(June 5): In June 1995, exactly two years before Hong Kong’s handover, I was in my small, windowless office in Causeway Bay, when a colleague plonked a Fortune magazine with the cover story, “The Death of Hong Kong”, on my desk. The piece by the late Louis Kraar predicted that over time, business confidence in Hong Kong would plummet and multinationals would abandon it for greener pastures and Hong Kong would die. “It’s time to stop pretending,” the story began.“The naked truth about Hong Kong’s future can be summed up in two words: It’s over.”
I heard friends and business leaders deride the Fortune piece over the years. Hong Kong, they noted, was far from dead. It was thriving under Beijing’s rule, going from strength to strength and, indeed, had become more than just a gateway to China as it emerged as the go-to global financial centre. With a lion’s share of China’s public listings, it was also the initial public offering capital of the world, ahead of New York, in seven out of the last 10 years. Two decades after the handover, the former British colony had reached near nirvana.
I interviewed former Hong Kong governor Chris Patten after he left office in 1997 and asked him about Hong Kong’s “premature death”. He dismissed it, saying, “so far, so good.” One jarring error in the piece was a quote from the Nobel Prize-winning economist Milton Friedman that “within two years of the handover”, Beijing would force Hong Kong to adopt the renminbi, abandoning the dollar peg. Each time I talked to John Greenwood, the architect of the Hong Kong peg, he would remark that despite all the dire predictions, the peg was still standing because Beijing knew that currency stability was the key to Hong Kong’s long-term prosperity.
I moved four homes in four cities over the 25 years but somehow kept that copy of Fortune. Last weekend, I finally pulled it out from a box. “With its enterprising citizens, its magnificent harbour, and financial wealth, Hong Kong will remain the gateway to fast-growing South China and a place where you can make plenty of money,” the piece predicted. “What’s indisputably dying, though, is Hong Kong’s role as a vibrant international commercial and financial hub — home to (one of) the world’s largest stock markets, 500 banks from 43 nations, and the busiest container port on earth. But as Hong Kong becomes a captive colony of Beijing and increasingly begins to resemble just another mainland city, governed by corruption and political connections rather than the even-handed rule of law, it seems destined to become a global backwater.”
Now, 23 years after the handover, the doomsayers’ dire predictions suddenly sound prescient. Years after he left office, Patten told me that he was optimistic about the future of the former colony because he believed the Hong Kong people would rise up and defend their own freedoms if they thought Beijing was breaking its promise and trampling on them.
Clearly, Hong Kong has a come a long way since Patten sailed away in the pouring rain on the Royal Yacht Britannia in the wee hours of July 1, 1997. Last year, protests began after the Hong Kong government proposed an extradition bill that would allow the transfer of criminal suspects to and from Taiwan, mainland China and other jurisdictions with which Hong Kong does not have an extradition treaty. Under the new security bill, Hong Kong people, as well as visitors, would be subject to mainland Chinese jurisdiction, undermining civil liberties and freedom of speech guaranteed for 50 years under a China-UK agreement. The protests continued unabated even after the Hong Kong government withdrew the bill. Only the spread of the coronavirus and the countermeasures stopped the protestors.
So, what has changed? Why are Hongkongers, one of the most dynamic, entrepreneurial, hardworking and pragmatic people on earth, protesting against China? For one thing, the disparity between rich and poor in Hong Kong is huge and growing. Like elsewhere around the world, wages for mid-tier and lower-rung employees have not kept up with real inflation. Look no further than the property market to see why nearly 70% of Hong Kong people have little or no sense of belonging. As property prices have soared in recent years, the dream of owning a home there is way beyond the realistic reach of the young generation.
A mountain of reserves
There is also a lot of frustration felt by the Hong Kong people who see tons of mainland Chinese tourists in the shopping malls and streets on the weekends, carrying bags from luxury goods stores or jumping queue and snapping up the choicest luxury apartments. All this in a territory that has piled up US$142 billion ($200 billion) in fiscal reserves, not to mention US$450 billion in foreign exchange reserves that have been set aside mainly to defend its US dollar peg. Hong Kong’s forex reserves are greater than South Korea’s, a country with more than seven times its population, and even Saudi Arabia, a huge oil exporter with four and a half times the territory’s population.
What does Hong Kong spend its money on? Literally, Mickey Mouse stuff. Ongoing expansion of Hong Kong Disneyland, and subsidies to keep Ocean Park going will cost US$1.6 billion this year. The two theme parks are expected to lose US$1.3 billion annually for several years unless visitor numbers balloon. For a territory whose citizens are screaming for affordable housing is it prudent to waste so much on dolphins and Donald Duck?
Hong Kong’s fiscal and forex reserves are essentially rainy day funds. In Hong Kong, for the bulk of the population, it has been pouring for years and the reserves have just been growing. The question to ask about Hong Kong is not why people are protesting against the government, and against China, but rather what took them so long to come out on the streets to defend their rights and ask for fairer treatment. Why not spend US$28 billion — or 20% of current fiscal reserves — on public housing and give young people in Hong Kong a stake? Singapore’s HDB, though not perfect, is a nice template.
On May 29, China’s National People’s Congress approved a new national security law for Hong Kong, bypassing Hong Kong’s own Legislative Council (Legco). Essentially, the law seeks to clamp down on any subversive action against the Chinese government, efforts to split China, terrorist behaviour and working with foreign sources to interfere in Hong Kong affairs. Instead of just accusing protestors of rioting, Beijing can now charge them with treason, sedition and subversion.
Forget the larger aims of the bill for one moment. By overriding the Legco, Beijing is violating the Basic Law, its mini constitution, which strictly stipulates that the Hong Kong government can enact laws “on its own” to prohibit treason, secession, sedition, subversion, theft of state secrets and to ban foreign political organisations from conducting political activities in Hong Kong. The Basic Law allows Hong Kong to manage its own affairs in all areas except national defence and foreign policy under the “one country, two systems” principle.
Little wonder, then, that the reaction from Washington has been sharp and swift. US Secretary of State Mike Pompeo told the US Congress that “no reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China, given facts on the ground”. Pompeo’s decertification of Hong Kong’s autonomy has opened the door to action by the US, including possible sanctions.
But more than that, Hong Kong is now expected to lose the “special status” that it has enjoyed under the United States-Hong Kong Policy Act of 1992. The US recognises Hong Kong as a unique customs territory; as such, it was largely spared the upheaval of the US-China trade war last year. Hong Kong is the world’s seventh largest trading territory, with US$1.2 trillion in annual trade. It is also America’s biggest export market and has a zero tariff rate on US imports. But as the world’s No 3 financial centre behind New York and London, it has been a key conduit for capital and investment flows into and out of China. Without Hong Kong, China loses that critical conduit. And as its status as the No 3 financial centre diminishes, Hong Kong will lose thousands of high-paying services jobs, like deal-making bankers, corporate lawyers and accountants, at a time when its people are out on the streets protesting about growing disparity. Hong Kong’s status as a global financial centre was hard earned through decades of an open economy and free capital outflow structure as well as the rule of law.
Top rankings
In the annual Global Financial Centres Index rankings this year, Hong Kong fell to fifth place behind New York, London, Tokyo, Shanghai and Singapore, from the third place it had occupied for years. World Justice Project’s Rule of Law Index puts Hong Kong in 16th place — just below Japan but ahead of US which was at 21 and China at 88. Hong Kong is still ranked 38th in the EIU’s Global Livability Ranking, two places ahead of Singapore, and is considered the third most livable city in Asia, behind only Osaka and Tokyo. Hong Kong can live with US tariffs, even sanctions that US has threatened. But as its role as a global financial centre diminishes, my former hometown will become a shadow of its former self.
Once dubbed as the “Pearl of the Orient” and “Asia’s World City,” Hong Kong is now set to become a second-tier city in China, behind Beijing and Shanghai, if tariffs, sanctions and the erosion of its financial centre status follows. It is unlikely to be a quick, steep falloff but more of a steady decline. “Nothing will happen to Hong Kong,” veteran Hong Kong analyst Francis Lun told me recently. “It will lose some business, the media will make more noise, the protesters will go home and Hong Kong will go on.” That is the optimistic view though Lun concedes things could get out of hand.
So, what is wrong with China completely absorbing Hong Kong 27 years before the planned end of “one country, two systems”? Does Hong Kong really matter? Yes, Hong Kong matters because it has been the place to make money in Asia. No other market comes close. Just take stock market returns, for want of a better yardstick. From end-June 1997 when Britain handed over the sovereignty of its former colony to China through to the past week, Hong Kong’s Hang Seng Index is up 150%. In comparison, Singapore’s Straits Times Index is up just 27.9%, London’s FTSE 100 has risen 33%, while Japanese barometer the Nikkei 225 index is up just 21%. Only the US markets have performed better than Hong Kong. US barometer the Standard & Poor’s 500 is up 230%.
Sydney has a nice harbour, New York is more cosmopolitan, and arguably, Shanghai now is almost as entrepreneurial, but only Hong Kong has all of that, and more. It will be a pity if what has long been one of the world’s great business cities and the freest market, is forced to change its colours. Why tinker with something that works?
Assif Shameen is a technology and business writer based in North America
