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7 A Dangerous Business Model The most puzzling feature of Hong Kong's banking history is the eclipse of the local Chinese bankers. The previous chapter described their once proud status, their resilience in the face of political turmoil and economic disasters, and their skilful management of credit risks in troubled times. It also explained how their‘ status deteriorated throughout the 1950s in spite of the extra-Iegal privileges which colonial officials granted them. Their decline was rapid but inevitable. These ba此ers had clung to their past glories. Adjustment to the economic t 訂 ransfo 叫 n 吋 -m uncωomfoωrtabl 】址 le a challenge for t 血 hem. The local Chinese-owned banks failed to capture their full share of the flood of new banking business from manufacturers as industrial exports flourished during the 1950 and 1960s. In 1969, when data on bank-Iending patterns first became available, this sector of the economy was mature and more secure than ever before. But these banks were allocating a mere 13 per cent of their loan portfolios to manufacturing. Industrial growth, it seemed fair to conclude, had been fuelled by HSBC and the foreign-owned institutions. These banks devoted 22 per cent of their totallending to manufacturing and, in the process, provided three-quarters of all bank financing for Hong Kong's factories in 1969.1 It was not that foreign bankers had a bigger appetite for risk. On the contrary, loans to manufacturers producing for export was banking at its most prudent and routine. But, as the next chapter will explain in some detail, industry did not offer the chance for personal premiums and speculative gains to which local bankers were accustomed. So, what did local Chinese-owned banks do with their depositors' money? They used it very much as if it were part of the owners' equity, an attitude which the colonial administration assumed to be a natural feature of the Chinese banking modeI.2 The result was to provide little incentive for this group to upgrade its management standards or to adopt modern corporate practices. Indeed, officials believed that any regulatory pressures on them to 130 Profits, Politics and Panics do so would be wrong, as the previous chapter has already demonstrated. Most local bankers stuck to what they found most comfortable: gold trading, currency dealing and property speculation. Here again, government policies favoured preserving the past. Albeit accidentally, these boosted the types of business most favoured by local Chinese-owned banks when Hong Kong had still been part of the Mainland economy. The historical foundations of local banking had disappeared when the Chinese Communist Party came to power in 1949. Nevertheless, the colonial administration took a series of decisions in the 1950s which permitted: • the revival of the gold market; • the continuation of currency dealing; and • the dramatic expansion of the property market. This chapter links the inability of local Chinese-owned banks to dominate the financiallandscape, despite cultural advantages and favourable government policies，的 their failure to modernise their business model. That was the economic price to be paid for the government's indulgence towards the local Chinese-owned banks which had reduced their incentives to change with the times. There were also serious social costs to these policy decisions - including corruption, smuggling and narcotics trafficking - which this chapter will identifY. The Lure of Gold Immediately after the 1948 Banking Ordinance was passed, the gold trade seemed destined for extinction.3 Chapter 4,‘Financial Centre under Siege', explained how London compelled the colonial administration, despite its vigorous protests, to comply with International Monetary Fund (IMF) restrictions and close the free gold market in 1949. Gold tr司ading at free market prices was to remain illegal until 1970. Hong Kong's free market survived, nevertheless, operating in open defiance of the law. It was buoyed up brief1y by booming demand from the Mainland for gold and foreign currencies as inf1ation soared out of the ruling Guomindang's control and then as the Chinese Communist Party's military advance was proving unstoppable. Mter the fall of the Guomindang régime in 1949, the Mainland market disappeared as China's new rulers quickly sealed the frontier against smugglers and profiteers. In 1953, London allowed Hong Kong to import gold again but only for transhipment. The trade revived very rapidly because the nearby Portuguese enclave of Macao provided a backdoor through which the Hong Kong gold trade could operate, and the colony became the main centre for gold smuggling in the region. Its largest...

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