Commentary: Beijing’s crackdown on overseas investing is making Hong Kong more important, not less
Hong Kong is being repositioned as a controlled gateway between two worlds, says Enodo Economics’ Diana Choyleva.
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LONDON: Beijing recently imposed heavy penalties on three popular investment platforms used by Chinese savers to buy foreign stocks and funds. It would be easy to conclude that China is simply tightening capital controls and making it harder for households to invest abroad.
That reading is understandable. It is also wrong.
If Beijing’s goal were simply to keep Chinese savings trapped at home, why is Hong Kong enjoying its strongest market for initial public offerings in years?
The answer is that Beijing is not trying to stop capital from crossing borders. It is trying to ensure that capital crosses borders through channels it can supervise.
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BEIJING’S FIELD OF VISION AND CONTROL
Viewed through this lens, many of China’s seemingly disconnected financial policies over the past few years begin to fit together.
Stock Connect and Wealth Management Connect have been created as official channels linking mainlanders and Hong Kong markets. The Qualified Domestic Institutional Investor and Qualified Foreign Institutional Investor schemes have steadily broadened access for Chinese institutional capital going abroad and foreign capital entering China.
More Chinese technology companies are listing in Hong Kong rather than New York, and the city’s bond market is offering an expanding range of yuan-denominated assets.
The recent action against Futu, Tiger Brokers and Longbridge is another piece of the same architecture. The campaign against what Beijing calls “illegal” cross-border securities activity has been years in the making. It is opposed to overseas investing that takes place outside its field of vision and control.
GATEWAY BETWEEN TWO WORLDS
Hong Kong’s current IPO boom reflects that shift. As unofficial routes close, the approved route becomes more important.
Companies seeking access to Chinese savings increasingly need a Hong Kong listing. Chinese investors seeking overseas exposure increasingly need Hong Kong products.
The logic behind the Connect schemes themselves is revealing. Mainland investors can buy Hong Kong-listed shares through Stock Connect. But when they sell, the proceeds ultimately return to yuan.
Capital is allowed to venture into international markets, but without ever fully leaving China’s financial orbit.
Hong Kong is therefore being repositioned. Rather than serving simply as China’s window to the world, it is increasingly becoming the controlled gateway between the worlds of the yuan and the dollar – deep enough to attract international investors, but supervised enough to serve Beijing’s interests.
MORE CHOICE WITHOUT SURRENDERING CONTROL
This strategy does not eliminate the underlying reasons Chinese households seek overseas assets. Like savers everywhere, they want diversification, higher returns and protection against domestic risks. Restricting unofficial channels does not remove that demand. It merely redirects it.
For decades, much of China’s excess savings reached the rest of the world through the state. First, they were recycled into foreign exchange reserves, much of which found their way into US Treasury securities. Later, they financed state-led initiatives such as the Belt and Road.
Beijing made those decisions. The next phase may look different.
By opening Hong Kong wider, China is gradually allowing households and private institutions to make more of those choices themselves, while keeping the process within an architecture it controls.
But giving Chinese households more say over where their savings are invested is not the same as embracing free capital flows. Beijing is seeking to broaden choice without surrendering control. The result is neither financial autarky nor Western-style liberalisation, but a distinct model of controlled openness.
NAVIGATING US-CHINA PARALLEL TRACKS
This points to something larger than a debate about capital controls. China is quietly building a parallel ecosystem centred on the yuan.
For the past several decades, the world has operated around one dominant financial system centred on the US dollar. The yuan system is not a replacement, at least not yet.
But a world with two financial systems will be more complicated to navigate. Money flowing through Hong Kong increasingly operates under Chinese oversight, while capital in the dollar system remains governed by American laws and institutions.
A company listing in New York accepts a heavier regulatory burden and greater exposure to lawsuits, but benefits from the predictability of US rules. Listing in Hong Kong involves fewer legal requirements, but investors must also consider the influence of Beijing.
The aim is not to replace the dollar system overnight, but to build deeper capital markets and a larger yuan ecosystem with Hong Kong as its gateway.
Hong Kong is becoming more international, but on China’s terms. Whether that is reassuring or unsettling depends on where one sits. But mistaking it for a retreat is a serious analytical error.
Diana Choyleva is founder and chief economist of Enodo Economics and a keynote speaker on global macroeconomics, China, and US-China strategic competition. She is also a senior fellow at the Asia Society Policy Institute’s Center for China Analysis.
Source: CNA/zw(ch)
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