It has been a difficult year for Hong Kong. A different city will emerge following the ushering in of the national security law. But concerns over its future status and role as a global financial hub are premature as it enters a period of political and technological adjustment.
Over the past 12 months, Hong Kong has suffered civil unrest and record GDP growth decline, but mainland China is the only major global economy expected to grow this year. And despite pro-democracy voices, Hong Kong’s future lies inescapably in further integration with the mainland and specifically the Greater Bay Area – a region of southern China with a combined population of 70m and a $1.5tn economy, which is expected to reach $3.6tn by 2030.
Democratic and human rights were major issues for Hong Kong long before its return to China in 1997. Hongkongers have historically had limited control over their own destiny. However, there is a view that the new national security law is breaching Beijing’s assurances in the basic law, Hong Kong’s mini constitution – as well as China’s international pledge to the ‘one country, two systems’ governing framework. Yet this is no sudden about-face, and though Hong Kong may have been promised more than a spot on the ‘Ding Ding’ (Hong Kong tram) in 1997, Beijing has stayed in the driving seat.
Rather than retaliation to deteriorating US-China relations, the controversial law is seen as a necessary step by Beijing in safeguarding China’s national security and sovereignty in President Xi Jinping’s ‘other grand plan’ (in other words, not the Belt and Road initiative), the Greater Bay Area. Beijing wants to turn the region into a unified economic hub and an innovation and technology powerhouse to rival Silicon Valley.
This transformation would cement Hong Kong as a crucial financial centre for China. Foreign investors have always seen the region as a gateway to China, and this geo-economic union of 11 cities will foster stronger bonds between Hong Kong and mainland financial, commercial and educational systems.
The city is repositioning itself for China’s new economy, but Hong Kong won’t become ‘essentially just another Chinese city’. The financial centre, which has tactfully converged interests to manage as best it can Beijing’s ‘one country, two systems’ arrangement, will play a key role in the ‘one world, two systems’ framework borne out of US-China economic and technological decoupling.
Since the promulgation of the national security law, which drew international opprobrium, the US and other countries have introduced a series of measures aimed at sanctioning individuals and financial institutions involved in its development and implementation.
There have been warnings that continued tensions – which are unlikely to alleviate with any change in the White House – could usher in further economic and technological fragmentation between Beijing and Washington by cutting Chinese banks and dealers out of the dollar based-system.
It would go against US interests to take heavy-handed measures, but there is precedent. In 2012, the Bank of Kunlun was cut off from the dollar payments system for financing deals with Iran. But given its size and integration with the world economy, it is difficult to envisage China being treated indiscriminately like Russia, Iran or Venezuela.
Yet the international response to the national security law will only spur China to lessen reliance on the US-dominated international financial system, boost the use of renminbi, and reduce technological dependence.
China has embarked on an ambitious blockchain strategy. As part of the Greater Bay Area project, Beijing will aim to fulfil a key role for Hong Kong in the adoption of its digital currency electronic payment project, known as DCEP. Hong Kong’s legal system is far more widely accepted for international trading, and will provide an ideal proving ground for Beijing’s blockchain and DCEP technology.
The roll-out of DCEP aligns with its evolving domestic payments system, the cross-border interbank payments system. Yet questions remain as to whether China has the want, desire or ability to position CIPS to operate independently of the dollar-based payments system.
For all Beijing’s advancements in digital currency and cross-border payments, as well as economic and technological decoupling with the US, Hong Kong is so deeply embedded in the international financial markets architecture, that China will continue to support Hong Kong’s role as an international financial centre. Without it, China’s financial markets, and the rest of the world’s, would be even more isolated.
Adam Cotter is Director and Head of Asia at OMFIF.