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No, Shanghai Can't Replace Hong Kong


93 Sept 30, 2014 12:12 AM EDT
By William Pesek

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If there's any likely winner from China's  unprecedented clampdown on Hong Kong, it's  Singapore.
All the tiny city-state needs to do to attract the  giant banks, hedge funds and multinational firms currently clustered in Hong  Kong is sit back quietly as Beijing's henchmen do their worst. The firing of  teargas at peaceful demonstrators over the weekend marked a chilling assault not  just on Hong Kong's civil liberties, but on the city's economic  future.
Let's first dispense with the fiction that Hong Kong  authorities aren't doing Beijing's bidding. The Communist Party set the stage  for student-led demonstrations this week when it rejected  any compromise to open up Hong Kong's political system in 2017, when voters are  supposed to elect their Chief Executive directly for the first time. Chinese  President Xi Jinping has taken a similarly hard-line stance toward every  perceived challenge to his rule -- whether from disgruntled Uighurs in Xinjiang,  former Party bigwigs or popular microbloggers. Hong Kong's top officials had  every reason to assume their superiors in Beijing would want them to suppress  initial student demonstrations quickly, before this Wednesday's National Day holiday.
All the Chinese regime is demonstrating, however, is  why Shanghai will probably never replace Hong Kong as a global financial hub.  The clampdown in Hong Kong comes just as Xi's government is tightening the  screws on the global media on the mainland, investigating a fast-growing list of  foreign companies and making it harder to discern which politicians' families  own which assets. For all the talk of bold reforms and accepting a "new normal" of lower growth, Xi has tightened rather than loosened the  government's hold over the economy and society.
As I've pointed out before,  China should be learning from Hong Kong's first-world institutions. It should  emulate the laissez-faire ethos, rule of law, open capital accounts and  free-wheeling media environment that underpin Hong Kong's success -- not stamp  them out. Instead, Xi's government appears to be intent on remaking Hong Kong in  China's deteriorating image.
If Beijing continues to erode the liberties and  institutions that have made Hong Kong such a great place to do business,  multinationals aren't suddenly going to shift base to Shanghai. Indeed, by the  time the mainland's favored hub reaches Hong Kong's current level of  transparency and financial sophistication -- if it ever does -- all the banks  and household corporate names would've already moved to Singapore, or elsewhere  in the region.
Those asking what's next for China's "one country, two  systems" doctrine are pondering the wrong question. This pipedream, one that seduced Margaret Thatcher into returning Britain's former colony to Beijing, is  unraveling before our eyes. China's decision to renege on its promise to let  Hong Kong pick its own leader by 2017 comes as political frustrations rise in  Macau as well. One can only imagine how darkly Taiwanese now view the prospect  of the mainland's embrace.
No, the real question is where Xi is taking the  world's most populous nation. Rather than adapt to international standards, China is becoming even more  of a black box. Meanwhile, investors can only fret about runaway debt, a growing  shadow-banking system and official corruption. Xi's policies smack more of fear  than strength. In the long run, it's China that will pay the price for  them.

To contact the author of this article: William Pesek  at wpesek@bloomberg.net
To contact the editor responsible for this article:  Nisid Hajari at nhajari@bloomberg.net