Hong Kong and China: One Country, and Whose System?

By Kharouf, Jim | Modern Trader, September 1996 | Go to article overview

Hong Kong and China: One Country, and Whose System?


Kharouf, Jim, Modern Trader


On July 1, 1997, China is set to take over the reins of Hong Kong, one of the most vibrant economies in Asia. Some say China will keep its word and allow Hong Kong to chart its own economic path under the "one country, two systems" plan. Others say Chinese authority means a new uncertainty for the province. What will the transition mean to the futures and options industry?

China taking over Hong Kong is akin to a car buyer getting a new sports car. The question is, will the buyer appreciate it and take care of it, or will he hop in and drive it into the ground?

Many of the futures trading firms in Hong Kong believe the Chinese appreciate what they're getting when they take the keys duly 1, 1997, from the United Kingdom. Most say China will pamper the business sector, including the Hong Kong Futures Exchange (HKFE), allowing it to do what it does best: make money.

"The business of Hong Kong is business," says Bill Grossman, director of Jardine Fleming Futures Ltd. in Hong Kong. "I don't see any changes there."

Grossman echoes the sentiment of most traders and businessmen in Hong Kong's futures market. There is confidence the Chinese will leave Hong Kong alone, at least the business side of it. And there is some evidence in the futures market to back it up. Membership in the HKFE since 1990 has jumped 75% to 135 members. Volume on the Hang Seng Index futures also has risen steadily since the October 1987 stock market crash that disabled the HKFE. Since 1988, volume has risen 3,143%, and the Hang Seng options contract introduced in 1993 has risen 118% through 1995. Meanwhile, prices on the Hang Seng continue to stairstep upward, advancing 475% over the past 10 years.

Optimists do not see anything that will alter any of those trends.

"Hong Kong is such a fantastic source of income, why change it?" reasons Niels Hanson-Love, regional manager of FIMAT Futures Asia in Singapore. "The Chinese will leave the business side of Hong Kong alone. They are very pragmatic."

The crux of the Chinese takeover of Hong Kong from the British is the agreement to leave the territory largely as is for 50 years. Chinese officials have reiterated that mantra to quell fears. And that's comforting to trading firms in Hong Kong who not only want the territory to flourish but are standing in line for the mainland to open its markets to the world.

Getting into China's futures and equities markets on the ground floor is worth the risk of China bungling its supervision of Hong Kong. China is developing exchanges in major cities and has been working alongside regulators in Hong Kong to learn how to regulate its markets and bring them up to international standards. With China's population of 1.2 billion and a flood of foreign investors to back up futures and securities exchanges, the carrot is too tempting to pass up.

"Hong Kong will remain an interesting place to do business," says Magnus Ericsson, managing director of W.I. Carr Futures Ltd. in Hong Kong.

Hong Kong also makes business sense, boasting the lowest corporate tax rate in the region at 16.5%, and undercutting the regional average of 30%, including rival Singapore's 26% rate.

While Hong Kong is the gateway into China, even the most positive trading professionals are still keeping their eyes open, watching every signal from Beijing and trying to decipher exactly what each means.

"As far as a business is concerned, it's the right place to be," Hanson-Love says. "But we have to remain extremely alert. And it's extremely difficult to read Beijing."

Reading Chinese

While virtually every futures trader and manager interviewed for this story expressed optimism and few worries about the handover from a business standpoint, there are clear signs China may forever change the social and political fabric of the territory. Most try to separate business from politics in Hong Kong. However, in any country, business and government are inextricably connected. …

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