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Even Xi can't turn Macao into an international finance center

Hong Kong's position will remain secure until the mainland itself fully opens up

| Hong Kong, Macao

Chinese President Xi Jinping has arrived in Macao in time for celebrations to mark the 20th anniversary of the city's return to the motherland's embrace.

As is customary among his compatriots, he is not coming empty-handed. But rather than bringing cash for the gambling tables, Xi is bringing goodies for his hosts said to include the formation of a yuan-denominated stock exchange and an offshore yuan settlement center and Macao's admission as a member of the Asian Infrastructure Investment Bank, China's homegrown development bank.

City authorities have hopes of diversifying Macao's economy, as heavily dependent on gambling as ever, into other sectors. Yet in light of recent unrest in Hong Kong, Xi's proclamation can also be seen as a warning that Beijing has alternatives to the former British colony.

While often lumped together, Hong Kong and Macao are quite different. Macao has 3% of Hong Kong's land area, less than 10% of its population and virtually none of the global financial infrastructure of bankers, lawyers and accountants who have made Hong Kong one of the world's leading financial centers.

Macao might take comfort in how the Shanghai Stock Exchange's STAR Market for technology companies went from announcement in November 2018 to launching trading just eight months later. But creating meaningful financial infrastructure in Macao will be far harder than just expanding on an existing major Chinese market.

Recent moves by the national government and state-owned companies from the neighboring mainland city of Zhuhai to issue yuan bonds in Macao should not be seen as indicative of what is to come.

More bonds will not themselves make Macao a financial center able to challenge Hong Kong or even bite at its heels, much as a handful of listings does not make a marketplace. There are dozens of exchanges globally that provide listing services and many cities which aim to be financial centers. Trying to be one won't simply make it so.

Macao also faces the challenge of shaking off its inglorious financial history. After 12 years, local financial group Banco Delta Asia remains under U.S. sanctions for allegedly facilitating North Korean money laundering activities. The growth over the period of Macao's casino industry has not necessarily improved the city's reputation.

Xi, however, no doubt sees his Macao announcement as a reminder to the people of Hong Kong that China's patronage and favor can fall elsewhere. Yet actually what Beijing is admitting is that it really needs the services of an offshore financial center.

Hong Kong is China's financial window on the world. As a financial center, Hong Kong's challenge comes not from Macao, Singapore, Taipei or Tokyo. Only Shanghai, or possibly Shenzhen, could steal Hong Kong's role but only if China opened up to free flows of capital, information and talent in ways which simply will not happen under one-party rule. Until that changes, Hong Kong's role is secure.

Macao, like Hong Kong, operates under a "one country, two systems" model, although many in Hong Kong would find elements of its system distasteful. Macao's version emphasizes "one country" ahead of two systems and the city has implemented national security legislation while Hong Kong has failed to. There is minimal political opposition and the city's constitution holds no promise of democratization.

Seemingly capricious border controls are another issue. Among those most recently turned back were the chairman and president of the American Chamber of Commerce of Hong Kong on their way to their Macanese sister organization's annual ball.

Two hours of detention, no explanation and then deportation back to Hong Kong -- hardly good advertising for a city wanting to show that it is open for international business. The free flow of people, money and information are necessary hallmarks of a financial center and Macao has fallen at the first hurdle. To some this was a one-off incident but surely middle-aged Americans in their party best could not be a threat to the world's next superpower?

Xi can promise anything he wants but Macao won't be challenging Hong Kong in financial services anytime soon. It may get its own market, but trading will be next to nonexistent.

After six months of unrest, Hong Kong has seen only a few billion dollars at most of capital outflows, according to the latest estimates. Meantime, the city has successfully retained its crown as the world's top market for stock offerings by listing Alibaba Group Holding and trading volumes through its links with markets in Shanghai and Shenzhen are at record highs.

Hong Kong financial position remains secure. Macao is in no position to challenge it and risks instead seeing its market project turn into a repeat of the Xiongan New Area, Xi's underwhelming initiative to build a new high-tech urban center south of Beijing.

Beijing attempt to threaten Hong Kong only shows its lack of understanding of the need for a political solution to the city's protest movement. Let Macao celebrate its anniversary, but it is not the future center of Chinese offshore finance.

Fraser Howie is co-author of "Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise." He has worked in China's capital markets since 1992.

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