China News 8th November 2021
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China News 8th November 2021

This week’s news has stories about China and about Hong Kong.  Alex Lo, of the South China Morning Post give a succinct and lucid analysis of the recent changes in China.  He comments how these have caused unease – while being understandable parts of China’s governance and future.

Henry Kissinger recently complained that the United States didn’t have a coherent policy towards China. Implicitly, he meant that those in charge in Washington didn’t understand the country. Perhaps that’s true. But it is also true that many Chinese themselves are perplexed and confused by Beijing.

Under President Xi Jinping, there has been a sea change in many policies at different levels of state, society, and economy. And that’s what scares people, even those who are sympathetic to China and its leadership. People don’t like change because that means uncertainty. They will naturally question whether the changes will be for the better or worse. But who can tell when some policies aimed at the short term, such as liberalising the coal pricing market system, may have lasting consequences while other grandiose visions such as “common prosperity” may or may not pan out.

Just consider the policy changes Beijing has introduced this year alone, which admittedly has been more frantic than previous years.

There is the crackdown on Big Tech, which includes discouraging mainland companies from listing in the US and tightening data collection and security. That completely messed up the post-IPO (initial public offering) valuation of ride-hailing company Didi Chuxing in New York and subjected it to harsh regulatory scrutiny. All that followed the cancellation of the IPO of fintech company Ant Group at the last minute in November last year, in Shanghai and Hong Kong.

Beijing wants to switch to a “green” economy and achieve decarbonisation. But that has contributed to a coal shortage and energy rationing across the country. In turn, coal pricing has been temporarily liberalised. Economic growth is expected to be negatively impacted for the rest of the year.

“De-risking” is not new to Xi, as Beijing has long realised the economy depends too much on an inflated real estate market; the developers are too leveraged and many local governments – which sell land to developers – are deep in debt. As early as 2007, former premier Wen Jiabao had warned that the trajectory of China’s economic growth was “unstable, unbalanced, uncoordinated and unsustainable”.

by Zhao Qirui/ China Daily
by Zhao Qirui/ China Daily

But it was Xi who drew the so-called three red lines – the liability-to-asset ratio, net debt-to-equity ratio and cash-to-short-term borrowing ratio – late last year that severely hammered the ability of heavily indebted developers to borrow and triggered the Evergrande debt crisis. 

Meanwhile, a nationwide property tax is in the works, but will be introduced in phases and only after five years in a kind of experimental trial. Of course, it had been tried as early as 2011 in Shanghai and Chongqing, where the tax remains today. But according to a recent survey by Swiss bank Julius Baer, Shanghai is the most expensive city in the world, with some of its most prized real estate exceeding the priciest in Hong Kong, London, New York, Paris, San Francisco, Tokyo and Geneva.

by Markus Winkler
by Markus Winkler

One reason for that survey’s result is that Shanghai has one of the world’s highest concentrations of billionaires. While the late Deng Xiaoping said some people would be allowed to get rich first in China’s economic opening, he did not mean a handful of multibillionaires would have net worth that rivals small nations and whose political loyalty was unclear.

Muzzling the tycoons is the flipside of common prosperity, which aims to achieve greater social equality, but which will remain a work in progress for a very long time. As part of the same equality drive, regulators have cracked down on cram schools, seen as an education arms race that disproportionately favours the children of the well-off and middle class over those from poorer families. But the crackdown has also put many university graduates out of work as teachers at those schools, which represent a multibillion-dollar industry, with some school chains earning more in a year than the annual budgets of many smaller mainland universities.

Frequent comparisons of Xi Jinping with Mao Zedong therefore add to the unease

China’s extreme inequalities have been compared to America’s Gilded Age, the Belle Époque in Europe at the height of the British Empire, and of course, the phenomenon of “the 1 per cent” in contemporary US. They call into question the very legitimacy of the Chinese communist state, which historically legitimised itself by denouncing Western imperialism and capitalism. At the very least, they are a profound ideological embarrassment.

Many of those programmatic policy changes were announced within the past year. But they are put in place against the backdrop of other big changes such as the Belt and Road Initiative for global infrastructure development and ending the term limit of the Chinese presidency.

The crackdown against the opposition and secessionist forces, along with an overhaul of recent electoral gains, in Hong Kong, completely reverses the more liberal tolerance of political agitation in the city under Deng, Jiang Zemin and Hu Jintao. And tensions have been rising across the Taiwan Strait, leading even to talks about the possibility of war.

Regardless of the rights and wrongs of these political developments, they add to the perceptions of uncertainty and instability introduced by fundamental policy changes, in aim and direction, of those already mentioned.

Critics often attribute “performance legitimacy” to the popularity of the Communist Party in China. But it’s not just that the party has made the nation stronger and richer after “a century of humiliation”. Rather, people’s lives have become more stable. Deng, Jiang and Hu represent social stability and improvement in contrast to the revolutionary upheavals of Mao Zedong. Frequent comparisons of Xi with Mao therefore add to the unease.

China News 8th November 2021

Looking ahead, the central government must find the right rebalance of state, economy, and society after a period of phenomenal growth unprecedented in history. Many of the new and even radical policies may be justified, but their potential for mistakes and other unanticipated consequences must worry even the most diehard supporters of the communist state. Xi is taking China into uncharted territories.


Our second story covers a recent survey of international companies in Hong Kong.  It shows that political risks are not the most important factor in international companies choosing to come to, stay, or withdraw from Hong Kong.  Costs and profits remain key.

The Census and Statistics Department published its latest annual survey on international companies stationed in Hong Kong. The report sampled 9,049 companies to study regional headquarters and local offices in Hong Kong owned by parent companies outside Hong Kong. The survey found that the number of companies using Hong Kong as a regional headquarters has declined.  In 2020 there were 1,504; in the year 2021 they dropped to 1,457, a decrease of 3.1%.   the number of US-funded enterprises in China dropped by 10%, from 282 to 254. In the past year, the number of employees involved in the regional headquarters of these foreign-funded companies has also decreased from 177,000 to 161,000, a decrease of 9%.

China News 8th November 2021

On the surface, this report seems to confirm that foreign investors are indeed withdrawing from Hong Kong.  In August this year, the US State Department warned about the risks of doing business in Hong Kong.   In addition, as Hong Kong maintains its strong defence against the epidemic, some chambers of commerce have warned that companies may withdraw from Hong Kong or reorganize their businesses in Hong Kong.  However, we must carefully consider what factors will affect international enterprises and whether they choose to set up their headquarters in Hong Kong or not.

Political stability and security are not the main reasons for the withdrawal

The Hong Kong National Security Law created doubts about political risks among governments and enterprises of various countries.  According to the data collected by the Census and Statistics Department, many overseas companies expect the SAR government to focus on political issues, and political stability and security.  But the SAR has also been rated by companies as having a simple taxation system, freedom of information, and a clean government.  

Another factor affecting business views is Hong Kong’s local political development in future.   However, political factors are only one of the many that affect the business plans of foreign-funded enterprises in Hong Kong.  They do not mean that companies will withdraw from Hong Kong.  Census and Statistics Department’s survey this time focuses on companies that are staying in Hong Kong, rather than those that have already transferred their business. Therefore, it has not collected the reasons for the withdrawal of foreign capital from Hong Kong. 

Although the number of foreign-funded companies’ operations in Hong Kong has decreased overall, the regional headquarters of mainland companies and British-funded companies have increased by 6% and 5%, respectively.  The number of overseas companies in Hong Kong has not fallen across the board.  Profit and cost are still the most important considerations for companies choosing to station in Hong Kong or not.  

As for the US-funded companies with significant declines, their reasons for withdrawing from Hong Kong are also not necessarily related to politics. For example, in August last year, Vanguard, the second largest asset management company in the world, announced its withdrawal from the Hong Kong market. This was because Vanguard identified China as the world’s most promising capital market. The Hong Kong staff positions were transferred to branches in Shanghai and Singapore.

The number of overseas companies in Hong Kong has not fallen across the board. The above examples illustrate that political factors alone have not caused foreign companies to suspend their investment in Hong Kong.  Indeed, when financial regulators in China are tightening their measures, many foreign companies still choose to enter the city. Cost is often the main factor in their choice of investment location.


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