Central Hong Kong is now entering its fourth straight day of protests calling for the resignation of the region’s chief executive and for free and direct elections in the territory. Beijing has announced that at the next election, the chief executive must be chosen from a list of candidates that authorities have pre-approved.
What happens next in Hong Kong may depend on the answers to two very important questions: How crucial is access to the Chinese market for North American and European banks and other financial institutions? And how do the authorities in Beijing believe those global banks will respond to any crackdown on democracy protestors in Hong Kong, China’s financial center and the financial hub of Asia as a whole?
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In other words, just how vital has maintaining access to the China market — at any price — become for institutions like JPMorgan Chase, Citigroup and Deutsche Bank? We may be about to find out.
Since Hong Kong passed from British rule to China in 1997, the territory has been governed under the “one country, two systems” approach. It’s China but it’s not China, and that approach recognized the freewheeling capitalist system that had taken root in the decades leading up to the 1997 handover. Decades before Deng Xiaopeng ever proclaimed that “to get rich is glorious” and created special economic zones in places like Shenzhen that have since become super-cities in their own right, Hong Kong already was the region’s financial center.
When China opened its doors in the 1980s and began to boom in the 1990s, Hong Kong was a gateway. A stable rule of law, including respect for private contracts, helped achieve that status. Banks hoping to capture a greater share of China’s burgeoning business built up their Hong Kong-based staffs. This role has survived a series of crises since then, from periodic, smaller-scale democracy protests to the SARS epidemic of a decade ago.
Hong Kong is still vital to China, for a number of reasons. While most global banks have a presence in China, it is liquidity, liquidity and liquidity that dictates where trading takes place — and for now, when it comes to the equity markets, that resides firmly in Hong Kong. Shanghai simply hasn’t kept pace, and won’t be able to, unless and until Beijing is willing to revisit the issue of capital controls.
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As long as China has Hong Kong as a financial interface with the rest of the world, Shanghai’s relatively underdevelopment hasn’t mattered all that much. Hong Kong was the home for the IPO of the Agricultural Bank of China in 2010, the world’s largest bank IPO. (Dual listed and sold in both markets, more than half of the stock was sold via the Hong Kong market.) The existence of Hong Kong banking institutions has also given Beijing a way to test the internationalization of the Chinese currency, the renminbi.
Right now, the democracy protestors are threatening all that, at least in the eyes of some observers. What is striking, though, is the extent to which the views depend on whose eyes you’re seeing them through.
For example, consider the fairly straightforward question of whether Fitch Ratings believes that Hong Kong’s credit rating will be damaged by the protests. An article by Bloomberg News, referring to a slump in the stock market and “a deterioration in the near-term economic outlook,” quotes Andrew Colquhoun, the Fitch analyst responsible for the rating, as warning that an escalation of disturbances “could be a negative ratings trigger.”
If you turn to Reuters, you get quite a different view of precisely the same ratings comment from precisely same individual. Clashes between pro-democracy protestors and Hong Kong police “won’t significantly affect the city’s credit ratings in the near term,” Colquhoun says, unless they last longer — which Fitch doesn’t doesn’t “currently see this as very likely.” For the record, Fitch has left Hong Kong’s AA-plus rating (with stable outlook) unchanged.
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Chinese authorities clearly have an interest in playing up the amount of economic chaos in order to quash the challenge to their leadership. Indeed, the sole mentions in mainland media have described the protests as unlawful assemblies by “radical” groups that now threaten Hong Kong’s “economic well-being and social stability.”
What comes next, though? A repeat of Tiananmen Square in 1989?
It’s hard to ignore the parallels: a direct challenge to one-party rule, in the name of democracy, in the shape of mass gatherings in city streets. But 2014 is not 1989 and most importantly, Hong Kong is not Beijing.
In one sense, China has more freedom to quash the protests, if they don’t simply fizzle out of their own accord, or to sweep up leaders in mass arrests even after they do fizzle out. China today is vastly more important as a global economic force — as a trading partner, as an investment banking client — than anyone might have imagined it would be a quarter of a century ago. Jack Ma’s Alibaba.com has, after all, just completed the world’s largest-ever IPO.
At the same time, however, the fact that Hong Kong is still their financial center serves as a check against such actions. Any misjudgment on the part of China’s leaders sitting in their plush villas in the elite Beijing compound of Zhongnanhai as to how important China is to global banks would come with severe consequences. How much will those banks tolerate before they pull out and relocate to Singapore, which is making an aggressive push to compete with Hong Kong?
A wrong move by Chinese leaders and the balance could tilt in Singapore’s favor.
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