But the act doesn’t cover the far more extensive role Hong Kong plays as China’s main point of access to global finance. As of 2019, mainland Chinese banks held 8,816 trillion Hong Kong dollars ($1.137 trillion) in assets in the semiautonomous city, an amount that has risen 373% in the last decade…. China’s banks do much of their international business, mostly conducted in U.S. dollars, from Hong Kong. With Shanghai inside China’s walled garden of capital controls, there is no obvious replacement.
While the U.S. doesn’t directly control Hong Kong’s status as a financial center, Washington has demonstrated its extensive reach over the dollar system, with penalties against Korean, French and Lebanese financiers for dealing with sanctioned parties. The U.S. recently threatened Iraq’s access to the New York Federal Reserve, demonstrating a growing willingness to use financial infrastructure as a tool of foreign policy. Even though the U.S. can’t legislate Hong Kong’s ability to support Chinese banks out of existence, the role of an international funding hub is greatly reduced if your counterparties are too fearful to do business with you.
Putting the ability of Chinese banks to conduct dollar-denominated activities at risk would be deleterious to China’s ability to operate financially overseas, posing a challenge for the largely dollar-denominated Belt and Road global infrastructure initiative. It would also put the more financially fragile parts of the country, like its debt-laden property developers, under strain. China’s hope to develop yuan into an influential currency also centers on Hong Kong’s remaining a viable global financial center—more than 70% of international trade in the yuan is done in the city.
Britain’s banks, heirs to empire, have long coveted the riches of China. On October 15, 2013 their hopes of reaping them rose greatly when the chancellor of the exchequer, George Osborne, announced a deal with China that is intended to make Britain the main offshore hub for trading in China’s currency and bonds and for foreign institutions investing in China’s fast-growing economy.But there was a price. Mr Osborne conceded that British regulators would “consider” (which tends to mean “approve”) applications from Chinese banks wanting to enter Britain as branches of their parent banks rather than as subsidiaries. The difference may seem arcane but in the world of banking regulation it is hugely important. Branches are overseen by their parents’ bank supervisors at home. They are not required to have thick cushions of capital to absorb losses or large chunks of cash to see them through hard times. Instead they are expected to call on their parents for help if they run into difficulties. This makes branches much cheaper and more attractive for banks than subsidiaries.
It also explains why regulators generally dislike them. The laxer rules on branches leave them more vulnerable if they or their parent banks get into difficulties. In allowing Chinese banks to use branches, British authorities are in effect betting that if anything goes wrong the Chinese government will bail them out, says Simon Gleeson of Clifford Chance, a law firm.
The chancellor’s decision has raised eyebrows in London’s financial district. Some worry that a supposedly independent regulator has been subjected to political interference and has been forced to lower its standards. Yet critics of the deal overlook two important points. The first is that there is an inevitable tension between a bank regulator’s mission of maintaining financial stability and the wider aim of promoting economic growth. Tension between a regulator and elected officials is not just inevitable but healthy.
Just as important is the tricky balance regulators must find between protecting their own banking systems and encouraging the smooth functioning of global capital markets. Letting banks use branches allows capital to flow more easily around the world. Forcing them into subsidiaries can lead to the creation of stagnant pools of cash and capital. Although Britain has cast a more sceptical eye over branches of foreign banks since the crisis—particularly after its taxpayers were left out of pocket by the collapse of Icelandic banks and their British branches—it has generally stood on the side of financial globalisation. In this it is increasingly lonely. American regulators are likely soon to force foreign banks to establish fully-capitalised units. EU officials are threatening to do the same. Given this trend, Britain’s stance looks less like an opportunistic grab for Chinese business and more like a last, probably hopeless, stab at keeping alive the dream of a seamless global financial market.
Chinese banks: Open for business, Economist, Oct. 19, 2013, at 62