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Why does Beijing Risk Hong Kong’s Future as a Global Financial Center?

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The new security law which punishes criticism of Beijing, is a threat to the financial center and the beginning of the end of globalization as we know it.

Questions to Heribert Dieter, visiting professor in Hong Kong.

Deutsche Welle: Mr. Dieter, you are currently in Berlin, and if everything goes according to your plan, you will continue your visiting professorship in Hong Kong in September. What is the mood like among your colleagues there?

Heribert Dieter: Bad. Some continue as before without worrying about the security law but it remains to be seen whether this is possible but others are very depressed and find that a totalitarian regime has come to them overnight.

How important is the Hong Kong financial center for China?

Hong Kong is the only financial center in the People’s Republic of China that has no restrictions on the movement of capital. That means foreign and Chinese capital can be be transferred in and out of Hong Kong without any restrictions. In Hong Kong, companies can issue bonds denominated in Euros, Dollars or Yen to meet their financing needs.

If this were no longer possible, Chinese companies would have to borrow in the local currency, the Yuan. This has serious disadvantages as the yuan is not freely convertible, so you can’t buy companies in an OECD country with Chinese Yuan. In addition, the interest rate level for loans in Yuan is much higher than for loans in US Dollars, Euros or  the Japanese Yen.

On top of that, private companies in mainland China have been marginalized as borrowers during the era of President Xi Jinping. Almost 90 percent of the new loans go to state-owned companies and this is fatal for the Chinese economy, because private companies in particular are innovative and productive and bring the country forward economically. So there is every indication that the Hong Kong financial center is essential for mainland China in its current form.

Germany Kuka robot at the Porsche plant in Leipzig (picture alliance / dpa / J. Woitas)Kuka robots at the Porsche plant in Leipzig. The takeover of Kuka by Midea from China in 2016 caused a stir in Germany

In recent years, Chinese companies have also been shopping in Germany and have taken over many companies. Wouldn’t that be possible without the Hong Kong financial center?

Such acquisitions would at least be extremely difficult because of the lack of funds. Over the past few years we have seen Chinese companies with full bags of money, buying companies and pay prices that were simply astronomical for competitors from OECD countries. Without Hong Kong, they would have to get the money elsewhere but who in New York, London or Frankfurt would provide companies from mainland China with such funds?

Conversely, Hong Kong is also important for western companies and banks. What is the meaning here?

That is the other side of the coin. The western banks can serve the Chinese market from there without having to subject their employees to the disadvantageous living conditions in mainland China. Hong Kong was the best of both worlds: gateway to the world from the perspective of Chinese companies, and gateway to China for western companies. All of this is now endangered by the Security Act because it makes working conditions in banks and companies significantly more difficult.

The law is – well aware – very vague. Basically, it criminalizes everyone who, according to the authorities, is too critical of the leadership. Can this already affect the work of financial analysts in Hong Kong that for example, pass a negative judgment on a state company?

This is exactly the risk for bank employees who have to evaluate the Chinese economy. They run the risk of being charged with subversive activities and in the worst case, being put in prison. At the moment it is not clear how the government will handle this but the law does allow it. From Beijing’s point of view, this is what makes the law so appealing: you do not specify exactly what is punishable.

This also applies to bank employees which also means that a sensible assessment of the Chinese economy can no longer take place if you are no longer allowed to express yourself critically, but have to tune to the cheering messages of the Communist Party in Beijing.

Heribert Dieter Economic Expert Science and Politics FoundationThis year guest professor at Hong Kong University: Heribert Dieter from the Berlin Science and Politics Foundation

Conversely, there have already been reports that western banks in Hong Kong are separating from customers who are too critical of Beijing.

The new law affects banks directly. The Asia chief of the Hong Kong Shanghai Banking Corporation (HSBC) welcomed the law before he even knew it in detail and university presidents did the same, but it is clear that the banks have to implement what constitutes the law which means that regime critics can no longer have a bank  account with HSBC.

These are very dangerous developments that many people did not expect and they are a major threat to the future of Hong Kong as an international financial center.

Nevertheless, banks are reluctant to criticize and Western financial institutions are unlikely to voluntarily withdraw from Hong Kong but what would happen if they had to withdraw, for example under sanctions?

There are already indications that banks are voluntarily withdrawing from Hong Kong. Deutsche Bank’s new Asia chief takes office in September and traditionally, this function was based in Hong Kong. That has now changed and the new Asia chief has his office in Singapore. These are the first indications that there may be a migration from Hong Kong as they want to be able to speak freely and openly with a beer at a pub in the evening.

So far they could do this in Hong Kong, but not now anymore. They also have families who value uncensored internet which also might get restricted in Hong Kong and the big winners will be Singapore or Tokyo,

Hong Kong Building of the Bank of China, Cheung Kong Center and HSBC (AFP / Getty Images / M. Clarke)Building of the Legislative Council, the Hong Kong Parliament (center). Top managers at Bank HSBC (right) welcomed the security law before it was passed

The conflict between the United States and China continues to worsen and how likely do you think sanctions will be put toward Hong Kong’s financial sector?

The U.S. government is ready to get tough on China. Since July 1, the United States has gradually restricted the special status that Hong Kong has enjoyed since 1997. What would happen if the US government now prohibited Hong Kong from freely trading the US dollar? This is certainly something that is currently being discussed in Washington, however this would also hit US companies hard.

Hong Kong is so attractive as a financial center because the local currency, the Hong Kong dollar, is more or less firmly linked to the US dollar. This means that there is almost no exchange rate risk for companies and players in the financial markets and switching to the Chinese Yuan would make everything difficult and expensive.

Combo picture Xi Jinping and Deng Xiao PingChina’s economic opening began under Deng Xiaoping (right). What is Xi Jinping’s course?

Given the enormous importance of the financial center for Beijing, which you have just described, why is the Chinese government putting all this at risk by enforcing this security law in Hong Kong?

That is one of the most difficult questions and I think about it a lot. Why is the government in Beijing currently ready to seek conflict with almost all actors from Australia to India, the United States and even at some point  to the European Union.

This only makes sense if China is decoupling from the world and a central strategy of the Communist Party. China might retreat to its own territory, as was mostly the case in 5000 years of Chinese history. The opening of the country that Deng Xiaoping initiated in the late 1970s would be the exception.

But that’s just a guess. There is no document to prove this but the policy actually observed by the Chinese government suggests this interpretation.

That would be the end of globalization as we know it.

It would be the end of globalization as we have known it so far, but of course it would not be the end of globalization. Globalization is changing anyway, not only because of Xi Jinping, but because China has become too expensive as a production location. The conflicts between the United States and China and between China and the rest of the world are fueling these tendencies. But in my opinion, the international division of labor has too many advantages to be given up entirely. Globalization will change, but it will not end, but China will no longer play the role it has played in the past 20 to 30 years.

As you just said, the EU is now also more critical of China, but nevertheless the EU has been very reluctant to criticize the new Hong Kong Security Law too much?

Absolutely, the EU is holding back too much. A treaty was broken here, the treaty between Great Britain and the People’s Republic of China from 1984. The German government is particularly to be criticized and Chancellor Merkel is looking for close cooperation with this totalitarian communist regime.

Germany need to react much more critically to the violation of international law and other European countries are much more further, such as Great Britain or France. Germany is now exporting more goods to China than the other Top eight EU countries combined, so the reluctance can be explained.

Against the background of German history, I think it is particularly important that we do not deal with dictatorships and communist regimes in a conservative manner and we should make it clear that this is a breach of international law,

Heribert Dieter is a researcher at the Berlin Science and Politics Foundation (SWP) with a focus on global governance as well as development, trade and financial policy. He is currently a visiting professor at the University of Hong Kong.

The interview was conducted by Andreas Becker.

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