Stock Connect, Hong Kong, and China's Belt and Road Gamble

Book: Financial Cold War by James A. Fok | ISBN 9781119862765

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The last section of Chapter 5 is where James A. Fok ties China’s capital market openings to Hong Kong’s politics and Xi Jinping’s outbound ambitions. The technical story is impressive. The political risks are just as real.

Connecting China and the world

In 2012, Shanghai Stock Exchange chairman Gui Minjie asked HKEX a simple question: what if we linked our markets so investors could trade across the border?

Earlier schemes were clumsy. QFII and RQFII had quotas and opaque approvals. A 2007 “Through Train” idea sparked a Hong Kong bubble and was shelved. Fu Hao’s Stock Connect design was smarter. Orders route electronically. Clearing runs through a closed loop. Regulators on each side keep visibility. Capital cannot leak into unapproved assets.

Guo Shuqing at the CSRC and Zhou Xiaochuan at the PBOC backed it behind the scenes. Ashley Alder at Hong Kong’s SFC negotiated details with the CSRC for months. Daily and aggregate quotas capped flows at launch. Northbound access was broad. Southbound required at least 500,000 yuan in a securities account.

Premier Li Keqiang announced Shanghai-Hong Kong Stock Connect in April 2014. Launch slipped when the Umbrella Movement blocked Hong Kong streets that autumn. Trading began November 17 anyway.

The program passed a brutal stress test in 2015. Regulators talked up the bull market. Margin lending exploded. The CSI 300 rose about 150 percent then crashed. The CSRC suspended roughly 45 percent of listed firms. Through it all, Stock Connect kept working. Sovereign wealth funds noticed. Selling A-shares via Hong Kong clearing meant payouts run under Hong Kong law even if mainland politics turn ugly.

Shenzhen-Hong Kong Stock Connect followed in 2016. Bond Connect opened in 2017 with Tradeweb linking to CFETS after Bloomberg initially passed on partnering with HKEX. Index inclusion came next. MSCI added A-shares in 2018 and raised weight to 20 percent by 2019. FTSE Russell phased in Chinese government bonds from 2021, potentially drawing $140 billion more.

Foreign stock ownership rose from 1.5 percent to 4.3 percent. Over 70 percent of foreign equity investment now sits in HKEX’s clearing arm. The renminbi entered the IMF’s SDR basket in 2016, helped by Stock Connect’s credibility.

Hong Kong’s share of China’s GDP fell from 18.4 percent in 1997 to 2.7 percent in 2019. Its role as conduit grew, not shrank. Chinese banks held $1.1 trillion of assets there in 2018. That makes Hong Kong stability a mainland financial issue.

Hong Kong’s crack and the NSL

Fok spends pages on why Hong Kong protesters were angry. Heritage Foundation rankings ignored monopolies, cage homes, and a Balkanized school system. Wages stagnated while mainland money bid up apartments. Universal suffrage promises stalled. The 2019 extradition bill lit the fuse after bookseller disappearances and the Xiao Jianhua hotel abduction.

Carrie Lam withdrew the bill in September 2019. By then demands had expanded. The National Security Law arrived June 30, 2020 bypassing local legislature.

For finance, the worry is rule of law. Jimmy Lai’s bail ruling flipped the presumption. NSL judges can be picked by the chief executive. Firms reportedly hesitate to choose Hong Kong governing law in contracts. A brain drain accelerated with UK visa offers to BN(O) holders.

If investors stop seeing Hong Kong as a distinct jurisdiction, they may bypass it for direct mainland deals without common-law protections, or avoid China entirely. Chinese outbound deals struck in Hong Kong also enjoyed shelter from foreign sanctions. Losing that hub hurts both sides.

Can’t buy me love

Xi launched the Belt and Road in 2013 speeches in Astana and Jakarta. The Silk Road Fund and AIIB promised over $1 trillion of potential infrastructure spend across 130 countries.

Fok lists four motives. Absorb industrial overcapacity through Chinese SOE projects. Open new export markets after the GFC exposed reliance on slow-growing Western consumers. Earn better returns on $2.3 trillion in net foreign assets instead of sitting in low-yield Treasuries while foreigners earned more inside China. And build influence outside US-dominated institutions.

The record is mixed. Sri Lanka leased Hambantota port for 99 years to settle debt. Mahathir canceled $20 billion of Malaysian rail deals and warned against a new colonialism. Billions were lost in Libya, Venezuela, and South Sudan. Chinese development bank lending fell from $75 billion in 2016 to $4 billion in 2019. Mega projects above $1 billion dropped to 20 in 2020. Xi’s “dual circulation” strategy acknowledged limits of export and outbound-led growth.

Two steps forward, one step back

Fok closes the chapter by naming the tug of war. Deng and Zhu pushed reform because growth helped ordinary people. Their success created a politico-entrepreneur class that profits from the party sitting above the law. Private tech billionaires want property rights the party will not grant. Global integration means foreign countries now care how China allocates capital.

Preserving CCP control over SOEs and finance blocked further banking, currency, and legal reform. GFC stimulus fixed short-term growth but worsened imbalances. BRI exported some of the problem and invited strategic backlash.

Looking ahead, Fok lists what China still needs: higher productivity led by the private sector, real risk-based returns for savers, wider international funding for pensions, and better relations so capital does not get walled off. All of that requires ceding some control over courts and finance.

Whether Sino-US ties turn into a full financial cold war depends less on ideology than on whether both sides can accommodate each other’s material interests. Chapter 6 picks up that thread.

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