidity. And Chinese money will flow through Hong Kong.