In this piece the always provocative Andy Xie, former chief economist at Morgan Stanley, highlights a basic fact: as China’s trade surpluses–and foreign reserves– continue to rise (and rise…and rise), the world is about to see a huge surge in Chinese investment abroad, and in things //in addition// to US treasury bonds (NOT, I would argue, INSTEAD of). Andy says China’s role as a huge exporter of capital makes it likely that Shanghai will supplant HK as a global financial center. It’s a famliar argument, and one day might be true. The question is, how long is it going to take?
To my mind the more interesting question for now is, is the world ready for the coming surge in Chinese investment? It’s been two years now since the US Congress had a heart attack over a state owned Chinese company trying to buy a second tier US oil company. Has anything changed? And will reactions among politicians in Europe–which also has trade problems with China–be any different when a Chinese company tries to buy something there? I’m a skeptic.
Anyway here’s Andy’s piece. It’s on the op ed page this morning of the South CHina Morning Post, but since it’s a pay for play site I’ll post the entire essay…www.scmp.com
A Different Cycle
The rhythm of life seems to have stayed remarkably constant in Hong Kong.
Every three years or so, a new concept catches on, the stock market begins
to rise and investment banks go on a hiring spree, mostly from each other.
They search high and low, mostly on the mainland, for companies that look
remotely like the listed companies that are ：hot；. After being worked on
by an army of lawyers and accountants, these companies look like just what
the market wants. An initial public offering frenzy follows.
Fund managers all over the world knock on the doors of investment banks for
a piece of the action. The market rises more. The momentum finally catches
the attention of retail investors. They all pile in at the same time. The
The buoyant market then attracts the unsavory types, who simply fake the
appearance that the market wants, and con money from direct investors,
investment banks or retail investors. As soon as the liquidity tide recedes,
they get exposed. There is a confidence crisis, and the market collapses.
Investment banks go on a firing spree. The wily old-timers already have
their guarantees, and laugh all the way to the bank. The novices learn, bide
their time, and position themselves for the fat guarantees in the next
In this wonderful cycle of life, landlords always have the last laugh. When
investment banks hire like mad and bankers enjoy big packages, Hong Kong
landlords are always ready to take their money by raising rents. Somehow,
they manage to lock in the rental contracts at the peak.
Life, however, may not be the same next time. A monumental change has
occurred. China has become a capital-surplus country. Mainlanders are in a
feverish mood for wealth acquisition. This excess energy either becomes
bubbles, or massive current-account surpluses, or both. Because China is so
big and its productivity growth rate so fast, its capital surplus will
overshadow that of Japan・s in the 1980s, and may exceed US$1trillion per
It will fundamentally change China・s role in the global financial system.
Hong Kong・s financial sector has played two roles in helping China. It is
the bridge between international financial capital and Chinese
opportunities. Mainland Chinese companies raised over US$40 billion (1.5 per
cent of gross domestic product) in Hong Kong last year alone. More
importantly, state-owned enterprises and private companies have gone through
Hong Kong・s system to develop corporate structures that meet international
standards. The SOEs・ better performance today is partly due to the
restructuring they went through for a Hong Kong listing.
Mainland China・s capital surplus is about to make Hong Kong・s past roles
obsolete. First, the buoyant A-share market has made cheap capital available
to mainland companies, and with low hurdles. They have been complaining
about stringent international standards and the high costs to meet them.
Mainland companies don・t pay lawyers or accountants unless they get paid
more by someone else afterwards. Now, they can kiss expensive foreign
accountants, bankers and lawyers goodbye, and get easy money at home. This
may not be good for the development of China・s corporate sector in the long
run, but you cannot blame businesses for taking the easy way out.
Second, mainland China simply doesn・t need foreign capital anymore. Its
main challenge is to export capital. London and New York became
international financial centres when their countries needed to export
capital, because the most efficient way to do so is to bring opportunities
in, rather than to search for them outside. China has a unique opportunity
to develop a genuine international financial centre. There are only two
potential candidates for
this role: Hong Kong and Shanghai.
On the surface, Hong Kong is much better positioned to fill this role. It
has a world-class system, its market, supported by international
institutional investors, has more depth, and its investor community is more
rational. But, it has three disadvantages. First, unless Beijing completely
liberalises its capital account, it is just not practical for an offshore
financial centre to mediate domestic savings into investment.
Second, Shanghai is much bigger and has a larger hinterland than Hong Kong.
Its population is already 20 million, and may reach 50 million in two
decades. Hong Kong・s population is 7 million, and is not growing, as it is
not totally open to mainland jobseekers. A country・s financial centre is
usually its largest city.
Third, Hong Kong・s separateness means that its knowledge of the mainland is
relatively shallow. To some extent, Hong Kong・s financial sector is still a
playground for foreigners. Local people play a supportive role. This is
because, as an offshore financial centre, the most important thing is to get
money from New York, London or Tokyo. The market moves more on international
sentiment than Chinese reality.
Despite its many advantages, Hong Kong actually faces more challenges than
Shanghai in becoming China・s financial centre. In fact, Shanghai is well on
its way to becoming just that and, over time, is set to become a premium
international financial centre, due to the mainland・s capital surplus.
Hong Kong may become a centre for private wealth management, like
Switzerland. It has low tax rates, offshore status and precious distance
from mainland police. Rich mainland families still feel insecure at home and
want to diversify. China・s national wealth stands at about US$8 trillion,
now, compared with US$50 trillion for the United States, and could multiply
five to six times in two decades. Some diversification could sustain Hong
Kong・s prosperity. Singapore is the closest competitor in that regard. It
has a unique advantage in being able to offer passports on flexible terms.
Becoming another Switzerland is not a bad choice for Hong Kong. It is
already rich and Hongkongers are no longer as hungry or as driven as
mainlanders. The massive wealth could sustain a good living standard without
strong economic growth: Hong Kong people can afford to watch mainland
China・s mad dash for money. If you already have it, why bother again?