one country two systems

One of the “Big Three” credit rating agencies, Fitch Ratings, recently downgraded Hong Kong’s credit rating to AA (from AA+). The move was in reaction to concern over China’s growing influence and amid global worries that Hong Kong’s special ‘One Country, Two System’ status may be deteriorating. 

At the same time, China is steamrolling its way toward a digital version of the Yuan. This new currency is looking like it will enable peer to peer transactions. (However, such peer to peer experiences will still fall under Chinese law. Meaning it would lean heavily towards state surveillance via internet restrictions and social trading scores.)

As a result of the rating decrease, Hong Kong’s business sector could likely see higher loan rates, which would have trickle effects on Hong Kong’s economy. This represents the first time Fitch has altered Hong Kong’s AA+ rating since 1995, two years before British rule ended. 

Hong Kong’s Chief Executive, Carrie Lam, disagreed with the downgrade, reaffirming China’s and Hong Kong’s commitment to preserving the One Country Two Systems policy.

One Country Two Systems – How it all started

After coming under British rule in 1941 during the 1st Opium Wars, Hong Kong was named a British Dependent Territory. In 1898, a 99-year lease was signed by the British and Chinese governments enabling the Brits to rule the Territory during that entire duration. This was the case except during WWII, when Japanese seized it from 1941-1945.

When the lease expired in 1997, Britain ceded their rule back to China. But this was on the condition that China allow Hong Kong to keep its One Country Two System form of governance. To that end, Hong Kong became a Special Administrative District (SAD). Even though it was considered Chinese, the SAD would retain its own government and currency (HKD).

Why would China agree to that? Because Hong Kong has been, and is today, the global trading center that connects China with the Western world. 

Of course this also benefited Western powers, many of whom now have their regional headquarters in Hong Kong. There, they can continue doing business in Asia without coming under China’s law, and without having to officially endorse any humanitarian differences.

Update on Hong Kong protests

In Hong Kong, their own dynamic economy and status as a leading global hub for business has been hurting since protests began in June 2019. News of violence, riots and police actions throughout the summer have especially affected retail and tourism sectors. According to Forbes, Hong Kong experienced a 40% decrease in tourism revenue in August 2019 from the previous year.

The protests began in reaction to Beijing officials pushing for laws enabling them to transfer Hong Kong residents to the mainland, for instance in the case of an investigation. Recently, Lam withdrew the controversial Extradition Bill in hopes of calming the fears of Hong Kong residents. All while reaffirming her commitment to the One Country Two Systems protocol.

Overall, the proposed law and subsequent protests delivered uncertainty throughout the region and beyond. Our economy is becoming ever more global with the impact of events in Hong Kong spreading far and wide through our business (not to mention, social) interconnectedness.

How much is FUD?

This movement, which has been carefully watched from across the globe, has no doubt been victim to manipulation from multiple external forces. Who exactly is behind any manipulations and to what extent is largely unclear. Though one general suspicion was reported by the New York Times:  China had used Twitter and Facebook to spread disinformation. Living in the world as it is today, it would be hard to believe that this sort of propaganda would be restricted to just one side of the coin.

Some people believe that the demonstrations point to a general move towards further independence for Hong Kong. Others view it as FUD created to strengthen or weaken China’s economic power. Independence from China would alter the world economic landscape – Hong Kong has long been China’s bridge to Western and global business acceptance.

Factors fueling uncertainty

But there have been many other developments leading up to and following the summer demonstrations that have also come into play:

  • Trade wars – China and the US have been parlaying, with both governments wanting to come out ahead. The US of course, is currently led by a POTUS whose Tweets are now being traded against by JP Morgan analysts using their just revealed, Volfefe index.
  • USD as a world reserve currency has been recently taken into question.
  • Hong Kong residents have stridently opposed China’s moves toward state surveillance. As an example, June protesters were using cash only ticket lines to use the transit system instead of their Octopus Card. They feared their cards would fall under surveillance by the China or Hong Kong government in efforts against protesters.  
  • China’s upcoming cryptocurrency may officially come out on November 11th, 2019. As this is China’s biggest shopping day of the year, the government may be issuing the new digital Yuan via a group of Chinese banks, tech companies and credit card service providers. It will be the job of these 7 entities (plus possibly an 8th yet to be named) to disperse the new cryptocurrency.

How China’s cryptocurrency changes the game

While all of these factors are relevant, one of them has substantially added to the uncertainty:

The Chinese state cryptocurrency. For five years, the Chinese have been working on this new, digital currency. A digitalized currency replacing paper currency would enable the Chinese to make financial surveillance easier and more efficient.  

Is it really a cryptocurrency? In the true meaning of the sense, no. In China may not be using a blockchain at all, something which was designed with financial privacy and freedom in mind. The sheer number of China’s citizens of course requires an extremely high transactions per second rate.

We don’t know a whole lot about how the cryptocurrency will work. What we do know is that on November 11th, a Chinese holiday (Singles’ Day) and their busiest shopping day, seven different entities could be disbursing China’s digital Yuan as instructed by China’s central banking system. This list seven includes:

Why crypto?

In creating a ‘cryptocurrency’, China seeks to make the most of the benefits of cryptocurrencies. Part of their plan is to infuse stability with a virtual currency controlled by the state. The Chinese people are already accustomed to using state controlled messaging and payment services. For the most part, they are a digital ready population.

But while there is lots of debate, most crypto industry leaders would agree: A cryptocurrency’s most interesting allure is that it has no central authority. While the Chinese value cryptography, control and efficient digital systems, they leave behind the entire notion of a public, distributed blockchain network. They appear to be leaving behind what makes cryptocurrencies immune to manipulation.

“Orwellian digital surveillance is a particularly powerful hindrance.”

Michael J. Casey, Coindesk 

The EU and North America are wallowing in a glut of confusing regulatory theories when it comes to cryptocurrencies. Their governments are slow moving because of the democratic controls. This is not the case with China. As a result, this holiday season we may experience a few new things:

  • A new Chinese currency, one that may or not be cryptographically secure from outside manipulation.
  • The use of China’s crypto as a harbinger for the global acceptance of cryptocurrencies.
  • A cryptocurrency-based world reserve race to the top dominating diplomatic relations everywhere.

What does this have to do with Hong Kong?

Hong has long enjoyed its own currency outside of the Yuan. It’s also a technological hub of innovation and fintech. All of these converging possibilities really just point to more questions. Questions we don’t know the answers to:

  • Will Hong Kong, and the rest of the world for that matter, want to deal in this new state run cryptocurrency?
  • Is China trying to design the new world reserve to replace the USD?
  • Who will first succeed in creating a national cryptocurrency?
  • Can Hong Kong maintain the One Country Two Systems and its own potential cryptocurrency under the current One Country Two Systems policy?
  • Does China fear globalization of money?
  • Will America continue to thwart cryptocurrency innovation?
  • Is China’s move to crypto a step toward a Chinese-centered global financial network?

With so much going, and protests slowly dying down in Hong Kong, what we know is that China, the West and Hong Kong all want to keep the One Country Two Systems territory at the status quo. But right now, the global status quo is in a state of flux, uncertainty and movement.