What can Hong Kong offer in tackling the mainland’s financial mess?

The time seems ripe for Beijing to draw on the city’s experience in weathering economic storms

PUBLISHED : Monday, 10 July, 2017, 4:17pm
UPDATED : Monday, 10 July, 2017, 11:21pm

Beijing may be finally learning from Hong Kong’s regulatory experience as it makes unprecedented efforts to maintain domestic financial stability and contain external shocks.

This can be seen from last week’s half-year economic analysis seminar where Andrew Sheng, former deputy chief executive of the Hong Kong Monetary Authority and chairman of the Hong Kong Securities and Futures Commission, was invited by Premier Li Keqiang to share his thoughts.

The rare presence of Hong Kong experts at such a high-profile occasion fuels speculation that mainland authorities are ready to draw from the financial hub’s regulatory experience to address some of the country’s most urgent problems, including shadow banking, excessive leverage, financial irregularities and capital outflows.

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“Hong Kong’s regulatory regime may be not the most perfect, but it is mature and strict enough,” said Gary Liu, president of the Shanghai-based think tank China Financial Reform Institute. “There is no doubt that the mainland should learn from Hong Kong on its road to financial liberalisation.”

Hong Kong experts have been called upon since the city was handed over to China 20 years ago, but their influence in policymaking has largely declined since Laura Cha Shih May-lung stepped down as vice-chair of the China Securities Regulatory Commission in 2004.

“There were only a few officials from Hong Kong, and their power was very limited,” Liu said. But Beijing now appeared willing to tap Hong Kong’s experience as its financial problems deepen.

The invitation to the former Hong Kong regulator Sheng came as domestic leverage jumped to a critical point after years of investment stimulus and external risks are fast accumulating on the tenth anniversary of the global financial crisis and the 20th anniversary of Asian financial crisis.

Sheng has researched financial crises deeply and helped Hong Kong weather its financial storms. He is also became very familiar with the mainland economy as chief adviser to the China Banking Regulatory Commission.

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Many pre-crisis signs outlined in his 2009 book From Asian to Global Financial Crisis: An Asian Regulator’s View of Unfettered Finance in the 1990s and 2000s, such as housing bubbles, over-leveraging and debt mismatches, have emerged in China.

The mainland’s overall debt rose to about 257 per cent of gross domestic product by 2016, compared to 141 per cent in 2008, according to the Bank of International Settlements. The high leverage of some financial institutions, accumulated through masses of business creation to bypass regulation and high exposure to the property market, has forced the top leadership to make financial stability its priority this year.

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Ding Shuang, chief China economist at Standard Chartered, said Hong Kong could set an example for the role of markets and the boundaries of government intervention.

“What level of tolerance should the government bear towards market volatility? What time should itintervene?” he said, adding that Hong Kong had a wealth of experience in such matters to reference.”

It may also reflect a much closer ties between the two markets, as seen from the Stock Connect and Bond Connect programmes that demand more regulatory cooperation in matters like capital flows, Ding added.