Hong Kong – China’s International Financial Services Centre?

Many years ago, prior to the handover from Britain to China in 1997, I lived in Hong Kong and worked in the financial services sector. A common topic of conversation involved speculation about Hong Kong’s role in the future. Would Hong Kong continue in its traditional long term role as the gateway of business and investment into mainland China? Would China respect and preserve Hong Kong’s freedoms, laws and practices? Would Hong Kong continue to prosper and grow?

Or would Hong Kong become irrelevant once China was able to build its own mechanisms and markets to attract international capital and, more importantly, to provide confidence to foreign investors and businesses?

Twenty years later, this question continues to be asked, and with the added concern about Hong Kong’s political, economic and social stability which is severely tested every time the locals accuse China of meddling in their local affairs. The “One Country Two Systems” concept, enshrined in the Basic Law of Hong Kong (which continues to follow the English Rule of Law) was guaranteed by China to apply for at least 50 years after 1997, and so any sign of influence by Chinese politicians and bureaucrats in the Hong Kong political process is greeted with outrage and large scale protests.

So, what does this all mean for the future of Hong Kong and can it continue to be “China’s International Financial Services Centre”?

On the plus side….

Hong Kong continues to be regarded by foreign companies and investors as the gateway for investment in the mainland, and as a world class financial centre in its own right. A low-tax haven, modern metropolis and fusion of east and west, Hong Kong has flourished as a financial services centre and banking hub for international corporations and wealthy individuals. Hong Kong now has one of the highest concentrations of banking institutions in the world, with 71 of the world’s largest banks managing their Greater China operations from Hong Kong, and is a gateway to over 3 million high net worth individuals in the Asia Pacific, with wealth totalling approximately US$10 trillion dollars, significantly more than their equivalent European counterparts.

Hong Kong has been officially anointed by the Chinese Government as “China’s international financial services centre” and plays an important role in managing the internationalisation of the RMB, one of the world’s most significant “mega-trends”. To prove the point, Hong Kong hosts the largest pool of RMB liquidity outside the mainland, with offshore RMB deposits of over RMB 1 trillion, and has become the global hub for RMB trade settlement, financing and asset management, offering a wide range of RMB products and services to meet the needs of businesses, financial institutions, and investors.

Hong Kong’s economic and trade relationship with China has become even closer as it has pinned its faith in China’s ‘One Belt One Road’ Initiative. Using its strategic position between China and the rest of South East Asia, Hong Kong plans to become the facilitator of capital, services and people traveling along the Belt and Road. Utilising its strengths in financial and professional services, Hong Kong has promoted itself as the foreign service provider to countries looking to tap into the opportunities and direct investment in and out of China.

Hong Kong’s competitive advantage continues to stand out in five key areas: its people, business environment, market access, infrastructure and cost competitiveness. The foundations of such a business environment are established in its freedom, English common law system, robust regulatory regime, a simple and transparent taxation system and a time zone that links American and European markets with the Asia Pacific region.

I still have many friends working in and out of Hong Kong, in the financial services sector and also in other industries as well, both expatriates and locals. Most are upbeat about Hong Kong’s future and some even some expatriates plan to retire there (an idea that would have been laughed at when I lived there!). Property prices, always a barometer of local confidence, are stable and at historically high levels, and the business community prospers from strong economic growth in mainland China which keeps them all busy and fully occupied. The feeling on the ground within the business community is buoyant and prosperous, as it always has been!

On the minus side….

From a social and political point of view, Hong Kong is at a crossroads, a position that surely can’t be tolerated or sustained for another 30 years when, in theory, the time for “one country two systems” runs out and China can fully take over.

When the Joint Declaration for Hong Kong was negotiated and signed in 1983, a ground-breaking diplomatic achievement by all involved, including Deng Xiaoping and Margaret Thatcher (and my father and step-mother who worked on many of the details and facilitated some of the relationships) China was a poor, rural and divided country which was only just emerging from the cultural revolution following the death of Chairman Mao in 1976. Hong Kong was a ‘beacon of gold’ in a ‘land of grey’, a place where many had fled from communist rule in the 1940s and 1950s with no intention of returning, and there was a genuine fear of “the red army across the border” and the prospects of communist rule in Hong Kong. The masterstroke by Deng Xiaoping and his advisers to propose the “one country two systems” concept, and placate all fears by guaranteeing the preservation of Hong Kong’s rights and freedoms for at least 50 years after 1997, settled the markets and allowed everyone to get on doing what they do best ie to make money and keep their heads down! At the time (before the internet, CNN and the 24 hour news cycle) 50 years seemed like an eternity!

Everything went well until June 1989, and the “Tiananmen Square incident” in Beijing, which hit Hong Kong like a thunderbolt and jolted everyone from their slumber, sparked the democratic movement (1 million people took to the streets of Hong Kong the next day in an unprecedented show of emotion, anger and fear) and brought into sharp focus, played out on their TV screens with the graphic scenes from Beijing, the potential reality of Chinese rule in Hong Kong. I lived through the ‘week of mourning’ in Hong Kong that followed these events, a time when the stockmarket was closed and everyone walked around in a trance, not wanting to believe what had actually happened, and it was obvious to all that any ‘rose-tinted’ hopes and optimism about Hong Kong were well and truly dashed on that sad day, 4th June 1989.

The 8 year period that followed (1989 – 1997) was a frenetic and uncomfortable time for Hong Kong. The new UK Prime Minister, John Major, who succeeded Margaret Thatcher in 1990 appointed his friend and Conservative Party Chairman, Chris Patten (who lost his seat in Bath at the otherwise successful election of 1992) to become the last Governor of Hong Kong with a mandate to introduce a “Westminster style of Democracy” for Hong Kong in the last 5 years of British Rule.

Chris Patten, a highly intelligent man, skilful politician and Oxford scholar of modern history was faced with an unprecedented dilemma as the last Governor of Hong Kong. Rather than preparing a British colony for ‘independence’, as had been done many times before, he was effectively responsible for handing it over to a communist country and authoritarian state from which most of its population had actively fled. With the help of close advisers in Hong Kong, and balancing the demands of politicians in London and British diplomats in the Foreign Office in Beijing, he attempted to engineer a solution which would allow the British to leave a legacy of democracy and self-determination for the people of Hong Kong. Bearing in mind that Hong Kong had been in British hands for nearly 99 years, it’s a shame in hindsight that this hadn’t been attempted earlier!

Most of the new democratic measures, introduced in haste during those last 5 years of British rule in Hong Kong, were immediately overturned after the British flag went down on 30th June 1997. What remains is a diluted form of democracy which falls between the two stools of a ‘benevolent dictatorship’ (as Hong Kong was under British rule) and what we know in the west as ‘full democracy’, and nobody seems totally happy with it!

Only the most optimistic “Sinophile” could have predicted how China would transform itself over the next 20 years. Much of this is documented in past blogs and need not be repeated here. Suffice to say that despite its continuing progress, strength and prosperity, Hong Kong is no longer the “beacon of gold” it was in 1983, and other Chinese cities (notably Shanghai, Beijing and Guangzhou but also many others) are now just as alluring and attractive to foreign investors, business leaders and entrepreneurs.  At the same time, local Governments in China are encouraging, if not furiously competing with each other to attract, foreign companies and investors to go direct, rather than pass through the traditional gateway of Hong Kong, by offering financial rewards, free trade zones, and other incentives to pave the way. Despite assurances from Beijing that Hong Kong remains as “China’s International Financial Centre” many wonder whether this is an empty promise bearing in mind the many efforts being made to bypass it.

As if this wasn’t enough of a problem, Hong Kong’s democratic movement gets louder in its criticism of China for meddling in its internal affairs and attempts to influence the political process, and there are more protests (including the well publicised “umbrella movement” in October 2014 which brought Hong Kong to a standstill for over a week) and media calls for Hong Kong to retain “a high degree of autonomy” as was promised under the Joint Declaration of 1983.

As I write this blog in December 2016, it is hard to imagine that the democratic rumblings in Hong Kong can continue unabated for another 30 years! The stakes are far too high. On the one hand, Hong Kong depends on mainland Chinese business, investment, tourism and collaboration to continue to prosper economically and this will no doubt motivate the business community (which has some influence in the local political process) to maintain a pro China stance and muffle, as best they can, some of the activists, mainly students, politicians and some academics, whose activities cause embarrassment and disruption. On the other hand, China must be careful to ensure that any meddling in Hong Kong (eg their insistence that Beijing should review and approve candidates for the position of Chief Executive of the territory) does not contravene the spirit, if not the wording, of the Joint Declaration which was registered by the PRC and UK governments at the United Nations on 12 June 1985 and would raise major concerns and outrage, in the media and amongst foreign Governments, if China was seen to be reneging on its international commitments.

In conclusion….

It is very hard to predict how all this will play out. At the time of writing, and having recently visited Hong Kong during a spate of democratic protests following the recent local elections, I find myself hoping for the best and fearing the worst!

In my personal opinion, Hong Kong needs to find a way to operate peacefully alongside China so as to preserve its economy and way of life. This requires a strong and respected local Government to lead the way, a level of tolerance and diplomacy amongst all Hong Kong people, particularly the politicians, to accept and acknowledge that China is the sovereign power, and a willingness to make concessions that are not strictly necessary under the terms of the Joint Declaration. Most of these requirements appear to be totally absent at the moment.

At the same time, as China becomes more confident in its emerging role as a global power, and its own political model evolves, as it may one day, towards a more liberal, open and possibly even democratic system, it may be possible for Hong Kong to become a testing ground for Beijing to “cross the river by feeling the stones” and explore one or more democratic models which could one day be adopted on the mainland. I appreciate that this might seem a somewhat distant thought at the moment!

Meanwhile Hong Kong can’t afford to become an unruly, subversive and insurgent enclave operating under its own rules on the southern tip of China. Nobody will win if this happens. Hong Kong has always, and will continue to, prosper if it works with China to promote its traditional role as a gateway to China, an international financial services centre, a place where ‘east meets west’, and a great place to live.  I sincerely hope it will find a way of doing this.