It is a truism that thriving financial markets need good information. Free flow of information allows both bad news and good to be weighed by the marketplace. Censorship breeds rumor and misinformation. Can Hong Kong prove this truism wrong?
The world will find out. Asia’s global financial hub, top of the rankings for IPOs for much of the past decade, woke up on July 1 with a new national security law that gives China broad powers to clampdown on political opponents and critics. China’s soothing promises about a “high degree of autonomy” and “Hong Kong people ruling Hong Kong” that were made to put people at ease ahead of the 1997 Chinese takeover ring hollow now that we can finally see the full text of the new law. This was a national security bill that was rushed through in such secrecy that even Hong Kong’s leader hadn’t seen the law until after China’s legislature had approved it, gazetted at 11 p.m. on June 30, an hour before the 23rd anniversary of the handover.
Maybe Hong Kong can prove doubters wrong. In an article written shortly before Beijing said that it would impose the sweeping security law on Hong Kong, Washington University Professor David Meyer, an expert on international financial centers, argued that Hong Kong’s status as Asia’s leading financial center is safe because the territory has scale and sophistication, enjoys Beijing’s support, and that there is no obvious alternative.
Financiers want a comfortable place to live with low taxes, top-notch schools for their children and world-class health care system. They need a good airport with lots of flights. Hong Kong has all of those. Arguments about democracy in Hong Kong generally mean little to finance people, with most of Hong Kong’s top ones now from mainland China or other countries. The disruption to their weekend dinner plans and their children’s schooling matter more than calls for Hong Kong’s Chief Executive to investigate the police force.
This view squares with Beijing’s hope for the city.
Hong Kong is, at least for the moment, benefiting from the Sino-U.S. split. Alibaba, NetEase and JD.com are mainland stocks that first listed in the U.S. and, since November, have raised about $20 billion with secondary listings in Hong Kong. Hong Kong Exchanges & Clearing CEO Charles Li is optimistic about Chinese IPOs in Hong Kong.
The question is if these positive factors will outweigh the expected crimp in the free flow of information. Press freedom already has plummeted in Hong Kong. The World Press Freedom Index, which Reporters Without Borders has published since 2002, has seen Hong Kong fall from the eighteenth freest press, when the survey began, to eightieth in 2020. China ranked 177 out of 180 territories in 2020.
Technology may be a bigger test. Broking fees have collapsed. Blockchain may take away the need for exchanges. Algorithmic traders are taking away the need for physical traders. People can work remotely far more easily and effectively than we knew pre-Covid.
Meyer is almost certainly right over the next three, perhaps five years. Assuming that the U.S. does not take more aggressive action by, for example, denying Hong Kong banks access to the dollar clearing system. Hong Kong will continue to act as an airlock between China and the free world. Indeed, this has been its role from the 1949 Communist revolution that saw the establishment of the People’s Republic. As freedom of expression and of the press tightens in Hong Kong, the city will face a new test.
Beijing wants Hong Kong to succeed. But Hong Kong must succeed on Beijing’s terms. If Hong Kong people continue to signal that Chinese businesses and their staffs are unwelcome here, there may be an opening for Shenzhen and Shanghai to take on a more international role. Neither Shenzhen nor Shanghai currently have the qualities to become a truly global financial center like Hong Kong. But in an age where technology means that fewer people are needed, that might not matter.