Hong Kong’s squeaky-clean credentials have granted it access to the heart of the West’s financial systems—something China can only dream of
way to get your head around the role that Hong Kong plays in the global financial system, says a business figure there, is to think of it as an electrical transformer that connects two circuits with different voltages. One is the global financial system with its freewheeling capital flows, open dissemination of information and the rule of law. The other circuit is China’s vast and growing financial system with its controls on capital, censorship and capricious enforcement of contracts.
The most likely scenario is that Hong Kong’s institutions face gradual decay and that it drifts away from being a globalised financial centre towards one that is more mainland Chinese. China would be left with more control over a less effective capital market, raising the cost of capital for its firms.
Strikingly, even as Hong Kong has become more Chinese, its financial infrastructure has remained similar to that of an advanced Western economy. The constitutional formulation of “one country, two systems” has a cascade of benefits going beyond the rule of law. A layer down from the courts are world-class, independent regulators, including the Hong Kong Monetary Authority , the central bank, and the securities regulator.
More importantly, they also assume that an American dollar in Hong Kong is perfectly fungible with one in New York. This belief explains why so much activity is denominated in American dollars, including 97% of foreign-exchange deals, 58% of cross-border loans and other bank instruments, 43% of cross-border derivatives and 37% of deposits . The stock of dollar cross-border claims is $4trn, equivalent to a tenth of the value of America’s stockmarket.
The perception that Hong Kong is converging towards China could lead counterparties to apply a higher risk score to the territory. Stigma may become a problem: in the past Hong Kong firms have been able to buy strategic assets, from European utilities to American banks. That may be changing.
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