Jake's View

Hong Kong does best what China can't

The big yuan internationalisation drive would be bad news for this city if it came off - but don't worry, it won't be happening soon anyway

PUBLISHED : Thursday, 11 July, 2013, 12:00am
UPDATED : Monday, 27 June, 2016, 11:50am

As the leading offshore centre, we should take the initiative and work … to make the pie that is the offshore renminbi business bigger. What is good for the renminbi is good for Hong Kong.

Anita Fung, HSBC HK
Insight page, July 10

Pardon me for thrashing away at this one as often as I have done recently but the renminbi cheerleading chorus - "Go, Yuan, Go" - has become so loud that you would think there is nothing but cheerleaders on the field (which, in the game of yuan boosting, may just be the case).

First, however, that bit about what's good for the renminbi is good for Hong Kong. Sadly, the opposite is true. Our economy was built, and continues to prosper, by doing what the mainland cannot or will not do, right from the British theft of this place by armed robbery for the purpose of drug trafficking.

For instance, the big garment export boom that was the basis of our wealth in the 1970s and 1980s would never have come to be if that boom could have materialised in the mainland at the same time. When it did materialise in the mainland, the Hong Kong rag trade vanished.

Equally, the services export boom that replaced it could never have grown to be the mainstay of our economy if the structure of the mainland's economy were conducive to market-based financial industries and its legal system properly adapted to the rule of law. Shanghai would now be No1 again, instead of just the world's biggest wannabe.

So it may be uncharitable to wish that Beijing's ways remain inefficient forever, but it would certainly push us along just fine down here.

Not to worry that things will change soon, however. The problem with this big yuan internationalisation drive is that it is going down a one-way street already marked Cul-de-sac, Dead End at its beginning.

An international currency is not made by the fact that a few central banks are willing to hold some assets denominated in that currency as part of their national reserves. I'm sure you can find even some Bengal whoopees held that way.

It is made by corporations and individuals using that currency as a medium of exchange for business around the world even when it's not the national currency of any of the parties to that business. It's made when you say to the teller ahead of a trip to South America: "I think I'll take some US dollar cash, too."

But all that has happened in the mainland's drive for internationalisation is that over the past few years, importers have been able to settle some of their import bills in yuan.

They have been able to do it because their suppliers think it's a good speculative bet that Beijing will continue to force the yuan up against the US dollar and will also hold yuan interest rates at higher levels than US rates.

Very few mainland exporters, however, have customers who hold yuan, leave alone are willing to pay in yuan. The yuan that has moved out of the mainland in trade receipts comes back as speculative investment capital, not as payment for mainland exports. Let confidence in yuan strength wither, as eventually it must, and the game comes to a swift halt.

Most of all, while Beijing welcomes investment flows into the mainland, only connected individuals and corporations have the privilege of taking investment capital out. All others must cheat, and if they do it through Hong Kong, they risk a 10-year prison sentence for creating the appearance of money laundering.

It is absurd to talk of a country having an international currency when the large majority of its citizens are still prohibited from investing that currency internationally.

And there is little prospect of this changing any time soon. To let an ordinary labourer in Wuhan convert his savings unhindered into US dollars and buy into an offshore bond fund with the money is for Beijing to lose its control levers on the mainland's financial system. It will no longer be able to tell banks where to advance their money and at what rate. The money will just flee if depositors don't like what they get.

I think what's good for Hong Kong will stay good for Hong Kong a while yet.