Published: 00:27, April 30, 2024
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America, what exactly do you want to achieve with financial decoupling?
By Ho Lok-sang

In September 2023, while visiting Vietnam, US President Joe Biden told reporters that the United States had no intention to contain nor to isolate China, and that the US only wanted to maintain stability in accordance with international rules.

But President Biden signed a bill into law that will ban TikTok in the US unless it is sold to a non-Chinese owner within a year. Even though TikTok Chief Executive Shou Zi Chew had given his assurance that the company has never handed any of its data over to Beijing, and even though all data collected by TikTok is stored in US tech giant Oracle’s cloud infrastructure, and access is managed exclusively by the TikTok US data security team, President Biden still signed the bill in the name of “national security”.

The “national security” argument is clearly stretched and has little credence. But even more unbelievable is that the bill, called the No China in Index Funds Act, has again won bipartisan support. The proposed legislation requires all index funds to drop any Chinese company or else be subject to civil penalties. I see this move as just another step to intensify “financial decoupling” to isolate China from international investors.

Financial decoupling has been going on over the past few years. By scaring away or disallowing investment in Hong Kong and the Chinese mainland stock markets, America has succeeded in driving our markets down. No wonder we have hugely underperformed relative to other bourses.

In multiple talks that I have given since the beginning of the year, I have pointed out that the US cannot really decouple from China in international trade or in the supply chain of manufactured goods, but it can and has been quite successful in undermining Hong Kong’s and the mainland’s development through financial decoupling.

The methods are many. One of the most effective is “sanctions” against Chinese companies that keep piling up. These “sanctions” make investors worry about which listed company might be the next to be sanctioned, so they are scared about buying mainland or Hong Kong company shares. Another is travel warnings. Business travelers and other visitors are told that they could be arbitrarily detained, which is definitely untrue. The warning advisory for travel to China is at Level 3, advising to “reconsider travel” because of risk of “arbitrary enforcement of local laws, including in relation to exit bans, and the risk of wrongful detentions”. The warning advisory for travel to Hong Kong is at Level 2, telling prospective travelers to “exercise increased caution” given possible “arbitrary enforcement of local laws”. Yet another mandates that some pension funds, including federal pension funds and university pension funds, do not invest in stocks related to China.

Any blanket exclusion of China in economic activities must be construed as an unfriendly “Cold War” move aimed at undermining China. If that indeed is what the US wants, China will know, and will find ways to drive ahead regardless

Still another is the ending of Hong Kong’s special status as a separate customs territory for trade and economic purposes, based on the argument that the national security laws enacted to end the riots in the SAR rendered it unsuitable to warrant differential treatment in relation to the Chinese mainland.

Then there was also the US bill that threatened to close Hong Kong’s economic and trade offices in Washington, DC, New York and San Francisco on the grounds that Hong Kong no longer has a high degree of autonomy from China.

These financial decoupling measures have hurt Hong Kong and the mainland markets badly: Both have been the worst underperformers in the last few years as many international investors have been scared away. The amount of lost wealth is staggering. In Hong Kong, market capitalization fell from HK$47.5 trillion ($6.07 trillion) to HK$31 trillion, or a drop of HK$16.5 trillion. The poor performance of the stock market has hurt business and consumption sentiments. Both business investment and consumption have fallen, dragging down economic growth. The property market has turned south. The office takeup rate has come down; housing prices have fallen, further undermining consumption.

The low stock market valuations have also produced a dramatic shock to Hong Kong’s IPO activities. According to KPMG, in 2023, Hong Kong managed to raise HK$46.3 billion, down 55 percent from the previous year. Only 70 IPOs were completed and the average deal size was a mere HK$660 million. This has undermined Hong Kong as a global financial center. While Hong Kong suffers, India — which the US has now befriended for geopolitical reasons — has surged ahead. The National Stock Exchange of India and the Bombay Stock Exchange completed a combined 150 IPO deals.

Some might think that Hong Kong need not worry about losing its global financial center status, because Hong Kong “has better things to do”, particularly in high-tech and innovations. But if our highly innovative companies cannot raise funds through IPOs in Hong Kong, and are deterred by geopolitical risks from listing in the US stock markets or bourses elsewhere, their research and development efforts will be handicapped.

So the US can cheer for its success in undermining Hong Kong and the mainland’s development. But President Biden said he had no intention of containing or isolating China. If he is true to his word, he should not sign the No China in Index Funds Act. He should also reconsider allowing pension fund managers to invest according to their judgment about returns and risks and lift the unwarranted travel warnings. Any blanket exclusion of China in economic activities must be construed as an unfriendly “Cold War” move aimed at undermining China. If that indeed is what the US wants, China will know, and will find ways to drive ahead regardless.

The author is director of the Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University.

The views do not necessarily reflect those of China Daily.