Hassle-FREE Online Campaigns On Sweech
Hong Kong is dead. Economic roadkill on China’s way to world domination.
Starting this weekend, a free-trade zone opening in Shanghai will supplant the former British colony as the gateway to the world’s most dynamic economy.
That’s the chatter in the city of 7 million people, where some fear becoming China’s Chicago, long ago eclipsed by New York as a financial and cultural centre.
Shanghai’s new free-trade zone, opening for business today, will offer freer yuan trading, more flexible interest rates, relaxed restrictions on foreign money, and maybe even access to Twitter, Facebook and other websites banned across China.
Li Ka-shing, Asia’s richest man, has warned of an existential threat. Shanghai “will affect Hong Kong heavily”, the property magnate recently said, and the city must act to raise its competitiveness. That warning is as intriguing as it is silly.
To spark an Adam Smith moment in Shanghai, Beijing would have to embrace a variety of things it has avoided. Leaders would have to create something approaching a first-world legal system and sound rule of law, ensure social justice, force politically connected firms to compete on their own, and allow unfettered free speech and access to banned websites. China would have to tolerate Google and stop rerouting anyone typing “Tiananmen Square crackdown” to tourism brochures.
Can a regime really step back and let traders and financiers run amok when its leadership model is based entirely on control, stability and a playing field level only for princelings and state-owned enterprises? Don’t get your hopes up. In fact, there’s reason to worry a Shanghai trade zone that’s free in name only will exacerbate China’s financial woes. It could well sap momentum and the will to implement much-needed sweeping reforms nationally.
Another risk is the danger of welcoming capital flows of the kind that overwhelmed south-east Asia in 1997. To maintain 7.5 percent growth, as Premier Li Keqiang pledged, means more borrowing by state-owned firms. That’s why it’s highly unlikely Beijing will allow complete yuan convertibility and full interest-rate deregulation.
“This must increase the uncertainty of capital inflows and outflows,” says Michael Pettis, a finance professor at Peking University. “As debt rises, so does expected volatility. Increasing uncertainty at the same time you increase the volatility of the system’s response to changes is a very risky business.”
Leaders also risk a flight of capital from other parts of the country. China can’t contain free capital flows within a specific geographic region just a taxi ride away from the nation’s financial capital. The zone will be viewed immediately as a kind of “green zone” for the elite who get rich though illicit land grabs, old-fashioned rent-seeking and insider trading. Wouldn’t this create fresh avenues for corruption among party officials? State-owned banks outside the zone also may experience runs on balance sheets.
If China is going to open up, it should do so nationally and evenly. A freed yuan would speed and deepen China’s integration with the world economy, create the bigger service sector China needs to wean itself off exports, enable markets to better price risk, reduce trade frictions, and insulate China from US charges of currency manipulation. Far from achieving any of these goals, this Shanghai half-measure is a distraction. Beijing will also have some explaining to do if 1.3 billion Chinese hear that a bunch of privileged foreigners in their financial green zone can view webpages that mainlanders can’t access.
So then, what is the real motivation here? That China is being so vague about what its Shanghai zone will offer and working on such a tight schedule to open it does make one wonder. Surely, political symbolism is part of the motivation.
The Shanghai experiment also seems aimed at Hong Kong’s pro-democracy movement, which is set on pushing the case for the universal suffrage Beijing has no intention of granting.
“It’s leverage over Hong Kong,” says Andy Xie, an independent economist with past stints at the World Bank and Morgan Stanley.
“If Hong Kong becomes ungovernable, the Shanghai free-trade zone will become real. Now, it is designed as a bird in a cage, as all China’s reforms have been.”
For the moment Hong Kong can breathe easy. That’s not to say the city doesn’t need to continue raising its game as an economic and cultural centre. But with apologies to Mark Twain, rumours of its demise are greatly exaggerated.
William Pesek is a Bloomberg View columnist.