Still water runs the deepest.

Photographer: Xaume Olleros/Bloomberg

Hong Kong, China's Real Stock Market, Remains Calm

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Not so long ago, Hong Kong was regularly dismissed as a financial backwater -- not just internationally, but even within China. Many pundits started writing the city's obituary when Jack Ma, CEO of China's e-commerce giant Alibaba, rejected listing his company in Hong Kong, in favor of New York. And as Shanghai's stocks skyrocketed in recent months, it seemed to confirm Hong Kong's obsolescence.

But the more instructive comparison between the markets in Hong Kong and mainland China has come more recently, as Chinese stocks have started to plunge. Government officials in Beijing have panicked, doing anything and everything to stop their stock markets' slide; they've slashed interest rates, boosted margin lending, loosened collateral rules, scrapped IPOs, strong-armed big shareholders, pushed brokerages to buy, and took about 1,300 companies off the market.

Hong Kong officials, meanwhile, have calmly let market forces do their thing as a selling tsunami slammed the Hang Seng Index. Hong Kong's composed and hands-off leaders have been showing Beijing how a mature and open economy is supposed to run.

That's worth keeping in mind this week, as the world obsesses over the release of China's latest gross domestic product figures. Officials in Beijing are likely to report China grew 6.8 percent in the second quarter (although there's reason to doubt the accuracy of whatever number is ultimately released). Investors will likely applaud the news, just as they did Monday's announcement that June exports rose 2.1 percent from a year earlier.

But the divergent responses to the equities debacle are far more important than China's inflated GDP numbers. And what they tell us is that size isn't everything. Hong Kong is Asia's 11th biggest economy, just barely ahead of the Philippines. Yet, thanks to its low taxes, rule of law, unfettered capital flows and transparent markets, it earns its status as one of the world's freest economies.

The city isn't without economic impediments, including a pegged currency, oligarchs towering over the economy and a leader picked by China (one reason for last year's massive Umbrella Revolution protests). But capitalist mores are clearly ingrained in Hong Kong in a way they're not in mainland China.

When Hong Kong reverted to Chinese rule in 1997, the hope was that Beijing would emulate the city. Twenty years on, optimists said, China would boast a free media, a stable and transparent financial system, and greater respect for human rights. Instead, President Xi Jinping's Communist Party is steadily trying to impose its brand of opacity, censorship and top-down economic-policy making on financial markets.

China will pay a price for not importing more of Hong Kong's sensibility. Xi's wildly-over-the-top moves to manipulate the market higher vindicates MSCI's recent refusal to include what's now effectively a state-backed market in its indexes. That may kill China's hopes to join the International Monetary Fund’s special-drawing rights system; to become a global reserve currency, the yuan has to be reliably convertible.

Beijing is also moving the country's financial froth into even riskier territory, says Marshall Mays, director of Emerging Alpha Advisors. It's nice that the Shanghai Composite Index has rebounded 13 percent in three days. The trouble is, Beijing "had the chutzpah to do it without any premise of earnings growth to support it," Mays says. "Sooner or later even the speculators will figure that out and sell."

Foreigners also may be less willing to invest in Shanghai if they feel like they'll have to constantly be worrying about political machinations in Beijing. Who wants to establish short positions or try hedging a bet on higher prices with China's public security bureau breathing down your neck? Meanwhile, the ongoing anti-foreigner campaign in state-run media is as creepy as it is hypocritical. Xi's government is second to none in the market manipulation department.

The message seems to be that if you want a piece of China's rise, it's best to find a proven and safe entry point. Fortunately, there's one already available -- its name is Hong Kong.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Willie Pesek at

To contact the editor on this story:
Cameron Abadi at