The Taiwan Banker

Developing the former Portuguese colony as a financial hub has as much to do with stalled financial reform on the mainland as it does Beijing's dissatisfaction with Hong Kong. Macau is not a likely global financial center. The former Portuguese colony, which reverted to China's control two decades ago, is best known as the Las Vegas of the Far East. It has the world's largest gaming sector and not much else. When it comes to finance, Macau has been focused on improving compliance - with mixed results. Nearly 15 years after the United States sanctioned Macau's Banco Delta Asia for its involvement in illicit North Korean activities, the territory remains a major money-laundering center, according to both the U.S. Department of State and the United Nations Office on Drugs and Crime (UNODC). “Macau has for a long time been seen as a place to launder money and for organized crime to do business, and while times and methods have changed it still unfortunately [is] seen this way by many,” Jeremy Douglas, UNODC's regional representative for Southeast Asia and the Pacific, told the Macau News Agency last July. Yet, Beijing is now signaling its intention to develop Macau as a financial hub. Following Chinese leader Xi Jinping's visit to Macau marking the 20-year anniversary of its return to China, Beijing signaled its intent to deepen the territory's financial links with the mainland. In a statement, China's banking and insurance regulator expressed support for Macau banks expanding to the mainland and mainland financial firms doing the same in Macau. Individuals' daily remittance limit of RMB 50,000 from Macau to mainland accounts will be raised to RMB 80,000, the People's Bank of China said. Further, Chinese media reported that the Macau authorities and Guangdong provincial government are collaborating to speed up the establishment of a stock exchange. It is instructive to view Macau's financial-sector ambitions through the lens of Hong Kong's political travails. Anti-government protests have wracked the former British colony since June 2019, at times bringing the city to a standstill. Above all else, protesters are demanding Beijing honor its promise to allow Hong Kong universal suffrage. The central government refuses, and the standoff continues. By comparison, Macau is docile. In the 20 years since the territory reverted to Chinese rule, the city's residents have never challenged Beijing's authority. Indeed, Macau implemented national security legislation (Article 23) prohibiting "treason, secession, sedition (and) subversion" against the Chinese government without incident in 2009. An earlier attempt by Hong Kong to pass similar legislation in 2003 provoked a ferocious popular backlash, forcing the Hong Kong government to shelve the law. Beijing is now rewarding Macau for implementing the central government's vision of "one country, two systems," the model by which Hong Kong and Macau maintain a certain degree of autonomy from the mainland. And indeed, Xi Jinping has made clear his views on Macau's performance. “Macau’s successful experience speaks volumes about the viability and strength of one country, two systems, as long as we are committed to it and act on it," he said during his visit to the city. A Reuters report in December, citing anonymous sources, said that Beijing sought to build up Macau as a financial center to mitigate any potential fallout from Hong Kong's instability. Creating a financial center in Macau would be a key part of a "contingency plan" in the event that the situation in Hong Kong deteriorates. That may well be true. Political unrest looks like the new normal in Hong Kong. But Beijing's need for a second offshore finance center also reflects stalled financial reform on the mainland. Shanghai, the mainland's commercial hub and home to its largest stock exchange, was supposed to become a global financial center by 2020. At least that's what China's State Council declared in 2009. That goal remains elusive. Shanghai is subject to the same capital controls as the rest of the mainland. The renminbi is still not fully convertible. Chinese regulators arbitrarily interfere in financial markets. The Great Firewall of China cuts the city off from the global internet. It is no wonder that AmCham Shanghai entitled a report published last year on the subject, "Shanghai 2020: A Financial Vision Unfulfilled." "Few respondents [to the survey] indicated confidence that Shanghai will become a significant global financial center anytime soon," AmCham said in the report. If anything, Beijing has backslid on financial reform in recent years. Most infamously, it clumsily intervened in China's equity markets to halt a precipitous decline in stock prices. When the Shanghai index lost about a third of its value between June and July 2015, China's leaders panicked. Rather than let the market turbulence settle, Beijing temporarily barred major shareholders from selling and banned new IPOs and short sales. It also ordered state-owned enterprises to buy up stocks (with borrowed money) to artificially inflate share prices.No replacement for Hong Kong When Beijing first announced plans to make Shanghai an international financial center by 2020, some observers worried it would come at Hong Kong's expense. After all, Shanghai was China's primary financial center before 1949. Hong Kong's opportunity came as the mainland engaged in a 30-year experiment with autarky. Concerns about Shanghai overtaking Hong Kong have proven to be premature. The Chinese Communist Party's refusal to ease its grip on the mainland's financial system virtually guarantees Hong Kong's continued role as China's sole hub for global capital. Despite the ongoing protests, Hong Kong led the global IPO market in 2019 on the back of two mega-deals: Alibaba's secondary share listing and the listing of Budweiser Brewing Company. Overall, Hong Kong completed 160 IPOs last year that raised about US$40 billion. Macau is a financial backwater by comparison. Hong Kong reports US$140 trillion in international assets, greater than all of mainland's China US$100 trillion, according to the Bank of International Settlements. Macau has just US$15 trillion. Hong Kong boasts a money supply of US$1.7 trillion, 22 times Macau's US$81 billion. To become an offshore financial center, Macau would need to significantly boost the amount of renminbi circulating in its banking system. The former Portuguese colony currency has just 39 billion (US$5.6 billion) in yuan deposits, compared to Hong Kong's 636 billion (US$91 billion). Macau could conceivably serve as a regional financial center for China's Greater Bay Area - a plan to create a massive innovation cluster that links the two SARs with nine Guangdong Province cities - but Hong Kong is much better qualified. Macau would only play that role for one reason: to carry out the central government's wishes. Some analysts say that Beijing is worried about Hong Kong becoming entangled in a U.S.-China financial war. Under that scenario, "if Hong Kong's financial operations are not smooth, Macau can compensate," Song Xiaozhuang, a professor at Shenzhen University's Center for Basic Laws of Hong Kong and Macau, said in a December Ming Pao commentary. Song accuses Washington of "choosing Hong Kong as a battlefield against China. Because Hong Kong is a financial center, the United States has this option," he said in the commentary. He warns that should Hong Kong "become unstable," mass capital flight will ensue. The money will go to the United States, bolstering financial markets and "U.S. dollar hegemony," Song reckons. Thus far, that looks like a remote possibility. Since the protests began in June, investors have taken US$5 billion out of Hong Kong, according to the Bank of England. That's just 0.3% of the city's money deposits of US$1.7 trillion. At the same time, Beijing's heavy hand is increasingly visible in Macau. During Xi Jinping's December visit to the city, 1,650 high-tech security cameras were deployed (about 50 per square kilometer, according to Asia Times), some featuring facial-recognition technology to spot anyone on the CCP's blacklist. Macau’s new light rail system was shut down for the duration of Xi's three-day visit. Tourist attractions were closed. Earlier in December, Macau separately denied entry to the leaders of the U.S. business group AmCham Hong Kong. The organization's president Tara Joseph and chairman Robert Grieves were on their way to the annual AmCham Macau Ball. Macau authorities did not give a reason for denying them entry. “We are puzzled as to why this happened, given this was simply a social occasion to celebrate AmCham Macau’s annual gathering,” AmCham Hong Kong said in a statement.Draconian security measures and border controls are not the stuff that global financial centers are made of. But looking on the bright side, Beijing has done investors a favor by showing them that one country prevails in Macau, not two systems. Ironically, Hong Kong's resistance to such mainlandization is one of the city's greatest assets as a global financial hub even as it ensures continued strife with the central government.