Mon. May 23rd, 2022


People seem to be able to ignore very big crimes against each other, but woe to the individual who harms a small, cuddly animal. Hong Kong is excited after the city imposed a death sentence on thousands of hamsters, following three human cases of Covid-19 related to a pet store, where several of the rodents also tested positive.

Hong Kong’s draconian pursuit of Covid elimination, with three weeks of quarantine for returning residents, has left the city cut off from the rest of the world. In addition to suppressing democratic opposition, that isolation has led to real concerns about the city’s continued existence as a financial center.

But those who have such doubts about Hong Kong is incorrect. For difficult economic reasons, the future of Chinese territory, which maintains a degree of separation from the mainland under the principle of “one country, two systems”, is safer than any global competitor except for New York. This is because China has capital control.

China uses a series of quantity-based limits to keep its financial system fenced off from the rest of the world. Chinese citizens, for example, need a permit to exchange more than $ 50,000 a year in foreign currency. There is a huge pent-up appetite from both the Chinese mainland who want to diversify their savings to international markets, and foreign investors who want to buy assets in the world’s largest source of economic growth.

To the extent that any of these requirements can be met, it is through Hong Kong, which maintains a completely separate and fully convertible currency pegged to the US dollar. A series of so-called Connect schemes in the city enable foreigners to gain access to Chinese markets and Chinese investors to invest money abroad. With Chinese companies no longer welcome in US stock markets, the Hong Kong Stock Exchange is the natural place for them to seek international capital.

It is a phenomenal, structural source of financial business, with few parallels anywhere in the world. As the de facto capital of global finance and home to its reserve currency, New York has a similar structural power. But almost every other financial center has to survive on its merits. London is in some ways the reverse of Hong Kong: while the EU is out to move the UK’s capital as Europe’s financial center, Beijing officials are stepping more and more into Hong Kong’s path.

All of this could change if China abandons its capital controls and makes the renminbi fully convertible. But that day is still far away. The classic trilemma of international finance says you have to choose two from an independent monetary policy, a controlled exchange rate and the free movement of capital. You can not have all three.

Independent monetary policy is essential to run China’s economy. The choice is therefore a dilemma: leave controls and risk periods of disorderly capital flight, as began during the mini-collapse of the Shanghai stock market in 2015, or keep a tight grip on the exchange rate with controls in place. China is likely to slowly liberalize its capital account, to Hong Kong’s advantage. But relinquishing all control would go against every instinct of the Beijing government.

What happens if capital controls do disappear? Until it fully returns to Chinese control in 2047, Hong Kong will still have other benefits, such as low tax rates, critical mass and decades of legal expertise. Economic geography is remarkably sustainable and the 200-year legacy as a trading center will not die easily. Most cities that are financial centers today were financial centers a century ago. It takes a lot to destroy one.

None of this implies that Hong Kong should be as pleasant or lively as in the past. Without freedom, it is difficult to innovate. Banks can choose to park their dealers somewhere else and if senior management thinks there is legal risk, they will follow. In any undemocratic jurisdiction, there is the risk of a decline in outright gang members, if the rulers are corrupt or erode the rule of law. Security of contract and ownership is the foundation of capitalism. Its loss will be the death knell for any financial center.

For the foreseeable future, people who want to move capital to and from China are likely to find themselves in Hong Kong. The Covid-19 quarantines are oppressive, but when it finally ends, foreign bankers will find that China is still where all the money is. The Hong Kong government can graduate from hamsters to Golden Retriever puppies and it will not make much difference. Money flows. And China’s money will flow through Hong Kong.

robin.harding@ft.com



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