Hong Kong's International Financial Centre: Retrospect and Prospect

focus on the other financial policy issue requiring work after the crisis, namely the issue of
consumer protection.
Consumer protection
The fundamental challenge is hardly novel or unique. In a world of free and more open
financial markets, does the responsibility of governmental authorities extend beyond the most
basic matters of licensing, establishing and adjudicating property rights, and otherwise ensuring
that competition in those markets takes place on a level playing field? The current answer
everywhere in the world where capital flows relatively freely is ‘yes.’ That, however, is where
full agreement stops. The follow-up question has necessarily normative cast. Where should we
draw the line between governmental responsibility and the responsibility of individual market
participants? Answers vary, both across national borders and within them.
Certainly before the handover in 1997, the traditional answer in Hong Kong was that the
role of government should be as limited as possible. As long as the society in which a relatively
free and unrestricted financial market is embedded is flexible and capable itself of adjusting
quickly to internal or exogenous economic shocks transmitted through those markets, then
financial openness and minimal official interference should produce prosperity. 63
As noted
above, several decades ago something like such an expectation might have guided official
decision-makers in Hong Kong. Nevertheless, the actions taken by their successors during each
major financial crisis since 1973, and certainly the actions taken during the crisis of 2008,
strongly suggest quite another expectation and quite another understanding of Hong Kong’s
society.
The saga of the Lehman Brothers mini-bonds in Hong Kong well illustrates the point. Its
observable conclusion is an evident social and political consensus to support a more
interventionist set of financial regulatory policies, including policies designed to protect the
consumers of financial services (from unclear risks and excessive fees) and to impose fiduciary
63 Michael Bordo and Barry Eichengreen “Crises Now and Then: What Lessons from the Last Era of Financial
Globalization” in Paul Mizen (ed). Monetary History, Exchange Rates and Financial Markets: Essays in Honor of
Charles Goodhart, Vol 2. London: Edward Elgar Publisher 2003, pp. 52-91. Consistent with this experience is the
historical evidence that suggestion a correlation between freely moving capital flows and shorter recessions. Note,
however, that studies making this point are often necessarily based on limited case material; we only have the late
nineteenth century experience, the inter-war period, the post-1945 period, and the post-1973 period to compare. The
actual, not the idealized, workings of exchange rate regimes also complicate analysis when very different countries
and regions are compared over time. Be that as it may, the observable fact since the Great Depression and certainly
since 1973, when countries at the core of contemporary international financial markets gave up their commitment to
the gold-exchange standard agreed at Bretton Woods, is that most contemporary societies are not flexible and
capable of adjusting quickly to internal and exogenous economic shocks. In practice and in very practical terms,
such flexibility and adaptability means that the financial losers of the moment have limited capacity to mount an
effective political reaction, that is, they cannot credibly demand a bailout either from the public purse or from
private sources acting under official duress. Nor can they plausibly expect such demands to be met.
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