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Beijing remaking Hong Kong in its image

Known for clean trade and free press, the city is being tainted by China's murky ways

Chinese President Xi Jinping declared over the weekend that Hong Kongers should profit from China, not defy it. What the Chinese President ignored was how all that profiting is threatening the city's economic future.

It's mea culpa time for pundits who said Hong Kong's return to China 20 years ago would revolutionise China. Just as China bent the global trading system and Internet to it whims, it absorbed the financial green zone Hong Kong represented, while stopping its laissez-faire mores at the door.

Rather, Beijing is trying to remake Hong Kong in its image: bullying local media, silencing dissent, dousing hopes for real elections, teaching patriotic values and buying subservience with pledges of swelling bank accounts to justify this "Chinafication".

China already may be taking this last gambit too far. Polls suggest that far from winning over most of Hong Kong's 7.3 million people, Mr Xi is courting considerable pushback by marking "red lines" and demanding fealty there on July 1. The feudal relationship Mr Xi favours is backfiring as Chinese cash drives living standards into the stratosphere.

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Surging flat prices are pushing Hong Kong's Gini coefficient, a measure of income inequality, into dangerous territory. Bottom line, the tycoons are monopolising gains from China's boom.

At the same time, Hong Kong leaders chosen by Beijing for loyalty, not talent, failed to diversify the economy away from overpriced property and finance. That's squeezing the middle class on both ends: surging rents and stagnant wages as jobs relocate to low-cost China. This combustible mix led to the giant 2014 Umbrella Revolution protests.

Beijing has since sought to change the narrative with cold, hard cash. In late 2014, it opened a Shanghai-Hong Kong Stock Connect spigot to cement the city's place as key middleman to China and enliven its gross domestic product.

Traders at the Hong Kong stock exchange. Too many mainland companies listing in Hong Kong are going public before corporate governance practices are up to speed, the writer says. Traders say last week's mysterious US$3 billion rout in small-cap Hong
Traders at the Hong Kong stock exchange. Too many mainland companies listing in Hong Kong are going public before corporate governance practices are up to speed, the writer says. Traders say last week's mysterious US$3 billion rout in small-cap Hong Kong stocks had Chinese fingerprints all over it. PHOTO: BLOOMBERG

Last December, Beijing offered another direct route to Chinese prosperity via Shenzhen. Yesterday, China added bonds to the mix, giving overseas punters access to its US$10 trillion (S$14 trillion) debt markets, with Hong Kong taking a percentage.

The Chinese ethos infecting Hong Kong's US$4.6 trillion market is less interested in balance sheets, price-to-earnings ratios and corporate visions than guanxi, or connections in Chinese. What really matters are connections with Communist Party bigwigs, whose nephew or niece is on the board, whose phone numbers are on the chairman's contacts list.

The nature of Beijing's largesse, though, is floating very few boats - nor is it likely to help many average Hong Kongers in the future.

One of China's rationales for accelerating the stock "through train" is that overseas investors will use local brokers and clearing houses, creating jobs and boosting Hang Seng shares. That wealth effect, it was hoped, would refocus Hong Kongers on the joys and benefits of Chinafication. Instead, the side effects are increasing inequality - and the wedge between the Communist Party and its free market green zone.

Chinese efforts to cool the overheating property market incentivised its growing ranks of millionaires - and billionaires - to spirit cash over to Hong Kong. That's pushing apartments out of the reach of young families, while rents are 47 per cent more expensive than in Singapore. Cost-of-living trends are diluting the benefits of Hong Kong's top 17 per cent tax rate. And Hong Kong has overtaken Tokyo as the most expensive city in Asia.

Beijing has addressed its housing bubble by encouraging investors to buy shares, even terming the swap in patriotic terms. Those efforts coincide with the government making it easier for wealthy mainlanders to shift into Hong Kong shares. So big have these flows been at times that the central bank has intervened in currency markets to maintain the dollar peg.

Blockchain technologies like Bitcoin, too, are helping to steer Hong Kong's way walls of money that are hard to track and control.

Mr Xi's government, meanwhile, is chipping away at Hong Kong's transparency. The city's appeal has always been its First World banking system, rule of law and free press.

Over on the mainland, Mr Xi is dragging the country's media and Internet freedoms backward by as much as two decades, making Asia's biggest economy even more of a black box. Yet, China has been prodding Hong Kong to ease up on personal data for company directors - concealing identification numbers and home addresses on which journalists rely to understand who owns what.

Learning who controls companies - if they are, say, Communist Party leaders - can be tricky enough in Chinese-speaking jurisdictions. Many of the same names are used, and obscured with variant English spellings.

Greater opacity in Hong Kong is not a risk under new pro-Beijing Chief Executive Carrie Lam - it is a given. Beijing wants her to enact "Article 23" anti-subversion laws. They are couched in ambiguous language that would encourage self-censorship among journalists and investment bank economists who normally would protect Hong Kong's transparency.

Meanwhile, too many mainland companies listing in Hong Kong are going public before corporate governance practices are up to speed. They have accounted for 90 per cent of funds raised from initial public offerings in the last five years. Traders say last week's mysterious US$3 billion rout in small-cap Hong Kong stocks had mainland fingerprints all over it.

Among the biggest decliners, 90 per cent or more, were China Jicheng Holdings and GreaterChina Professional Services. With Hong Kong regulators afraid of crossing Mr Xi's China, the city's small-cap space is looking no less casino-like than Shanghai's.

The Chinese ethos infecting Hong Kong's US$4.6 trillion market is less interested in balance sheets, price-to-earnings ratios and corporate visions than guanxi, or connections in Chinese. What really matters are connections with Communist Party bigwigs, whose nephew or niece is on the board, whose phone numbers are on the chairman's contacts list.

It is valid to fear that the folks at index compiler MSCI, in deciding to include mainland A shares in the most influential emerging markets index, are underestimating the murkiness that pervades China.

No matter what MSCI says, China's markets are still a rigged, opaque mess. And now Mr Xi's government is sharing its worst excesses and practices with Hong Kong. When you are a city whose entire reason for existing is doing business better than anyone else, that is a problem.

Hong Kongers may indeed want to hone their defiance skills.

• William Pesek, a Tokyo-based journalist, is a former columnist for Bloomberg and author of Japanisation: What The World Can Learn From Japan's Lost Decades.

A version of this article appeared in the print edition of The Straits Times on July 04, 2017, with the headline 'Beijing remaking Hong Kong in its image'. Print Edition | Subscribe