John Lee, the ultra hard-line Beijing loyalist who oversaw the introduction of Hong Kong’s bitterly controversial anti-sedition law, was anointed this week as the territory’s next chief executive. The selection, and Lee’s appointment, is another step in the steady dismantling of the “one country, two systems” principle that is supposed to give Hong Kong a special status until 2047.
Meanwhile, 800 miles to the north-east, Shanghai – the city that hopes to poach Hong Kong’s crown as China’s great financial hub – further tightened its already draconian lockdown measures. It came after president Xi Jinping vowed to “unswervingly” double down on the government’s increasingly controversial “zero-Covid” policy. Millions remain confined to their homes with no end in sight. And in both Hong Kong and Shanghai, question marks are growing over the cities’ futures as global financial hubs.
What’s happening in Hong Kong?
People are leaving. After two years of on-off pandemic restrictions and uncertainty, Hong Kong was battered earlier this year by a far deadlier fifth wave of the virus. For a period in March, the territory was registering tens of thousands of cases a day and had the world’s highest Covid death rate per capita. It meant that just as much of the world was pivoting to living with the virus, Hong Kong – which implemented a “dynamic zero-Covid” strategy aligned with mainland China – retained some of the strictest restrictions anywhere.
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That has damaged Hong Kong’s lustre as a global hub, and sped up an exodus of foreign business and talent. “It’s an unarguable fact that we have a brain drain and some senior management of some corporates have left Hong Kong,” said chief executive Carrie Lam (who will hand over to Lee on 1 July).
How bad is it?
Hong Kong saw a net outflow of almost 157,000 residents in the first three months of the year. That’s a big chunk of people in a city of 7.4 million, with reports of well-heeled residents getting out so fast they are abandoning their expensive cars in car parks. But that might not be the end of it.
According to Hong Kong’s Public Opinion Research Institute, almost a quarter of the city’s residents have plans to leave. Another survey found almost half of European companies with offices in the city were considering leaving. The Hong Kong Chamber of Commerce has warned the city is facing an exodus of educated workers not seen since the run-up to the return to Chinese sovereignty in 1997. Meanwhile, the expected windfall for Hong Kong, as mainland China makes it more difficult for its companies to list in the US, has not materialised.
But won’t Hong Kong bounce back?
It’s certainly too early to write it off, says Robin Harding in the Financial Times. “Economic geography is remarkably durable” and the legacy of 200 years as a trading centre will not be lost easily. Hong Kong’s most significant ongoing advantage is China’s policy of strict capital and currency controls.
While they remain in place, Hong Kong – with its separate convertible currency pegged to the US dollar – will remain the key conduit for Chinese investors wanting to diversify into foreign assets, and for foreigners wanting to access China’s markets. All that could change fast if China made the renminbi fully convertible and lifted capital controls – “but that way is still a long way off”.
So the city is safe?
Lee has pledged to boost the economy and protect its status as a financial hub. And as long as Chinese money flows through the territory, it will remain important, says Harding – benefiting from low tax, critical mass and decades of legal expertise. Yet its lustre is diminishing by the day. “Without freedom, it is hard to innovate”: we can expect the talent drain to continue.
Moreover, “in any undemocratic jurisdiction, there is the risk of a descent into outright gangsterism, if those in power are corrupt or erode the rule of law”. Business depends on certainty of contract and ownership: “its loss would be the death knell for any financial centre”.
What about Shanghai?
There, the Covid lockdowns have been even harsher than in Hong Kong. Thousands of foreign bankers, traders and investors have been confined to their homes, with some even struggling to secure food and other essentials. “What happened in Shanghai is shocking to most of the people. Few would have imagined things will get out of hand to such an extent,” Melvyn Xu, a Shanghai-based private-equity investor, told Reuters.
In the short term, Jörg Wuttke, president of the European Union Chamber of Commerce in China, estimates the country has lost about 50% of all European expatriates since the pandemic started – and predicts a further exodus this summer when the school year ends. “Shanghai as a marketplace has been grossly overplayed,” says Fraser Howie, an independent China analyst. “Shanghai has always been a state-owned enterprise creation.”
What’s the bigger picture?
Economists are busy downgrading Chinese economic growth forecasts, China's stockmarkets have fallen sharply in recent months and doubts are growing over the government’s ability to turn things round. Stephen Roach, the veteran economist and ex-Asia chairman of Morgan Stanley, is a long-time China cheerleader.
But in a recent article in Project Syndicate he wrote that “the China cushion” – the economic heft that helped drive the world through the global financial crisis in 2008 – had “deflated”. Shan Weijian, the chief executive of PAG, a Hong Kong-based private-equity firm, recently told investors the Chinese economy “at this moment is in the worst shape in the past 30 years”, according to the FT.
China has officially set a target date of 2035 for Shanghai to be an international financial centre with “major global influence”. Right now, as dark clouds hover over the Chinese economy, that looks a long way off.
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