The View

Summer of discontent: Brexit vote throws spotlight on Hong Kong’s governance

The era of poorly managed globalisation and winner take all capitalism is expressing its bitterness around the world

PUBLISHED : Thursday, 30 June, 2016, 3:53pm
UPDATED : Thursday, 30 June, 2016, 10:33pm

“Democracy is the theory that the common people know what they want, and deserve to get it good and hard.” H.L. Mencken perfectly described the law of unintended consequences writ large by Brexit. By abrogating their responsibility for a critical sovereign decision, politicians foolishly allowed it to be made by a deus ex machina, momentous referendum. People vote in the most unexpected ways at historically critical junctions.

The week of hysteria will recede like summer rains. The citizenry will accept that Britain is leading Europe out of an intellectual cul-de-sac of undemocratic socialism to a future relationship that actually functions.

At least they finally confronted a source of discontent. It is something that the political and business establishment in Hong Kong have yet to do with our own politics and economy.

The British vote to leave the European Union demonstrates the complacency and incompetency of the governing elites in Britain and Western Europe, and how their policies were unchallenged in the international media and financial markets for so many years. Decades of growing British enmity over the authoritarian regulation of their lives and occupations finally expressed itself.

Similar public discontent in the UK and the US reflect the mounting anger and fear over job losses due to unfair trade agreements. Tolerance for imprudent and illegal immigration was only exacerbated by the patronising aloofness of government leaders.

Most of the concerns and analysis have been focused on trade issues trying to determine which companies have the most exposure to the UK. However, Brexit’s biggest impact will occur in the derivative markets, not in the market for goods and services.

Depending on how you calculate it, the global economy carries US$250 trillion of debt and perhaps five times as much on a gross basis. Post financial crisis, a significant degree of volatility lurks in the financial system. Volatility spikes are risky and downright dangerous in an environment where liquidity could be sorely tested.

Brexit challenges the survival of the EU and euro zone systems. As the world’s largest trading block, EU banks are also the biggest suppliers of cross border finance. Increasing risk premiums and destabilisation of the EU will broadly impact volatility through growth, deflation and liquidity shocks. Massive investment positioning shifts will result in overcrowded trades and even more volatility.

Central bank intervention and policy will play a major role at this point for influencing financial asset pricing and volatility. Procrastination could let volatility spin out of control. A co-ordinated intervention strategy is the only way to lower risk levels.

Britain didn’t join the euro zone. But, the conundrum is that the euro zone is leading Europe to a more heavily centralised and undemocratic EU through a maze of financial regulations that is strangling industry.

Finance could quickly fragment into domestic markets and further raise operating costs for banks, ultimately hurting customers. If core businesses move away from London to other countries regulators might not allow certain banking functions to be conducted outside of the EU. Local regulators naturally want banking to be done domestically so they can monitor it.

The era of poorly managed globalisation and winner take all capitalism expresses its bitterness around the world. Hong Kong’ business elite and government face almost intractable problems in managing structural reform. In a recent Bloomberg interview, Hong Kong’s richest man, Li Ka-Shing, said Hong Kong is in the worst shape he’s seen in the past 20 years.

Unfortunately, no one dared to point out to Li that he is one of the people seen to be most responsible for Hong Kong’s current economic inequality and malaise. Cheung Kong’s grossly overpriced residential flats and other monopolised products and services are becoming a pernicious impediment against our standard of living.

Stop regarding the property tycoons like Lord Voldemort of “He-Who-Must-Not-Be-Named” in Harry Potter novels – someone so feared and sinister that mortals can’t look directly at or speak openly about. High profile business figures like Allan Zeman have to start talking to young people with more intellectual gravitas than is reserved for the opening of a new Ocean Park “Krusty the Clown” attraction.

Political decisions play an increasingly crucial role in the city’s future. Li has much at stake in the selection of city’s Chief Executive in March. A serious discussion about governance and the overarching power of the tycoons’ agenda needs to take place. The business establishment has to cooperate with the government in sweeping economic reforms. Condescending towards people with meaningless and beguiling “sweeteners” and homilies is fooling no one.

Peter Guy is a financial writer and former international banker