China vs. Hong Kong

China a 'Command Economy,' Not Market Economy: Every

11:50 AM HKT
July 8, 2015

Michael Every, head of financial markets research at Rabobank Group in Hong Kong, talks about China's stocks, policies and economy. China’s Shanghai Composite Index fell to a three-month low on concern a raft of measures to stabilize equities is failing to stop the bear-market rout as traders unwind margin bets at a record pace. Every speaks with Angie Lau on Bloomberg Television's "Asia Edge." (Source: Bloomberg)
<p>Cut the cord.</p>  Photographer: PHILIPPE LOPEZ/AFP/Getty Images

Cut the cord.

Photographer: PHILIPPE LOPEZ/AFP/Getty Images

Hong Kong's Peg to Instability

5 Apr 14, 2015 5:00 PM EDT

For years, any call for Hong Kong to scrap its peg to the U.S. dollar was deflected with a single word: stability. The city's monetary authority has consistently treated the 32-year-old link as the linchpin to the economy's international credibility. But with Chinese money now swamping the city, the opposite may be true.

China this week announced limits on mainland visitors to Hong Kong, who have been a longstanding source of tension in the city. But the flow of money from the mainland shows no sign of slowing. Politically-connected Chinese tycoons, who have a longstanding habit of squirreling their money abroad (the better to hide it from authorities in Beijing), are increasingly turning to Hong Kong's stock and property markets. As Louis-Vincent Gave of fund manager GaveKal puts it: "In its troubled marriage with China, it looks very much as if Hong Kong is about to get more money and less mainlanders."

And this is likely only to increase tensions in Hong Kong. Although last year's enormous protests in the city were presented in the international press as a call for democracy, they were as much about income inequality fueled by money from the mainland. As of 2011, Hong Kong’s Gini coefficient, a measure of inequality, was 0.537. That was the highest since record-keeping began in 1971 and puts Hong Kong well above the 0.4 level analysts associate with social unrest. 

It's no coincidence that record protests flared up at the same time as residential home prices surged by 13 percent. By the start of 2015, prices had more than doubled since 2009, spurred in part by money flowing in from China.

To their credit, locals officials tightened rules in February to keep homeownership from rising further out of the reach of local residents. But those efforts will likely soon be overwhelmed by tidal waves of mainland cash. It's safe to expect higher living costs in a city already plagued by a scandalous rich-poor divide.

If Hong Kong authorities want to cool down their overheating economy, they should start by addressing its undervalued currency. That's a key reason why Hong Kong's inflation is growing 4.6 percent compared with 1.4 percent in China and 0.4 percent in South Korea. It has also forced the Hong Kong Monetary Authority into an increasingly uncomfortable position. Since August, it has been forced to defend its conversation rate to the U.S. currency by selling off massive amounts of Hong Kong dollars.

But those efforts have allowed mainlanders to get a cheaper conversion rate than if the Hong Kong dollar traded freely. Unsurprisingly, they’ve been rushing to take advantage of it, by pouring more money into the city.

Hong Kong's peg, in other words, has outlived its usefulness. But Hong Kong authorities have been reluctant to scrap the peg, because they see it as the source of their credibility with western investors. Chinese President Xi Jinping -- who has ultimate authority over Hong Kong -- might have his own reasons for feeling risk-averse, given the magnitude of economic challenges facing China at the moment.

But there are options available to Hong Kong short of a sudden abandonment of the dollar peg. The city could shift to a basket of currencies, like Singapore. Even better, it could begin laying the groundwork for a peg to the Chinese yuan. There would be important prerequisites, including China making the yuan more freely convertible. But if China is serious about its bid to internationalize the yuan, its economy will eventually need to become far more transparent anyway; a Hong Kong-yuan peg could spur that process along.

Hong Kong, for its part, would be far more stable if its peg to the dollar weren't acting as a transmission device for China's imbalances. Local residents may greet the news that there will be fewer mainland tourists in the years ahead, but they would do better to worry about the mainland money that's been visiting their shores.


Will a democratic China harm Hong Kong?

Monday, 10 June, 2013, 1:01pm

Chang Ping

  • topshots-china-rights-protest-tiananmen-anniversar_36174273.jpg
A plain-clothes policeman (left) follows suspected journalists on Tiananmen Square in Beijing on June 4, 2013. Photo: AFP

Once democratised, China could hurt Hong Kong even more. This is what Dr Horace Chin Wan-kan, a core member of the "nativist" movement in Hong Kong, told Hongkongers in an article published on June 4.

This is not the first time Dr Chin has warned of the dangers of a more democratic China. In his latest publication, he has once again substituted imagination for reason.

"What we Hongkongers need is not a democratic China, but to build Hong Kong into an autonomous city-state first, merging the British culture with a restored Chinese culture," wrote Dr Chin. Next, Hongkongers should push for a "Chinese Confederation" consisting of separate and parallel states in China, Taiwan, Hong Kong and Macau, he suggested.

However, under Hong Kong's current political situation, this proposal not only sounds hallucinatory, but also comes dangerously close to breaking the Basic Law by advocating sedition.

How could a democratic China harm Hong Kong? Well, according to Dr Chin, democracy requires customs of morality, cultural dignity, civil society, rule of law and professional conduct, none of which China possesses today. When democracy replaces one-party rule in China, populism will reign in the legislature, dissolving the "one country, two systems" commitment and Hong Kong's valuable resources would become fair game to a voracious China.

All politics is local, as the famous US political saying goes. Dr Chin's cause, an emphasis on Hong Kong's unique identity, obviously has much relevance to Hong Kong - now under the shadow of an authoritarian China. He also makes sense when advocating that Hongkongers should care about themselves first before worrying about the world. However, what really defies reason, and smacks of hypocrisy, is when a champion for democracy like Dr Chin tells us that a vast number of people living under authoritarian rule should remain that way, or all hell will break loose.

So democracy is good - except when it doesn't apply to everybody? Some groups it appears just don't deserve it. The Chinese are too uncivilised for democracy, or there would be chaos. Does this all sound familiar? It is exactly what the Communist Party has been brainwashing the Chinese people with for decades. The party peddles this theory to people to subject them to its authority; and to foreigners, in the hope they will leave China alone. A renowned expert on democracy, Dr Chin knows all too well the havoc authoritarianism has had on society; but he fails to see that it harms the world order as well, especially neighbouring countries.

All the troubles and anxiety China has brought Hong Kong have their roots in the party's failure in governance. Why do pregnant women endure travel, hostility and uncertainty to have babies in Hong Kong? Why do young parents haul cans of milk powder across the border? Why are Chinese tourists so rude and inconsiderate? These are all consequences of the party's corrupt, ruthless and closed-minded rule. Dr Chin might notice that it is not just Hong Kong's maternity beds or pharmacy shelves that are being invaded by the Chinese; the same is happening across the developed world. If given no opportunity to change, things will only get worse in China, and these worrying trends would only spread further. Whether a city state, or part of a confederation, Hong Kong could not withstand such a corrupting spill over.

Dr Chin has also described many other terrible things he feared a democratic China could do to Hong Kong. These range from abolishing the "One Country, Two Systems" policy, tapping into Hong Kong's fiscal reserves, taxing Hong Kong, or even forcing Hong Kong women to marry mainland men!

I can only say he has an overactive imagination in which he transplanted his fears about authoritarianism into a democratic setting - forced unity, forced migration, and forced marriages. Do these sound more like the doings of an authoritarian state or a democratic one? In a multi-party democracy, could we even imagine any political party trying to buy votes in Hong Kong, or buy media outlets in Taiwan with public funds as we have seen and condemned the party for doing?

The professor calls himself a political pragmatist, by which he means as long as Hong Kong leaves mainland politics alone, the party will relax enough to let Hongkongers continue with their own experiment in city-state autonomy. How deluded and naive could one be to form such beliefs? Authoritarianism is all about control, and the party would never give up control over Hong Kong politics as Dr Chin imagines. Only a democracy could value diversity and free will enough to encourage experiments like these within its jurisdiction.

On the relationship between regional autonomy and a democratic central government, the celebrated French historian Alexis de Tocqueville writes: "I believe that provincial institutions are useful to all nations, but nowhere do they appear to me to be more indispensable than amongst a democratic people." I would suggest Dr Chin seek some enlightenment by reading de Tocqueville's famous text, Democracy in America.

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