the short version:

–the end of Hong Kong as a meeting ground between China and the rest of the world, and

–the end of “Socialism with Chinese Characteristics,” and the consequent return to central economic planning

Hong Kong

I started managing a Hong Kong equity portfolio in 1985 and remained an active investor there for about twenty years.

The nineteenth-century history of the UK in China in general, and in Hong Kong in particular, is horrifyingly ugly. In 1898, the UK used its military strength to extract a 99-year lease over the Hong Kong and the vicinity. In the early 1980s, China announced it would not renew the lease and would retake possession of Hong Kong in 1997. The two sides agreed to a 50-year transition period after that, during which Hong Kong would be a democratic, self-governing Special Administrative Region. 

After the initial shock of the handover announcement wore off, my Hong Kong business friends began to realize the incredible money-making opportunities that reunification would offer. They reestablished contact with family members still on the mainland and cross-border business began to boom. Hong Kong became, in effect, the commerce capital of China–and a gold mine of information about mainland political and economic trends, as well as about individual companies and their prospects. 

That era is over, however. A bit less than halfway through the transition period, China reneged on the agreement, neutered the local legislature and essentially imposed Chinese law on the former British colony. So we’re now past the era of free enterprise and in a new one of state control and thought crimes, where the runes are hard to read and the penalty for missteps draconian. The shades have been drawn over the West’s best window into China. Investment in either Hong Kong or the mainland exchanges (which one can access through Hong Kong), therefore, has become much, much riskier.

Socialism with Chinese Characteristics

When Deng Xiaoping took over as the political leader of China in 1978, the economy was in a shambles. One of the core problems was that in a complex economy of about a billion people, central planning bureaucrats in Beijing set production goals, industry by industry and plant by plant, without much regard for supply/demand or whether the factories were even capable of achieving them. Advancing in the Communist Party, however, depended on achieving these goals. The response of corporate leaders, all Party members, was to create a world of fake paperwork sent to the planners, all reporting that the goals had ben achieved. And local towns and companies would coerce area banks to lend them money to keep the lights on.

Deng declared a new era, one of Socialism with Chinese Characteristics, that replaced central planning with market competition–and ignited a decades-long explosion of growth.

That era is now over, too.

As Xi Jinping took over as head of the government, he began to perceive that the era of free enterprise Deng had launched had created powerful entrepreneurs who had become a threat to the dominance of the Communist Party. The attack on Hong Kong is one result of this. Limits on the activities of large non-Party-controlled companies, the confiscation of their assets and the jailing of their founders are others. Dealing with the problematic property market is another.

more tomorrow