Three recent developments could affect Hong Kong’s position as an international financial center.
The first one took place on July 15, when the Central Committee of the Communist Party of China and the State Council jointly issued a guideline to support high-level reform and opening-up of the Pudong New Area in Shanghai, which aims to build Pudong into a pioneer area for socialist modernization. The guideline requires Pudong to “expand openness from the factor level to the system level of rules, regulations, managements and standards, so as to provide high-level systems, high-quality products and high-efficiency funds, and to cultivate new advantages in international cooperation and competition”. China will continue to promote the opening of its financial sector, support Pudong in exploring the convertibility of capital accounts, and support Pudong banks in facilitating the transfer of cross-border funds between credible firms that comply with trade authenticity reviews and the requirements of combating money laundering, terrorist financing and tax evasion.
Efforts will be made to innovate internationally recognized renminbi-denominated financial products, to expand the scope of RMB investment products overseas and to promote two-way cross-border RMB capital flows. Research will be conducted to explore the possibility of piloting RMB foreign exchange futures in the China Foreign Exchange Trade System. Measures will be taken to promote the collaboration between the financial futures market and other markets, such as stocks, bonds, foreign exchange and insurance, so as to jointly develop financial products and tools that cater to the needs of investors. An offshore market will be built to advance Shanghai’s effort to develop itself into an international financial center, starting with Pudong developing offshore RMB transactions under controlled risks.
The second one is happening as Beijing accelerates the development of emerging financial industries like digital finance. Its Lize Financial Business District, which is the capital’s “second financial district” that has undergone construction for 10 years, is basically ready to be put into service. Lize currently occupies an area of 4.36 square kilometers and is a cluster of emerging financial operations and a pilot area for financial reform. During the 14th Five-Year Plan (2021-25), Beijing will expand the comprehensive demonstration zone and free trade zone to attract top financial institutions and high-tech companies to conduct trials on digital financial innovation. There are altogether 658 companies settled in Lize, including major financial and technological firms such as China Agricultural Reinsurance Co, China Broadcasting Network Corp, headquarters of Huawei Technologies Co, etc. Financial companies account for half of the total firms. The Digital Currency Research Institute of the People’s Bank of China, a top-level design and basic research institution of China’s digital currency, is also based in Lize.
The third one is demonstrated by China’s toughening stance toward certain Western governments’ attempts to contain its peaceful development. Wang Yi, a state councilor and the minister of foreign affairs of China, met with visiting Maltese Foreign Minister Evarist Bartolo on July 23 in Chengdu, Sichuan province. In the meeting, Wang dismissed the European Union’s recently announced China policy of “competition, cooperation and confrontation”, saying the three “C’s” conflict with and offset each other. At the third round of China-Pakistan Foreign Ministers’ Strategic Dialogue with his Pakistani counterpart, Shah Mahmood Qureshi on July 24, also in Chengdu, Wang told the media that if the United States has not learned to treat other countries equally, China and the international community have an obligation to help it make up for this lesson.
One may try to associate Beijing’s toughening stance against certain hostile Western powers with its move to develop Pudong into a center of international finance. For starters, the plan to build an international financial center in Shanghai is now focused on “raising the opening-up of the financial industry to the next level, namely, rules, a regulatory system, management and industry standards, to provide high-level system supply, high-quality product supply and high-efficiency capital supply”. One may suspect that China has begun preparing for a proper and necessary response to US-led Western powers’ determination to “decouple” from China. Until recently China had emphasized enhancing global trade and economic cooperation, but now it has begun building a “dual circulation” development pattern characterized by advancing the simultaneous growth of the domestic market and external trade and closer cooperation with non-Western economies in a complementary fashion. It is against this backdrop that the central authorities have chosen Pudong as the main test range for yuan convertibility.
Beijing will not compete with Shanghai for the international financial center status. The nation’s capital is given the mission of developing and experimenting with digital finance innovations and applications at its “second financial district” — the Lize Financial Business District. Digital currency is the primary path toward yuan internationalization. Digital finance will be the main mode of global finance in the 21st century. Shanghai’s Pudong New Area and Beijing’s “second financial district” will complement each other in showing the world how China will deal with the financial “decoupling” the US-led Western powers are pushing for to contain China’s development, by building a brand-new center of international finance open to friendly countries.
The Hong Kong Special Administrative Region must attach great importance to the nation’s overall development strategy every step of the way. The SAR government and especially the Hong Kong Monetary Authority must study the relationship between the Hong Kong dollar, the US dollar and the RMB, so that it can decide in a timely fashion whether it should maintain the exchange rate “peg” between the Hong Kong and US dollars or switch to yuan from the greenback. It must also decide if it will develop a digital Hong Kong currency on its own or join forces with the central authorities in building a digital currency platform for both the yuan and the Hong Kong dollar.
It is high time those who still believe Hong Kong’s prospect as an international finance center depends on its offshore yuan trade snapped out of that reverie. Given the central government’s unambiguous mandate for Shanghai to build an offshore financial trade market in Pudong that matches the city’s own international finance center status, Pudong obviously enjoys full support from the central authorities in developing offshore yuan transactions as long as it maintains effective risk control, which means Hong Kong must find another way to strengthen its status as an international finance center.
The author is a senior research fellow of China Everbright Holdings.
The views do not necessarily reflect those of China Daily.