Beijing's experiment with freer transfer of the yuan in Shanghai and Qianhai could spell the end of Hong Kong's pre-eminent role as China's international financial centre, analysts warn.
SCMP, September 16
Once again, my faith in that phrase "analysts say" or, in this case, "analysts warn" has been confirmed. When you hear it, put your money down the other way.
This initiative by Beijing to select two mainland cities for a trial opening of the capital account on the balance of payments is not a threat to Hong Kong as a financial services centre, but an assurance that there are still many years to go before such a threat will materialise.
Of course, I may be a little ahead of the game in making this pronouncement. Before pontificating on what effect these free zones will have on Hong Kong, one must first be clear on what will be allowed inside them. Just what will they constitute?
And, alas, this remains uncertain. Qianhai at present consists of a vast expanse of mud and Shanghai of a vast resentment that Hong Kong should ever have presumed to a role ordained by heaven as Shanghai's alone. Little more is yet evident.
But let's work out what it might be. Let's say what happens is that banks officially established within the boundaries of these free zones will be allowed to exchange yuan freely for other currencies and to invest this money abroad.
There would certainly be one immediate beneficial effect. We in Hong Kong would no longer clap little old ladies into jail for 10 years at a time on spurious money-laundering charges. Beijing will have made legal a crucial financial service that they provide.
No, don't laugh. Working as a courier on cross-border cash transfers, an important financial service to Hong Kong, can you land you in jail for 10 years if a judge thinks that a drug trafficker would handle money the same way. The court doesn't have to prove you guilty. You have to prove yourself innocent. Thank you, Chris Patten, for this breach of our civil liberties.
OK, OK, back on track we go. The problem is how to set up a wall around these free zones to stop all of China from taking advantage of them, as this would make the opening of the capital account general and no longer an isolated experiment.
How do you tell a branch of China Construction Bank in Qianhai that it may not accept money from Henan province for conversion to foreign currency? How would the tellers even know that the money originated from Henan? How would they do if it were the Royal Bank of Canada handling the money?
It is perhaps possible to do it with an army of financial police standing behind every teller and a ceiling-high stack of signed and witnessed paper work accompanying every transaction, but otherwise it is not. Take away the police and paperwork and everything goes through.
This was perfectly apparent to the authorities in Beijing six years ago when our previous monetary chief, Joseph Yam Chi-kwong, came up with the idea of a special "window" in Tianjin through which any mainland resident could invest in the Hong Kong stock market. That window was slammed shut and locked the first time Joe tried to open it.
Things are no different now. The reason that the authorities have not yet decided what will be permitted in these free zones is that there are only two choices: one, allow everything; two, allow nothing. In financial matters, you either build a wall that keeps these zones in China, or you build a wall that pushes them out.
That third option of doing it partially is available to the authorities only by closing their eyes to the existence of the likes of the Shenzhen underground banking system. It's inefficient and costly but it can do the job. However, it can only do so informally, and setting up free zones is a formal measure. It's a step the other way.
I suspect that in Beijing they really don't know what they're doing. They are thrashing about with no real plan that anyone has thought out. And this just says that the game will be Hong Kong's for a long time to go yet.