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A staff member cleans one of HSBC’s historic lion sculptures ahead of their unveiling outside the bank’s headquarters in Central on October 22. The sculptures were restored after suffering damage during last year’s protests. HSBC has come under increased scrutiny of late amid US sanctions and fears that China might place it on an “unreliable entities” list. Photo: Felix Wong
Opinion
Richard Harris
Richard Harris

Hong Kong as China’s Jersey? How mainland China can still find a use for our city

  • Corporate change is gripping Hong Kong as our integration into China is being accelerated by the coronavirus and the national security law
  • Mainland influence in banking, aviation and other sectors suggests that the Hong Kong economy will be more domestically focused than the global entrepot it once was
Richard Harris
Richard Harris
Why you can trust SCMP

When I first moved to America in 1984, AT&T provided monopoly telephone services to the whole of the United States and Canada. My impression of the company was undeniably positive. They provided me with a new phone line in two days – this was before mobiles – and gave me my future phone number there and then.

Monopoly power does not have to be a bad thing if it works in the interest of the customer. Admittedly, it rarely happens, hence the powerful US anti-trust laws that threatened the company’s forced break-up. AT&T voluntary spun off the “Baby Bell” regional telephone companies which cracked open the telephone service and equipment supply market to competition.

The recent announcement by the US Department of Justice to seek the break-up of Google is another exercise in anti-trust. It seems a perverse way to reward one of the most successful US companies in history. It might have been expected of the European Union, which has threatened to clip the wings of Big Tech for years.
We are told it is not related to the Trump administration’s ire over such companies adding a more balanced view to the president’s narcissistic belief in his skills in running the country. In any case, incoming Democrats are likely to have a similar view against oligopolistic powers, so Google has some thinking to do.

The break-up of big companies in America is nothing new. Standard Oil and American Tobacco were broken up in 1911. US Steel followed in 1920 and other behemoths, including Microsoft, have agreed to divestitures or settlements. Amazon, Facebook, Twitter, and even Apple are possible targets.

It seems ironic, in the land of capitalism, to break up not just large domestic companies but also global champions for doing stunningly well. On the other hand, it is a unique and beneficial element of American capitalism that companies are allowed to grow unfettered – up to a point. A split often means the sector gets a boost from increased competition, creativity and better use of capital.

Breaking up a national champion is of course anathema to China, which has encouraged the formation of highly successful near-monopolies in the domestic market. Boasting great strength and vast capital resources, Alibaba, Ant, Baidu, Huawei and Tencent are now more than capable of competing against their global equivalents.

However, their chances of breaking into European and US markets are fading. American and European markets are tough to crack because the very domesticity of Chinese giants does not always translate to Western appetites and, more recently, because the authorities there are increasingly inhibiting the domestically protected Chinese competition.

An Oracle-ByteDance deal for TikTok gives Huawei a glimmer of hope

This phase of corporate change is gripping Hong Kong, too, as our integration into China is being rapidly accelerated by the coronavirus and the national security law. Mainland Chinese bankers now hold more than half of the senior roles in Hong Kong as they take over Hong Kong’s financial sector, displacing Hongkongers who make up just 30 per cent of lucrative investment banking jobs in the city.
Two of the most senior roles in the University of Hong Kong are about to be taken over by mainland professors. The active encouragement for Hongkongers to join in Greater Bay Area activities will make the Hong Kong economy much more domestically focused than the global entrepot it once was.
The biggest corporate announcement last week was Cathay Pacific’s restructuring of its business, which was flying high before the coronavirus hit. The margins between success and losing billions are small in the fixed-cost airline business. Cathay is completely beholden to China for its operational and regulatory permission to survive.

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Hong Kong’s flagship carrier Cathay Pacific to axe 5,900 staff and immediately drop Dragon brand

Hong Kong’s flagship carrier Cathay Pacific to axe 5,900 staff and immediately drop Dragon brand

No private owner can support an airline that cannot fly. So it appears almost inevitable that Cathay will eventually become majority-owned by Chinese interests, who would acquire a portable brand with a Western mindset to tackle global expansion.

HSBC’s surprisingly good third-quarter results on Tuesday also highlight its high exposure to the Chinese economy. The bank is stuck between US demands to close the accounts of sanctioned individuals and the risk that China could demand those individuals’ accounts be maintained. Rumours that the bank may be placed on China’s “unreliable entity” list have rattled investors and depositors alike.

Businesses and investors bow to tense political reality in Hong Kong

We also have the undignified picture of former chief executive Leung Chun-ying suggesting a boycott of HSBC for not taking a strong political stance in supporting the national security law. It would be unsurprising then if the Hong Kong and China operations of HSBC developed a separate Chinese-majority ownership.

Its stock price took heart at Ping An Insurance reinforcing its role as HSBC’s biggest shareholder last month. Such a corporate adjustment would be a natural evolution of Hong Kong’s development into a red city, but it does not mean the loss of Hong Kong as a special economy.

Many countries find regions or dependencies with different taxation and legal jurisdictions under their sovereignty to be useful for their international economic activities. Monaco, Andorra, Jersey and the Isle of Man stand as examples. Hong Kong will fill this role for China.

Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer, broadcaster and financial expert witness

This article appeared in the South China Morning Post print edition as: HK’s natural evolution
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