A bit less of the obsequious fawning would do no harm

PUBLISHED : Thursday, 28 June, 2012, 12:00am
UPDATED : Thursday, 28 June, 2012, 12:00am


Hu Jintao will touch down at Chek Lap Kok airport tomorrow to a choreographed orgy of obsequious fawning from Hong Kong officials backed by a chorus of servile whimpering from the city's business grandees.

The impression that the president's handlers are aiming for is of a benevolent emperor descending from the clouds to secure the economic future of an undeserving local citizenry by dispensing life-saving financial favours.

In an attempt to build expectations, Beijing yesterday trailed some of the goodies it has in store. According to Xinhua, the central government will introduce a suite of new measures to promote yuan trading in Hong Kong that will 'further enrich' the city's offshore market.

And lest anyone fails to appreciate this generosity, Beijing's offer of largesse comes backed with a hint of steel. On Tuesday, there was a steep sell-off in Macau casino shares after a local newspaper warned that Beijing could slap visa limits on visitors to the territory and cap the amount of cash that mainland gamblers were allowed to withdraw once they got there.

For observers in Hong Kong, the implied message is clear: the gifts Beijing gives, Beijing can take away again. So if you want to continue to bask in Mr Hu's favour, be on your best behaviour. Otherwise you may be consigned to the outer darkness.

Yet this carefully constructed image of a Hong Kong dependent on handouts from Beijing for its livelihood is completely misleading.

The mainland government is not permitting the development of an offshore yuan market in Hong Kong out of a charitable concern for the city's economic well-being. On the contrary, Beijing is acting solely from self interest. It desperately needs Hong Kong's financial markets if its policy of internationalising the yuan is to stand any chance of success.

Beijing is haunted by the spectre of September 2008, when a sudden shortage of US dollar liquidity brought world trade to a near-standstill, halting assembly lines in factories across China. To prevent a repeat, it wants to promote the yuan as a currency of choice for international trade settlement.

At the same time, mainland Chinese officials are deeply envious of the benefits they think accrue to the United States as the issuer of the world's premier reserve currency. Establishing the yuan as an accepted alternative, they believe, will greatly enhance China's international power and prestige.

Whether it will is debatable. Conventional wisdom holds that to ensure enough global liquidity, the issuer of a major reserve currency must run a sizeable current account deficit. Unfortunately, over time a persistent deficit will tend to weaken the issuer's economy and undermine faith in its currency as a reserve of value.

The conventional wisdom may well be wrong. A current account deficit may not be essential. But if a would-be reserve currency issuer doesn't run one, it certainly needs a highly sophisticated financial centre to recycle large quantities of capital into international markets in order to provide the necessary liquidity, especially if, like the mainland, it still operates strict controls on the free flow of capital across its borders.

That's where Hong Kong comes in. Despite plans to establish Shanghai as an international financial centre, the mainland city simply isn't up to the job and won't be for many years.

To accept a currency for international trade and investment, let alone as a denomination for their official reserves, overseas holders need to have solid confidence in the institutional and regulatory quality of the market they are relying on.

According to the World Bank's Doing Business report, Hong Kong ranks in first place globally for its legal protection of borrowers' and lenders' rights, and in third place for the strength of its investor protection. Mainland China comes in 60th and 77th place respectively, alongside Zimbabwe and Bosnia.

Similarly, the World Economic Forum ranks Hong Kong among the top 10 markets globally both for the soundness of its banks and the breadth of financial services it offers. In contrast, it puts mainland China only in 64th and 60th place respectively, alongside Benin and tiny Brunei.

And, almost as importantly, Hong Kong is placed fourth for the affordability of its financial services; mainland China 41st.

In short, the rest of the world has no faith in the quality of either the mainland's regulatory regime or its financial institutions.

That means without Hong Kong's top-notch financial centre as an intermediary, Beijing doesn't have a prayer of persuading anyone else to use the yuan as a trade, investment or reserve currency at any point in the foreseeable future.

So when Mr Hu touches down here tomorrow, Hong Kong's officials and financiers need not act like supplicants, putting on quite such a nauseating display of servility. It's not only undignified, it's unnecessary.