Since the transfer of sovereignty over Hong Kong to China in July 1997, the CCP regime was using the weakness of Hong Kong’s limited democratic system in the next 15 years and gradually restricting Hong Kong’s democracy and freedom. It used tactics, gentle compared to that of nowadays, to conciliate Hongkongers, and encouraged young Chinese professionals to emigrate to Hong Kong so as to slowly replace the aging original Hong Kong residents, in the hope that Hong Kong would merge into the surrounding areas of Guangdong Province. However, the Beijing regime has in recent years been using increasingly high-handed and brutal way to treat Hong Kong with two goals: 1) promote Shanghai, Beijing as China’s main financial center cities so that Hong Kong loses its most important fighting assets; 2) when the CCP regime has Hong Kong completely under control, Taiwan would be next.

But these attempts showed how Beijing senior officials seem to be lacking real understanding of international economy and finance.

First of all, we have to understand the status of international financial markets. According to the Global Financial Centres Index (GFCI) which quantifies business environment, financial sector development, infrastructure factors, human capital, reputation and general factors, Hong Kong which has been the third place in the international financial center global ranking for a long time, has dropped to the sixth due to social disturbance in recent years. Tokyo has then overtaken Hong Kong and became the No.1 in East Asia. This ranking also shows part of the reasons why the CCP regime would risk being internationally sanctioned by ripping the Sino-British Joint Declaration apart to implement the Hong Kong national security law.

Thanks to being able to join the World Trade Organization and becoming the world’s factory, China, with its purchasing power parity (PPP), not only became the world’s biggest economy with it’s tier 1 cities leaped and joined the world’s main financial centers ranking: Shanghai (no.4), Beijing (no.7), Shenzhen (no.11) and Guangzhou (no.19); but even the tier 2 and the emerging cities such as Chengdu, Hangzhou, Qingdao, Tianjin, Nanjing and Dalian have got into the list of top hundred financial cities. The rapid economic development has made China become overconfident and arrogant, and no longer cares about Hong Kong’s special position in the global financial center.

What the CCP regime has neglected is that, in terms of the GDP per capita, China has only reached the level of a developing country. Beijing sees “one country, two systems” and other economic special treatment as doing Hong Kong a big favor. Years of protests from the millions of Hongkongers have not only angered “your highness” at Zhongnanhai, who also fears the protests might inspire people in China who might then threaten the ruling status of the CCP regime. This special treatment has indeed attracted a large number of Chinese immigrants (especially those with high education and have the professional ability for the international market), but it also caused people in the mainland to be disgruntled with Hong Kong citizens. By increasing control over Hong Kong, the CCP can downgrade Hong Kong to be a Chinese city and relatively lifted the position of other Chinese cities. It can also use Hong Kong as a warning to other dissidents within and outside the party to smooth out the internal unevenness, killing two birds with one stone.

In the institutional aspect, China’s economic system is still open at a low level internationally. It has very strict control over foreign currencies and the Chinese Yuan has long been experiencing significant human intervention. Although China tried to export its excessive infrastructure capacity through One Belt One Road initiative and promote the internationalization of Chinese Yuan, if the above problem has not been resolved, in addition to China’s central government and the currency not being able to maintain a high credit rating for a long period of time, then Chinese Yuan would still not be accepted as an international currency in the foreseeable future.

Therefore, even though Shanghai and Shenzhen stock markets have a total market worth of US$6.5 trillion in 2019 according to the World Federation of Exchanges, higher than Hong Kong’s US$3.9 trillion, but to list and make transactions at the Hong Kong or U.S. stock market is still the first choice for many Chinese enterprises who are trying to raise fund. Not only it is easy to raise fund in the U.S. stock market (total market value of the New York Stock Exchange and Nasdaq at the end of 2019 is worth over US$33 trillion), but the enterprises can also protect their assets with the help of an outsider to avoid being robbed by the government or its officials, and at the same time build up an international rapport in China.

In terms of the rankings in different areas, NY and London are the leader of the U.S. and Europe respectively and are top two globally; although Hong Kong is Asia’s no.1 in the business environment and human capital, in terms of financial sector development, infrastructure and reputation and general factors, Hong Kong has dropped its place and is under Singapore in 2020, with Tokyo, Shanghai and Beijing trailing behind. The office price, availability, and public transport are the factors considered in terms of infrastructure. For reputation and general factors, it is actually an impression score, partly being subjective and historical rigid such as how innovative, how attractive the brand is, cultural diversity and competitive position. Therefore although the CCP has been plotting in the past few years with the Hong Kong government to trigger social unrest and international sanctions, surprisingly, Hong Kong is still in an important position at the international financial center.

At this time the only two qualified candidates to replace Hong Kong in the international financial center are Tokyo and Singapore. The reasons being are their high degree of free capital flow, financial regulations and a high degree of integration with other countries; especially Singapore, which uses English, is Anglo-American common law system, and the industrial structure and financial institution client service market (mainly China and Southeast Asian countries) pretty much overlaps with Hong Kong, which has given Singapore its advantage over Tokyo.

China’s capital market has grown substantially following its economic development with a cluster of various forms of financial services, the financial division’s development shows its ability and potential; however, China’s regulatory reform, taxation, social corruption, economic freedom, and the difficulties opening a new business have not much improvement, therefore its mainland’s business environment can still not be on a par with other developed countries.

The decline of Hong Kong’s status as a financial center also highlights the possible decline of the whole of China. Getting a Hong Kong ID card has been part of the life goals of many young mainland Chinese, who are pursuing some seemingly insignificant “little luck” that those in power in Beijing could not comprehend, such as personal freedom and economic opportunity. This is the motivation of them going “overseas” to Hong Kong. Their hard work would in the end give back to China’s economic and social development. If Hong Kong becomes just one of the other Chinese cities, these young mainland Chinese would have no choice but to really go overseas for their opportunities. The loss of talents, limitations of interacting with the world, the lockdown of education and economy within the country might produce adverse effects on China’s development in the long run. What we should monitor from now on is the changes in the U.S.-China conflict, Beijing’s control on Hong Kong under the pressure of economic growth and to see whether Hong Kong’s rule of law, its integrity and efficiency deteriorate and how much the deterioration is.

(Paul Chiou Wan-Jiun, Assistant Teaching Professor of Finance, Northeastern University, Boston, MA, USA.)

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