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One Belt, One Road

by SCMP

One belt, One Road

Merge Hong Kong and Shenzhen in 2047 for a stronger economy

Keith Hui says Beijing should consider such a merger, as it would provide the financial support needed for its One Belt, One Road vision amid a slower pace of renminbi internationalisation

PUBLISHED : Sunday, 31 July, 2016, 3:31pm
UPDATED : Sunday, 31 July, 2016, 5:14pm

Come 2047, what will happen to Hong Kong? In recent years, talk about the city’s post-2047 future has intensified as its relations with the mainland grow strained over a number of issues. Most agree it is time for debate on what will happen to “one country, two systems” after 50 years.

From an economic point of view, I suggest the Beijing government consider merging Hong Kong and Shenzhen.

It is Beijing’s ideal plan to operate two offshore renminbi clearing centres – London and Hong Kong – with a view to turning the renminbi into a fully convertible currency, which involves liberalising China’s capital account. However, in the wake of two recent events, China may have to postpone such a plan at least until 2100.

Pace of renminbi internationalisation slows amid shifting political, economic dynamics

First, in a move that shocked in June, the International Monetary Fund apparently reversed its long-standing opinion on an open capital account. Since its establishment, the IMF has always urged economies to open up their capital accounts for investments and loans, but in a recently published paper, “Neoliberalism: Oversold?”, it admitted that such liberalisation has brought developing countries “the pervasiveness of booms and busts” rather than growth. “In addition to raising the odds of a crash, financial openness has distributional effects, appreciably raising inequality... There is now strong evidence that inequality can significantly lower both the level and sustainability of growth”, it said. As a Foreign Policy analyst put it, this assessment was a “political bombshell… that caused a near-panic among advocates of free market policies”.

As steady and balanced growth is China’s prime goal, there is now a lack of both ideological and practical justifications for a quick renminbi marketisation.

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Brexit is the second event. In light of Britain’s inevitably diminishing global connectivity and influence, Chinese scholars have suggested moving the renminbi clearing centre from London to Frankfurt or Brussels. But this won’t help, since the latter cities are much weaker in financial accessibility. Furthermore, the future of the European Union and the euro are vulnerable to deformation or even disintegration.

Looking ahead, the post-Brexit global financial dynamics could become so unfathomable that a free-floating renminbi could handicap Beijing’s capability to shield the Chinese economy from fatal volatility in the foreign exchange market.

However, halting renminbi internationalisation would hinder China’s efforts to promote the Silk Road project. After reaching an economic cooperation agreement with 16 Eastern European nations in 2015, China’s “One Belt, One Road” framework, which encompasses 65 countries in Asia, Europe and Africa, can be regarded as formally completed. In the coming 50 to 70 years, China has to shoulder tremendous funding provisions to build up the trading facilities and infrastructure in the belt and road zone. Given the high debt levels and gigantic risks involved, as well as the likely lengthy lag before investment returns are seen, China must find a way to achieve stability and benefit from globalisation simultaneously.

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Assuming Beijing shelves renminbi internationalisation but still want to position the renminbi as a global transaction currency second to the US dollar, China has to rely more on using the Hong Kong dollar (already a fully convertible currency) as a shadow currency.

Let’s say after 70 years, all Africa-China trades are settled in renminbi (international payment current account). China must ensure that the African exporters and importers could move easily in and out of the Hong Kong capital fund markets, with no restriction on currency conversion (international payment capital account).

For this purpose, China has to at least triple Hong Kong dollar circulation volume and speed up its velocity to ensure it has the necessary financial capacity required, given the immense scale of the belt and road business turnover. However, to accommodate such an expansion, Hong Kong’s present economic size is too small (only half of London, two-thirds of Paris and one quarter of Tokyo), usable land is too little (about half of London, Paris and Tokyo, which are mostly flatland), and human talent is not diversified enough.

The solution, I suggest, is to emulate the historical territorial expansion of other metropolises by merging Hong Kong and Shenzhen in 2047.

Such a merged entity would have a gross domestic product (purchasing power parity-adjusted) of about the same size as London’s and half of Tokyo’s.

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The key financial arrangement is to inject a large amount of US dollars by the People’s Bank of China in exchange for newly issued Hong Kong dollars, in several phases, to widen the pool, and then gradually allow Shenzhen institutions and residents to convert their liquid assets into Hong Kong dollars, according to appropriate official rates.

Other complementary arrangements include merging the two stock exchanges, in Hong Kong and Shenzhen, and encouraging the banks of African, East European, the Middle East, South Asian countries, as well as members of the Shanghai Cooperation Organisation, to open branches in Shenzhen.

Lastly, the finance sector cannot be upgraded without talent. The new Hong Kong-Shenzhen government should not just collaborate with the Hong Kong Science and Technology Parks Corporation and the Shenzhen High-tech Industrial Park to enable an innovative environment, but also coordinate Hong Kong and Shenzhen universities to run a variety of programmes for local students and also those from the belt and road countries.

Beijing should assess the merger’s pros and cons as soon as possible.

Keith K C Hui is a Hong Kong-based commentator