My Take | The status quo is the best and worst scenario for Hong Kong

Just reading the news headlines, you may be forgiven for thinking this is the end of Hong Kong. “Hong Kong risks exodus over extended Covid isolation”, “Hong Kong saw net outflow of 90,000 residents over the last year”, “Departing Hong Kong residents fly their pets out of city on private jets”. And so they go on.

People used to say that the city was the goose that laid the golden eggs, so there was no way Beijing would kill it. But while the metaphor is useful, it is also old. Over the past two decades, the mainland has achieved economic and technological successes undreamed of at the time of the handover in 1997.

Shanghai has taken over many financial advantages from Hong Kong, such as stock listing, while Shenzhen, measured as a stand-alone economy, has already exceeded the city. Both cities offer a level of entrepreneurship and technological advances that Hong Kong cannot even approach. Those cities have been laying golden eggs of their own. As Lau Siu-kai, the sociologist and vice-president of the semi-official Chinese Association of Hong Kong and Macau Studies, once wrote, the bargaining powers of Hong Kong with Beijing have diminished significantly over time. That’s precisely why Beijing calculated that it could risk overhauling the entire electoral system of Hong Kong and even its political environment after the unrest of 2019.

However, to refer to the overused metaphor again, the city still lays one golden egg that can’t be replaced. It is that the mainland has capital controls but Hong Kong doesn’t. And that’s thanks to “one country, two systems”. They are the very core of Hong Kong’s “high degree of autonomy” that will never be breached, until or unless mainland China lifts its own capital controls.

Why? Now we can go beyond metaphors, and dive into a very precise finding of contemporary economics. It’s called the “impossible trinity,” also known as the Mundell-Fleming trilemma, half of which was named after Robert Mundell, who was at one time a visiting professor at Chinese University of Hong Kong.

The model says that in setting its monetary policy, an economy has three options: (1) an independent monetary policy, (2) a controlled exchange rate and (3) free-flowing capital. You can only achieve two but never all three.