It is nine times bigger than in 2000, using the median of a panel of four capital-markets measures, and ranks third among global financial centres (see chart 1). When Hong Kong returned to Chinese sovereignty in 1997, it was a lively entrepot known for its rags-to-riches magnates and well-oiled expatriate bankers, but not a global powerhouse. Local executives and officials often call this the nuclear outcome.
The unlikely but not impossible worst case is that a miscalculation destabilises some of the $10trn edifice of cross-border financial claims that sits in Hong Kong, causing a shock that ripples across China and Asia.
China would be left with more control over a less effective capital market, raising the cost of capital for its firms. The most likely scenario is that Hong Kong’s institutions face gradual decay and that it drifts away from being a globalised financial centre towards one that is more mainland Chinese. In response the White House has proposed removing some of the legal privileges that Hong Kong enjoys-privileges that help it connect seamlessly with the global economy. On May 28th China commissioned a national-security law to prevent sedition and terrorism in the territory. This risk is growing for Hong Kong’s position as a financial centre, as tensions build over China’s interference in its government and legal system, which, under the formulation of “one country, two systems”, are supposed to be largely autonomous until at least 2047.
Under the wrong conditions transformers can become less efficient or even, in extremis, blow up.
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