"You should go to see for yourself how much China has changed in the past decade," a self-proclaimed Chinese nationalist suggested.



"But I don't feel safe in China. I feel like I disagree with the Communist Party all the time," I said.

"Firstly, you should feel safe in China. And secondly, there is no reason for you to disagree with the Communist Party. The Chinese Communist Party is more progressive than you think," my friend tried to comfort me.

"The problem is I am a conservative. I am not comfortable with progressives having the powers," I replied.

I traveled to Beijing in the summer of 1991. For the first time, I had witnessed an economy that is not entirely open but full of loopholes. As visitors, we had to use the Foreign Exchange Certificates(FEC) instead of the Renminbi(yuan). On the paper, FEC and yuan had a 1:1 exchange rate, but in the black market, the former commanded a much higher exchange rate. We could also buy in the black market with the Hong Kong dollar(HKD) at a much more favorable price.

"Why did mainland people prefer HKD and FEC to yuan?" This was the question that got me curious about economics.

In the 1990s, China was a closed economy with foreign exchange control. Most people were allowed to buy goods produced in China. But if you had FEC or other foreign currencies, you had the right to buy imported products from designated stores. FEC and yuan had the same nominal values, but in reality, the former had a much higher purchasing power. If you were a party cadre or government official, you would have a wider range of goods to choose from. So much for the equality promised by socialism.

This unfair and distorted arrangement was abolished in 1995, i.e., two years before the change of Hong Kong's sovereignty.

Hong Kong had been China's access to the world's goods and capital. My nationalist-minded friend might protest, "But the situation has changed. Nowadays you can buy anything in China. Hong Kong is no longer the place where the Chinese look for imported goods."

Chinese citizens, strictly speaking, are not allowed to invest overseas, say in the US, or even in HK’s publicly listed shares. However, if you are rich and powerful, you can always do so through the companies you control. If the companies you control are publicly listed, you will also have the option to leverage your assets and take advantage of the low-interest-rate environment. It is part of the reason why in China, the rich get so much richer while the poor remain abjectly poor.

Hong Kong's share of China's GDP dropped from 27% in 1993 to less than 3% nowadays. The figures are often cited as evidence that Hong Kong is no longer useful to China. However, if you look at the institutional arrangement, you will have the exact opposite conclusion. China can remain a semi-closed economy because Hong Kong performs its duty as an open economy. It doesn't matter if Hong Kong contributes 3% of China's GDP, or even less. The real question is how much China will suffer as a result if Hong Kong no longer enjoys its current status as a global financial hub.

Beijing, Shanghai, Shenzhen, and a host of first-tier cities have their own distinctive charms and strengths, but Hong Kong is the only place where mainland companies can access to foreign capital in a free and competitive manner. An independent judiciary, a rule-based monetary regime, freedom of information, etc., are the fundamental institutions for a financial market to function effectively. That is why Shanghai and Shenzhen can be anything but a global financial hub.

The imposition of the National Security Law will mark the end of Hong Kong as an international financial center. I am not sure if the top leadership of the Communist Party is aware of the fact that other than Hong Kong, they do not have any other means of accessing the world's capital market. On the contrary, some hardliners might still hold the delusional belief that the world will eventually kowtow to the economic reality; hence major nations, such as Germany, will not have the resolve to impose any meaningful economic sanctions on China through Hong Kong. However, the delay in the implementation of the law suggests the Communist Party leaders do have some concerns, and there might even be dissenting voices within the party.

From a game-theoretic approach, the US, EU, UK, and other democratic governments should present the consequences, including the ending of Hong Kong's special status, as precisely as possible. These sanctions shall be effective, automatically and immediately, in case the law is imposed.

Even without any sanctions from other nations, the CCP cannot avoid the trilemma: (1) China can remain a semi-closed nation as it is, but it must set Hong Kong free; (2) If Hong Kong is no longer free, China will either be a closed nation, like what it used to be when everything is under CCP's control. (3) Or China will be eventually forced to completely open itself, and go against CCP's wishful thinking that it can remain in control till the end of time.

(Simon Lee is a Hong Kong-based columnist for Apple Daily)

---------------------------------
Apple Daily’s all-new English Edition is now available on the mobile app
To know more: https://bit.ly/2yMMfQE
Apple Daily mobile app latest version DOWNLOAD NOW