Hong Kong's International Financial Centre: Retrospect and Prospect

7. The Changing Role of Government
Despite all the talk during the past decade about ‘globalization,’ we remain in a world
mainly organized by and around states. As in other realms of policy, in the economic realm most
states continue to do all they can to improve the competitive positions of their champions and the
home markets. During recent periods of systemic financial stability, this has taken the form of
loosening regulatory structures, intentionally leaving lacunae in supervisory nets, or providing
direct or indirect financial incentives. The objective is to create new opportunities for profitmaking
activity, to attract new businesses, to encourage efficiency, and to stimulate job and
wealth-creating innovation. During periods of instability, conversely, the focus of policy-making
typically shifts to intervening in markets directly or indirectly to limit the risk of systemic failure
and capital flight. In this context, and especially after 1997, the experience of Hong Kong has
been distinctive in many ways.
Although not a state, as a special administrative region of China Hong Kong retains a
relatively autonomous capacity to govern itself. Its government, moreover, is bound by a
constitutional mandate to “provide an appropriate economic and legal environment for the
maintenance of the status of Hong Kong as an international financial centre.” 57 As in other
places, that environment itself reflects the legacy of past crises. In Hong Kong’s case, the severe
international shocks experienced in 1973, 1987, and 1997 were decisive. 58
Capital markets around the world today rest on a foundational tension between innovation
and restriction. One crisis after another ever since the end of the Bretton Woods exchange rate
system in 1973 implicated core banking systems and the sensitive and increasingly cross-border
payments systems managed by banks. What always followed was a tightening of banking
restrictions, consequent innovation outside banking systems, and, when calm returned,
competition-driven moves designed to permit banks to participate directly or indirectly in new
markets created by such innovation. That policy cycle itself seems an increasingly global one,
That regulatory and supervisory adjustments lag the pace of market innovation but eventually
rein in new ways of doing things constitutes a design feature in modern capitalism.
Much to the regret of economic liberals, a seemingly inexorable political logic in free
societies with open capital markets leads not always to freer markets, with the main source of
discipline coming from shared understandings of the doctrine of ‘caveat emptor.’ Instead, in
moves quite understandably deplored by liberals but always acquiesced in by pragmatists, that
logic has led to larger and larger core banks, reinforcement of the idea that they and now other
institutions with which they collaborate are ‘too big or too interconnected to fail,’ the extension
of official nets to save them during perceived emergencies, the closing of regulatory lacunae, and
57 Basic Law, Article 109.
58 For an outstanding overview, and one that has shaped my own thinking in this section, see D.W. Arner, B.F.C.
Hsu, and A.M Da Roza, “Financial Regulation in Hong Kong: Time for Change,” Asian Journal of Comparative
Law, Volume 5, Issue 1, Article 8, 2010, pp. 1-47.
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