As published on scmp.com, Wednesday 15 July, 2020.
Hong Kong will remain an “extremely important” international financial centre because of its proximity and access to China, despite short-term difficulties related to its new security law, a former leading city financial official said on Wednesday.
“As long as China is growing – it is already the world’s largest trading nation and its saving rate is one of the highest in the world – all western banks and asset managers will want to flood into China to manage this large savings pool. And China will use the savings to diversify worldwide for good asset management reasons,” said Andrew Sheng, a Malaysian Chinese banker who helped the city weather the 1998 Asian financial crisis as chairman of the Securities and Futures Commission of Hong Kong.
Nevertheless, Hong Kong will suffer collateral damage from the escalating dispute between China and the United States, with the city’s new national security law haunting its financial and business community, he told an online seminar hosted by the Asia Society Policy Institute.
“When the two giants have huge disagreements, it suffers,” said Sheng, who is now a senior adviser to various Chinese financial regulatory authorities and the China Investment Corporation, the nation’s sovereign wealth fund.
“Businesses prefer to have less volatility … but [the current] additional costs of uncertainties are huge.”
The comments came just hours after US President Donald Trump signed into law the Hong Kong Autonomy Act, which ended the decades-old special privileges and economic treatment granted to the city by the US.
China’s foreign ministry condemned the US actions in an online statement and vowed to “take necessary action” in retaliation.
The latest row started when Beijing imposed its tailor-made national security law on the city on July 1, but it was just the latest episode in the sharp deterioration in China-US relations since 2018.
Sheng warned that it was particularly difficult for the business and financial community to price in the risks that the new national security law poses for operations amid the escalating decoupling between the world’s two largest economies.
In particular, there is concern in some quarters that Washington will target the 37-year-old Hong Kong dollar peg system or restrict access to the US dollar payments system, which would cast a shadow over the financial centre. Most analysts say that the US is highly unlikely to use either of these two “nuclear options” given the damage they could cause to the international financial system and to the US itself.
Sheng warned that use of broad financial sanctions could lead to a fragmentation of the global financial system.
“If a global payment system, say SWIFT, becomes completely politicised, is the global payment system going to be completely decoupled or fragmented? The underlying threat is that global public infrastructures that have served the world very well in trade, finance and even information could be collateral damage to the huge disputes that are going on right now,” he warned.
Beijing officials have said they have made “prearranged plans” for possible US financial sanctions.
Sheng, who described himself as a “layman on national security” and that his personal position was “yes to protests but no to violence,” sympathised with the growing frustration among the city’s elites that the financial hub had been ravaged by violence starting last summer. This, in turn, led to the need for a national security law, which he supported.
“Can you imagine if there were no national security law applying to the City of London, Manhattan, Tokyo or Singapore? It’s unimaginable,” he said.
Beijing aims to maintain stability, Sheng said, adding that the national security enforcement mechanism is “identical to the situation pre-1997” under British colonial rule.
“What is happening to Hong Kong is true for any finance centre, because no country can afford its financial centre to be bombed, disrupted or hacked.”