Shanghai: why Jim Rickards told me he’s bearish on Hong Kong

Written by Andrew Henderson
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Dateline: Cancun, Mexico

I’ve been working on my speech for the opening night of our Passport to Freedom conference here in Mexico and there is one theme I am focusing on: the rise and fall of nations.

We all know that, over time, power has shifted from one corner of the world to another. From the dawn of civilization in the Middle East to the Asian centers of culture in prosperity thousands of years ago to the western shift that created European colonial empires and eventually the United States.

Just as wealth is fungible and goes where it is treated best, societies rise and fall based on their legitimacy and their power. It is often civil war caused by poor economic conditions and repression that brings societies down.

Consider it a sort of free market for empires.

Even John F. Kennedy acknowledged this when he said that men die, and nations die, but ideas live on. Ultimately, people want to be prosperous and to be free.

Few places in history have seen that principle at work more times than China.

In addition to having the world’s first paper money, China has created some of the world’s wealthiest people.

Some of the most wealthy people in China historically have been proponents of graft, robbing the royal treasury to build massive wealth held in gold and silver. Others have been industrialists.

Either way, the spirit of earning money and having financial security is a current that runs strong in Chinese society.

However, each time China’s star has fallen from a peak, it is because of civil war. And that is exactly the basis for why Jim Rickards believes that Hong Kong’s best days are behind it.

I shared a lunch of fish tacos and guacamole with Jim Rickards earlier today while overlooking the beach. Being able to pick the brain of one of the top financial minds of our time while sitting on a beautiful beach was exactly why I chose Cancun as the home for our event.

While Jim doesn’t dislike Hong Kong, he does believe that China – unlike many western countries – understands its history and is taking steps to make sure that this time, history doesn’t repeat itself.

He says that Beijing’s aggressive response to demonstrators in Hong Kong is the beginning of a movement by China to suppress the idea of democracy in its Special Administrative Regions that currently operate under a “one country, two systems” approach.

In his mind, the reason for this is clear: China no longer cares about Hong Kong.

China’s goal all along, Jim says, was to make Shanghai the main international financial center of China. That is no secret, and having visited Shanghai I can tell you that it is bustling.

After dabbling with its first Special Economic Zone in Shenzhen several decades ago, China has been opening up new free zones around the country and taking a patchwork approach to liberalizing the economy.

Some of what they are doing is smoke and mirrors, while other moves are about as close to true capitalism as you can get.

China is a very different place now than it was in 1980, and China has had plenty of time to build a replacement for Hong Kong on the Mainland.

At this point, Shangghai is big enough that China could clamp down on Hong Kong and be just fine. As the story goes, Hong Kong was merely part of the transition plan for China’s building of Shanghai.

Indeed, Shanghai has rocketed to become the world’s sixteenth largest stock market and is a major hub for trading.

Jim Rickards’ take on this is that Hong Kong will enjoy fewer and fewer freedom starting with Beijing’s reneging on its promise to allow the city to choose its own leader in 2017.

He disagrees with myself and Jayant Bhandari who have spoken to the idea of holding Hong Kong dollars are a way to protect and profit from a decline in the US dollar with little risk.

And Jim even believes that Hong Kong banks are not as good as some say they are when it comes to freedom from political risk.

To be fair, Jim was very adamant in saying that he doesn’t think Hong Kong, its currency, or its banks will sink overnight. It will be an ongoing process as the Chinese government moves to position the Mainland as the place for investment.

But when I asked him about planting flags in Hong Kong, his answers suggested he prefers Singapore.

No doubt, if China attempts to tear down Hong Kong to allow Shanghai to rise to the top, companies will move to places like Singapore. In fact, under that scenario all Singapore has to do is sit back and wait for the business to come to it.

Personally, I believe Hong Kong still enjoys more capital freedom that Singapore, whether you’re a large multi-national company or an internet entrepreneur looking to plant a corporation flag.

In my mind, China can’t build Shanghai by tearing down Hong Kong. The people and companies that have made Hong Kong what it is can simply pick up and leave.

That doesn’t mean that Shanghai doesn’t have a bright future in the trading world, but as a home for multi-national companies and trading companies, China knows that it can’t simply destroy its beacon of capitalism if it wants to get rich from capitalism.

My biggest challenge with Hong Kong these days is that it is getting harder to gain access to the country’s institutions without being a resident. I’ve shared some of my favorite banks, places to buy gold, and corporation strategies in my private masterminds, and list of quality banks to go with in Hong Kong is shrinking.

Heck, I had a hard time getting a private vault box last year.

If you are willing to spend the time to do things right, Hong Kong is still a great place to plant a flag or two. You may remember thirty years ago when Margaret Thatcher’s plan to hand Hong Kong back to China left people running for the hills, worried things would descend into chaos.

Yet nothing happened.

Jim Rickards is a smart guy and his observations on Hong Kong are a good reminder to always make sure you are managing the flags you plant. The “nomad” in “Nomad Capitalist” is a reminder to be constantly vigilant and remember that no empire lasts forever.

For now, Jim Rickards and I agree to disagree, but he makes some points to be watchful of.

Andrew Henderson
Last updated: Dec 29, 2019 at 12:00AM

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1 Comment

  1. Reid K.

    While I don’t like to say “never”, and China is undeniably trying to promote Shanghai as a financial hub,.. I believe it would take such a huge amount of deregulation, skilled-labor, and development (of all kinds), that Shanghai is unlikely to even match Hong Kong, let alone replace it, until very late this century at the earliest.

    If Shanghai did catch up, it would have to be through its own development alone and not through downplaying Hong Kong. As you pretty much said, if businesses and investors saw China tear apart Hong Kong, why would they want to move to Shanghai to be abused even more? Beijing realizes this.

    What I think is more likely to happen, is for Singapore, Hong Kong and Shanghai to supplement each other in a London/New York/Zurich sort of way. Singapore would deal with Southeast Asia, Venture Capital and Forex. Hong Kong with financial markets, M&A, and international deals, and Shanghai with most of the above, but only within China.

    Reply

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