25 October 2016
'Red capital' from mainland China, either state-owned enterprises or private firms, makes up more than half of Hong Kong's stock market capitalization. It wants to grab control of the entire political superstructure in the city. Photo: Xinh
'Red capital' from mainland China, either state-owned enterprises or private firms, makes up more than half of Hong Kong's stock market capitalization. It wants to grab control of the entire political superstructure in the city. Photo: Xinh

Why ‘red capital’ is a blessing and curse for Hong Kong

While its pledges were still ringing in our ears, Beijing prodded the Hong Kong authorities to enact the national security bill not too long after the handover, an effort that failed.

In the ensuing years, similar imperatives, either covert or blatant, have led to the plain truth that “one country, two systems” has long been in limbo.

One theory to explain Beijing’s betrayal of its vows is that the Communist Party is capricious in nature, and when tyranny gets in its blood, the Basic Law — the mini constitution drafted to delegate Beijing’s powers to Hong Kong to ward off interference from the central government — must be, by hook or by crook, flouted, and the quicker the better.

The party is known for this, and its propaganda, its carrot, its stick and its banner of a united front are nothing new to us.

Anyone familiar with the history of modern China prior to the establishment of communist rule could have easily envisaged Beijing’s treachery, even in the 1980s.

For instance, Beijing once curried favor with local intellectuals, including Johannes Chan Man-mun, during the drafting of the Basic Law, yet how it has dragged Chan through the mud in the University of Hong Kong pro vice chancellor appointment saga is reminiscent of the way Beijing disposed of scholars and socialites once they became no longer useful after 1949.

But how to explain the sudden spike of retrogressive developments seen in recent years?

Do they hold a clue about the shape of things to come?

Here I suggest a new approach, based on political economy, to gauge Beijing’s logic.

Capital from China, or “red capital”, has been swelling in size, and its impact has been felt most in Hong Kong: 15 of the 20 largest counters on the local bourse are China-invested, and “red capital” as a whole makes up as much as 60 percent of total market capitalization.

“Red capital” can be roughly categorized into three types: listed state-owned enterprises (SOEs, like H-shares and red chips), state-backed non-SOE firms (like Alibaba Group Holding Ltd.) and “gray area” private funds, which are unlisted, funded by shadowy money channeled overseas and operated by princelings or their agents.

On the face of it, the SOEs and state-backed private companies listed offshore are not under the baton of the Communist Party.

However, SOEs are all run by communist cadres, and leading private firms usually have princelings sitting on the board.

Gray-area funds, by comparison, are fully, directly controlled by cadres and princelings in a hidden fashion.

Given this, they may have the most profound impact on local politics, through their many veiled connections to officials.

Bloomberg, the New York Times and Reporters Sans Frontières made a serial exposé in 2013 of the Hong Kong assets owned by families of top Chinese leaders, including former premier Wen Jiabao (溫家寶).

Before long, Kevin Lau Chun-to, then chief editor of Ming Pao Daily, was brutally stabbed in broad daylight, and some believe the attack was a result of the newspaper’s related reports.

How large is this pool of shadowy money from north of the border?

There may be more than 20 such gray private funds with capital of between US$1 billion and US$2 billion each, one financial analyst told me.

Shadowy money gained from embezzlement or bribery needs an exit, as its owners have to whitewash their assets.

The Bo Xilai (薄熙來) case offered a glimpse of how cadres transfer and operate their money beyond the Chinese border.

Yet western countries’ stepped-up scrutiny and the market’s waning appetite for China concept stocks have made that difficult.

Several Chinese firms have delisted from US stock exchanges since 2012, and, having nowhere else to go, the shadowy proceeds have flocked to Hong Kong.

But Hong Kong is far from being a haven for princelings and their business interests, as its regulatory environment is hardly slacker than that of any western market, if not stricter.

That is exactly why they want to remold Hong Kong’s established institutions to unfetter themselves.

The city’s independent judiciary, transparent regulation, freedom of the press and academic freedom all need to be dismantled.

And this underlies all the repercussions, like stalled democratic progress, functional constituencies, brainwashing in schools, inhibition of press freedom, as well as political decisions to prosecute or not by the Independent Commission Against Corruption, to use force or not by the police, or to appoint somebody or not to senior posts at local universities.

In a nutshell, since red capital has been ruling the roost of the local economy, it wants to grab control of the entire political superstructure.

Some may worry that the inflow of shadowy money, controlled by feuding factions within the party, will impair Hong Kong’s standing as a financial hub.

But there exists a “Nash equilibrium” that can prevent any indiscretions: strategic compromise is necessary for all factions, as they all want to pursue profit in Hong Kong.

Likewise, red capital possesses a characteristic rationality in times of crisis, as making money needs a stable environment.

While sparing no effort in remolding Hong Kong, they know the city’s virtues well, and they oppose full mainlandization, since when Hong Kong no longer maintains its uniqueness, they will all stand to lose.

This also applies to other issues like Article 23 and Hong Kong independence: princelings marshaling money away from mainland China are never genuinely patriotic, and they may not necessarily side with radicals in favor of any crackdown or ruthless bloodletting in Hong Kong.

This, for sure, means some room for maneuver for the local democratic movement.

This article appeared in the Hong Kong Economic Journal on Feb. 18.

Translation by Frank Chen

[Chinese version 中文版]

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Former full-time member of the Hong Kong Government’s Central Policy Unit, former editor-in-chief of the Hong Kong Economic Journal

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