Witnessing history with a yawn


Weeks and months of jumping up and down in excitement reached a crescendo yesterday as many of the Big Lychee’s most important puffed-up men in suits banged a gong and launched the Shanghai-Hong Kong Stock Connect. The men in suits laughed, shook hands and clinked champagne glasses as if they were ‘going to witness history’, to quote the actual words of HK Exchanges Chairman CK Chow.

Stan-SouthboundThis was in line with the build-up. Mainland authorities announced the cross-border stock trading system as a major breakthrough in opening China’s capital account. Some commentators couldn’t resist suggesting it might also be a ‘gift’ from Beijing to help out poor Hong Kong; when the arrangement was delayed, they claimed it was to ‘punish’ Hong Kong for pro-democracy students’ occupation of city streets. When the scheme was back on track, it emerged that Chinese officials had been sorting out such minor last-minute details as whether the cross-border trading would be subject to Mainland capital-gains tax. And after all that, Stock Connect doesn’t open China’s capital account at all: all the money flowing up and down the system remains sealed off and must ultimately return to its own side of the border.

Like the Shanghai Free Trade Zone, Shenzhen’s Qianhai Financial Blah-blah Zone Hub, the CEPA HK-Mainland trade arrangement and dozens of cross-border Pearl River Delta Co-operation and Partnership Agreements, it’s basically baloney. China’s leaders crave the might and glory of the Renminbi replacing the US Dollar as the global currency. But the Communist dictatorship must rig exchange and interest rates to stay in power. So it’s out of the question. (Some experts would caution a developing economy like China against lifting capital controls anyway.)

The problem with all the hype and backslapping and champagne is that, apart from some credulous overseas media, we become immune to it, and more cynical. Yet another make-believe Big Breakthrough to take our minds off the fact that China’s economy is trapped by the corruption, cronyism, protectionism, bad debt and misallocation of capital that keeps the Communist Party in power. What will happen if they ever introduce a real post-Deng reform of significance and substance? The bores in suits will be grinning away as usual with their banners and gongs, while the rest of us just yawn through a chance to genuinely witness history.

So how did the Shanghai-Hong Kong Stock Connect go on its first day? Essentially the ‘wall of money’ associated with the original ‘through train’ concept years back didn’t materialize (indeed can’t, owing to a strict cap on volume). Hong Kong funds did rush northward. The South China Morning Post reports that local and international investors couldn’t resist Shanghai’s cheap railway and liquor plays. A contrarian thing, perhaps: what better time to buy, when Mainland railway bosses are getting sentenced to death or jumping from tall buildings, or when maotai sales are plummeting owing to anti-corruption drives? Some funds of questionable taste are apparently chasing Looming East Asian War-plays in the form of defence-related companies. Another explanation is that investors are switching to this new way of buying Mainland equities to avoid the capital gains tax. A tax-break like this is of course essentially a subsidy – or to put it another way, ‘desperate eagerness on someone’s part to attract traders and save face’.

As for the southbound flow of funds – well, whoops. Where were they? Even the Standard and Sing Tao, which never fail to cheerlead vacuous cross-border hype, register disappointment and clutch at flimsy excuses. While any Hongkonger can access the Shanghai market, subject to the quota, only wealthy Mainlanders can invest in the other direction. We are told they need time to learn about the Hong Kong market, and they find the high valuation of locally listed stocks a turn-off. The high valuation reflects Hong Kong’s far higher standards of corporate governance and regulatory oversight (cue indelicate thoughts of pearls before swine). Hong Kong does have its share of mom-and-pop day-traders in penny stocks and covered warrants, which serve as glaring loopholes in the city’s strict laws against gambling. But Shanghai is by many accounts pretty much a risky, fraud-ridden casino. Hong Kong must look weird to them.

One winner from any increase in volume will obviously be Hong Kong Exchanges and Clearing, which makes its billions by slicing a little bit off every trade. In this respect, the Stock Connect is just another of those Cram More Stuff Into Hong Kong schemes that our rent-seeking tycoon-bureaucrat elite see as economic development. As with the increasing flood of Mainland shoppers, the Zhuhai Bridge, Disney, additional airport runways, more malls, more churn, more turnover, more money going in and out – it’s all about intermediaries and landlords raking off a piece of the action each time, and any budding entrepreneurs or innovators should get used to being luxury retail assistants. Not the sort of history we need to witness any more of.

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15 Responses to Witnessing history with a yawn

  1. Stanley Gibbons says:

    Hemlock – You can reach a climax, but not a crescendo……

  2. Qian-Jin says:

    @”But the Communist dictatorship must rig exchange and interest rates to stay in power. ”

    Hardly fair to say this. What the heck do you think the Americans have been doing with their currency for decades?

  3. Real SCMP Commenter says:

    Qian-Jin makes a damn good point…

    Also, the tax exemption wasn’t just ‘desperate eagerness on someone’s part to attract traders and save face’. it was more like desperate measures to stop the whole thing from flopping completely. Had they not announced an exemption at 5pm on the Friday before go-time, yesterday’s southbound flow would have been a wall of money in comparison to the northbound.

    It’s a long, complicated and ultimately boring story, but has at its heart the mainland tax authorities’ historical unwillingness to actually levy or clarify CGT on foreign investors, while not wanting to give up the option of charging it at a time and in a manner of their choosing. Couple that with the hermetically sealed through-train pipe from Shanghai to HK, and HKEx found itself in line for the (uncertain) liability, as it straddled the edge of tax jurisdictions. Fine, said they, we pass it onto our members, should it ever emerge. Here it gets complicated, because the HK brokers, being unable to ensure that their clients also sold through them all the shares bought (such inability being standard developed market practice), faced liabilities that could potentially not even be calculated. If a client bought a share at 100 through broker A, and sold it later at 110 through broker B, HKEx would face a tax liability on 10 – but how would they pass that on? And how could Brokers A and B possibly indemnify themselves against a complete unknown like that?

    Basically until last Friday night, it was unclear if anyone would be willing to trade northbound (both brokers and clients). The fact that the announcement came almost literally at the 11th hour is probably because the tax authorities on the mainland preferred to keep their stony 6-year silence (the problem wasn’t theirs, after all) but were asked by ever-higher levels of authority to do the only thing that could be done in the time remaining. And it took until Friday to hit whatever level in the Politburo they couldn’t say no to. (It is worth noting that they didn’t put an expiry date on the exemption. They want to keep all the options to themselves, wherever possible. The usual paranoid-authoritarian stance common to totalitarian regimes, in other words.)

    Sorry, that went on for a bit, didn’t it. Look, I did say it was long & boring.

  4. john says:

    No faith in any Govt. is well enshrined .. ALL are schemers munching on gullible subjects .. ALL comes with lavish hypes & promises .. when Govt. ideology is not same, then toppled it, when Govt. is run by minorities is thru deceit and if majority then absolutism .. politicians, religion, journalism, military are permanent foe yet men build societies along these lines .. covering from womb to tomb and all things in-between


  5. mjrelje says:

    So, how exactly is this good for HK and the average HK citizen? CY made out that this was the big deal that we had all been waiting for when he met with the great unelected in Beijing. How is it a big deal??

  6. Stephen says:

    @ Real SCMP Commenter

    Fair enough – But I don’t understand your first line about Qian–Jin making a good point? No Qian- Jin doesn’t. Just rehashes the time and tested nonsense that China only ever does the same things the U.S does and therefore everything the PRC does is peachy. Now I’m not out to beautify the United States, and if Qian-Jin wants to bash the U.S. there are plenty of blogs to do that on, but it is not the same.

    On the Shanghai Hong Kong Connect (Mainland first) I wanted to beat my breast in pride this morning that I live in a city where such luminaries and innovators had come up with such a “History in the making”, poverty eradicating, cure for ebola, real democracy for Hong Kong, elixir. I eagerly leafed through some heavyweight foreign titles expecting front page news and that Charles Li Xiaojia was in the running for Time Magazine’s “Man of the Year”.

    Alas the excitement seemed limited to Tobacco Charles GBM dreadful Hong Kong publications.

  7. mpr says:

    the guy who writes this blog is a genius. (ok not quite – but what a treat.)

  8. Real SCMP Commenter says:

    Stephen, fair do’s. Maybe I misunderstood, but I took QJ’s point as being that successive US governments have similarly rigged interest rates (and thereby currency, the flip side of the same coin) to stay in power, with results as diverse and fun as a widening wealth gap and the 2008 crisis. They’re still at it, only more so.

    I don’t see that in any way as a controversial statement, nor do I see it as saying PRC is therefore justified. But, again, I may have misunderstood our Advancing co-commenter. I will concede that it probably *was* a fair accusation for China as much as for the US. It’s rotten pretty much everywhere you look, albeit by degree.

    I am beginning to sound like john at 1:33 pm, so maybe I’ll stop!

  9. Scotty Dotty says:

    @ Qian-Jin and Real SCMP Commentator

    ”But the Communist dictatorship must rig exchange and interest rates to stay in power. ”

    Hardly fair to say this. What the heck do you think the Americans have been doing with their currency for decades?

    Real SCMP Commenter says: Qian-Jin makes a damn good point…


    I also disagree Qian-Jin’s point was on the money.

    The Banks who just got pinged for rigging exchange rates will also disagree – they got fined for NOT letting exchange rates trade freely.

    Hemmers point is surely right that The China Machine is about one deeply corrupt and offensive and genocidal (remember that?) regime aiming to use anything, including exchange rates, to keep its grubby self in power. In the US (and the UK) regimes come and go every few years.

  10. MonkeyFish says:

    Agree with QJ, US dominates current global monetary system, via control of processes: (e.g. SWIFT system); multilateral institutional actors (IMF, World Bank, etc etc); access to and control over its USD FX market, and by extension control over all USD denominated debt.

    Since WWI, US Military Industrial complex model scaled up and sold to the world based on global perception of US as icon of personal freedoms (both economic and political), which gradually went from being part sales pitch and more-or-less reality, to mainly sales pitch and partly reality, to total sales pitch with no basis in reality (e.g. see geopolitical contradictions inherent in the US ideology today – US ideology aimed at mainstream TV undereducated nematodes). At least the CCP is more-or-less openly fucking its own people: US deep state and military industrial complex fucks the whole world, everyday, in secret.

    However, and this is where CCP defenders fall down: the fact that the US economy and monetary system is the dark engine of an increasingly horrendous and unsustainable political and economic world order, built on narrow profit extraction and externalization of environmental and social costs (and its leadership are demons in human form running amok – hat-tip Bill Hicks, RIP), using the US as an example is a very poor argument for maintaining the current Chinese system as is. China has undergone a radical transformation in the last 100 years, and in particular economically (and politically at the grass-roots level) in the last 30 years. The only open question, is whether the CCP remains credible as a participant and leader of the transformational process, its speed, and its direction, and if the CCP loses credibility, who the other actors who fill that void are (military? regional alliances of big businesses). In other words, is Xi going to be remembered as a Gorbachev, or a Ceausescu?

    (apologies for long post and anti-US rant)

  11. Not really correct that this does not represent any opening of the capital account. It represents another very modest, incremental one. The fact that money ultimately has to return to the place it came from is immaterial. The important point is that a capped amount of money can cross the border without permission and CAN go home. The risk, of course, is when it all decides to leave in 10 mins because Hugo, having invested in something he does not understand, gets a freak on. And that is why the initial maximum amount is capped low. The cap will gradually increase, just as has been the case with the permitted reservoir for Qualified Foreign Institutional Investor (QFII) funds. Eventually the capped amounts for this stuff will be very big, allowing for the kind of millennial financial crisis that will allow Hemlock to get a full night’s sleep. But it is still a ways off…

  12. PD says:

    Hemlock is right — and remarkably well-informed and insightful — to express boredom at the tiny increase in the international use of yuan and mainland shares. It’s drip-fed CEPA and HK-style zones all over again.

    But the comparison with America just doesn’t make sense. It’s ploy no 3 (or thereabouts) in the CCP playbook, and amounts to little more than cutting and pasting text in response to detected key words.

    The point he is making is surely the cronyism and low-level corruption of the local media: hyping any “patriotic” theme instead of carrying out real investigative journalism or in-depth commentary.

  13. PHT says:

    MonkeyFish – Perhaps the US “dominates current global monetary system” because it is still by far the largest economy in the world and many places (especially less developed countries) still seem to have faith in US dollars being able to keep their value.

  14. Knownot says:

    Big Lychee sensibly mocks today’s (Wednesday’s) mouth-frothing, so it’s nice to think about the English language instead. Stanley Gibbons wrote: “You can reach a climax, but not a crescendo……”

    I’ve looked it up in two dictionaries and they both accept that the word can mean ‘peak’ as well as ‘gradual increase’. It’s true that it contradicts the origin of the word, the Latin ‘crescere’, to increase – but so does the standard word ‘crescent’. A crescent moon can be waxing or waning.

  15. MonkeyFish says:

    @PHT – the US dominates the world monetary system because of a series of strategic moves by its government and financial elite over the last 100 years, specifically implementation of a private fractional reserve banking system in the Fed acts (to finance WWI), Bretton Woods I & II, closure of the gold window and implementation of the petrodollar as reserve currency, and most recently QE1/2/3/4, intended to attempt to keep Pax Americana breathing as it continues to wane in both influence and importance in an increasingly uncompromising multipolar world.

    None of the recent history of the US would have been possible without US oil-producing allies accepting its debt as a reliable store of value, which is in part based on their faith in the proposition that the US gov is a sound debtor, and will continue to be so.

    And this leads to the crux of the matter, which in game theoretic terms is considered a “game of asymmetric or imperfect information”. The US economy, to the financially literate, is in poor shape, mainly as a result of the attempt of .gov policymakers to keep highly leveraged financial institutions solvent and create time for the repair of balance sheets and debt write-down through unfettered money printing and the madness of monetary neo-keynesianism, as well as the offshoring of the real US economy to fatten corporate profit lines (and quarterly incentive payments for executives). The symptoms of the disease are manifold: i) record low rates of labor force participation (the real unemployment story); ii) flat real wages since 2008; iii) rapid acceleration of US regions into a highly unequal 2 track economy (a short driving tour of Michigan would help to understand the second track); iv) flat or anemic economic growth since 2008 (based on official, fudged, numbers) or economic depression (based on how economic numbers used to be calculated 20 years ago – NB check John Williams @ http://www.shadowstats.com – a great resource on this, calculates economic indicators based on historical “non-fudged” formulas); v) continuing degradation of the US fiscal position.

    This is an unsustainable dynamic. US citizens are starting to wake-up and demand accountability from the US gov (Ferguson, Occupy Wall Street); meanwhile the Shanghai Co-op Organization is building an alternative global monetary system, based on a BRICs + Germany alliance, backed by precious metals (among a mix of reserves).

    The US as a dominant global leader is history and has been for some time. Based on my analysis of the last 20-30 years of US gov policy making, in particular foreign policy post-2000 and domestic policy post-2008, I fear the completion of this collapse process is going to be ugly, turbulent, and with tremendous potential for violence against US citizens and US interests, both in the domestic US arena, as well as internationally.

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