As China obtains more power, camouflage becomes less necessary
It’s time for Hong Kong to start planning for life after 2047
Hong Kong was supposed to live happily ever after 1997. It used to be called “a city living on borrowed time.” Now it is living on borrowed time again as the need to plan for the end of the Basic Law in 2047 looms large. Important recent events offer a glimpse of what is in store.
So far, despite the partially explained disappearance of five booksellers, not only has the rule of law continued to function in Hong Kong, but no US aircraft carriers have showed up in Victoria Harbour. It is business as usual. “Rendition with Chinese characteristics” has not led to significant international reaction beyond some press coverage.
Like all gambits, the arrests either initially appear as a reckless move or bold strategy by the Chinese government. Now that they have determined that Hong Kong’s government and business establishment will not speak out, take action or protest a major violation of the Basic Law it opens possibilities about how to shape Hong Kong’s economy and political system after 2047.
Whatever statute will replace the Basic Law in 2047, proposals and high certainty should be agreed and established around 2020 in order to provide continuity for the business sector, society and economy. Local banks need certainty on how they will issue or refinance mortgages before 2047. So far, after 2047, without any agreement in place, they intend to issue rolling one-year mortgages. I am not aware of any bank currently issuing mortgages whose terms extend beyond 2047.
“Rule of law” is often quoted as Hong Kong’s fixed fortification– its last line of usefulness to China as an inflated property market has driven out everything else. It is becoming a cliché as China has developed and carved out its own position in international markets. Foreign companies seek to enter an increasingly important domestic Chinese market and are willing to operate with Chinese laws.
China’s growing demand for more sophisticated financial services makes it eventually imperative to locate a foreign bank’s headquarters in Beijing or Shanghai and not Hong Kong.
Hong Kong’s rule of law is certainly important, but not absolutely essential for financial services. It is unlikely that China can fully reconcile its Communist Party-dominated legal system with a Western-style, independent judiciary. But, China’s vast banking market and the gradual opening of its capital account are attractive enough to compel Western banks to find a way to work within China’s shortcomings.
Hong Kong has a reliable judiciary, but this only means that banks will maintain a minor presence in Hong Kong in order to maintain a legal entity. China’s legal system is ill suited for litigating complex financial transactions, so this will probably require a large, dedicated, legal and compliance team based in Shanghai or Beijing.
Most bankers are reluctant to admit that if certain communications regarding a financial transaction with a mainland Chinese counterparty need to be kept confidential it cannot be transmitted over voice, video, messaging or email platforms. This delicate situation applies to many banking areas like private wealth management and corporate finance. Travelling is no substitute for the convenience of a local office.
China is exhibiting a level of confidence in its international affairs – the rapid internationalisation of the yuan, entry into the International Monetary Fund’s special drawing rights, establishment of the Asian Infrastructure Investment Bank – unprecedented in its history. It reduces Beijing’s dependence on Hong Kong’s flawed political system and intellectual shortcomings.
The bookseller incident places Hong Kong’s pro-Beijing supporters and the business establishment in a terribly compromised position. But, Beijing’s allies represent a small sacrifice in order consolidate power.
Hong Kong has crippled itself with almost 20 years of reckless pro-business governments. The business establishment can’t evolve beyond its own self-interested property and business cartels. Its grotesque ossification and inability to reform and adapt resulted in the Occupy protest and is evidenced in a political talent pool of leaders that is dwindling and unpopular.
The resulting cynicism threatens to destabilise Hong Kong. Rather than reform, Hong Kong ‘s establishment has thrown breadcrumbs at young people in the form of feel good conferences on how to be an entrepreneur and aimless investment funds. Complete economic and political integration into China may be its only salvation.
Power always reveals. As China obtains more power, camouflage becomes less necessary. The curtain begins to rise. The revealing begins. Hong Kong has no convictions for which its elite or citizens would be willing to stake their lives.
Peter Guy is a financial writer and former international banker