Financial Cold War. James A. Fok
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I found Confucian and Mencian philosophy rather tedious and often diverted these tutorial sessions to discussions on stocks and options trading. Over time, Auntie Sue taught me the basic principles of securities valuation and options pricing that, as an adolescent with dreams of riches, I absorbed with enthusiasm.
In my first year at university, with savings from part-time work and various entrepreneurial ventures, I opened an online trading account and began investing in the markets myself. It was in the middle of the Dot-com boom and I had some initial success but, ultimately, this was to lead to one of my first great lessons in the pitfalls of overexuberance. Nonetheless, my interest in financial markets wasn't extinguished.
As an undergraduate in Beijing in the 1990s, I got to experience first-hand how market reforms were transforming China. I witnessed the launch of Starbucks, Walmart and the trappings of American consumer culture in the country. A huge number of Chinese students aspired to post-graduate studies in the United States (US) and I was regularly asked by fellow students to help them study for the GRE English test, success in which was a prerequisite for acceptance to American colleges (although, frankly, most of them scored far higher than I would have done). At that time, it seemed to me that the ‘Chinese Dream' was pretty similar to the ‘American Dream' and, like many observers, I expected economic growth would ultimately lead to political reforms and a more liberal democratic society.
I also glimpsed some of the hangovers from China's traumatic past. When five US guided bombs hit the Chinese embassy in Belgrade during the Balkans conflict in 1999, people were quickly whipped up into a nationalistic frenzy. US authorities claimed that this incident, in which three Chinese citizens were killed, was due to a CIA mistake. China has never accepted this explanation. In the days that followed, angry crowds demonstrated outside the US embassy. One evening shortly afterwards, I was out with a friend from Korea. Conversing in English, we were mistaken for Americans and chased after by a mob. That certainly left an impression on me that populist nationalism is a pretty scary thing.
On completing university, I joined the graduate programme of an American investment bank in London. I rapidly specialised in advising financial services clients and learned top-down and bottom-up about the international financial system.
For almost a decade until mid-2021, I worked at the centre of Hong Kong's financial markets at Hong Kong Exchanges and Clearing Limited (HKEX). HKEX is the sole exchange and clearing house operator in the most successful initial public offerings (IPOs) market in the world. I landed there because, back in early 2012, I found myself between jobs with time on my hands. A social acquaintance who was running Business Development for HKEX at the time asked if I might come and help out on a corporate takeover the Exchange was contemplating. I had been due to join another investment bank several months later and my wife told me I should just relax and enjoy my time off. However, although I had previously worked on transactions involving banks, insurers and asset managers, I had never seriously looked at how exchanges work, and curiosity got the better of me. The transaction turned out to be the competitive auction for the London Metal Exchange (LME), the world's leading venue for trading industrial metals, with a history tracing back over four centuries.
From the outside in, HKEX in those days looked like a sleepy and bureaucratic organisation. On my first day in the office, I discovered that the company did not have international direct dialling from the desktop phones. To make an overseas call, you had to find a secretary to come and input a long series of codes before being able to dial out. The first-round bids for the LME were due in a couple of weeks. When I got home that night, I told my wife that I would be able to resume my time off after that. Famous last words…
HKEX was then in the early stages of a transformation to broaden its focus from stock trading. Notwithstanding the company's inexperience in international takeovers, the then Chairman and CEO were determined to win the race to acquire the LME. In the latter stages of the transaction, I was asked whether I might stay on in a full-time position. My wife was sceptical about the idea. We were thinking about starting a family and working for the Exchange would involve a meaningful pay cut. However, somehow it just felt like the right move.
Hong Kong is a small town and I already knew a number of people at HKEX. Most importantly, the Exchange was one of the few sizeable financial institutions that is Hong Kong-based. HKEX sits at the heart of Hong Kong's financial ecosystem, which is integral to the city's success and prosperity. It was attractive to me to be putting my energies towards building a company that can make a big difference to Hong Kong, and where the key decisions were made locally, rather than far away in Frankfurt, London or New York.
Hong Kong's raison d'être since it was ceded to the British in 1842 following the Opium War has been as a centre of trade, connecting China and Western markets. Over time, the trade in goods was supplemented by trading in securities and derivatives. Following the return of sovereignty to China in 1997, Hong Kong's role as the leading financial centre connecting China and international markets has continued to grow.
HKEX has grown alongside Hong Kong, expanding its role in the past decade from serving as the leading platform for Chinese companies to raise investment from international investors to trading in fixed income, currencies and commodities. The company has also cooperated with Mainland Chinese market infrastructure operators to expand and deepen the connections between China and international markets.
Initially, I worked as Chief of Staff to the CEO. Later I took over running Group Strategy for the organisation. Through my work on the formulation and execution of HKEX's strategy, I found myself at a fascinating intersection of global geopolitics and financial markets at what is arguably one of the most pivotal points in international relations in my generation. From this perch, I had the opportunity not only to interact with the top managements of the major global banks, corporate issuers and investors who are HKEX's customers, but also to work closely with regulators and policymakers in Hong Kong, Mainland China, and around the world. This opened my eyes to the broader geopolitical considerations surrounding financial markets policy and regulation.
In most parts of the financial services industry, the main challenges are to work out how to get something done and how to make money doing it. Due to their central position in the marketplace, exchanges and other market infrastructures that constitute the ‘plumbing' of the global capital markets overlap with regulation and policy to a much greater extent than other financial organisations. For regulators and policymakers, making money is only a secondary or even tertiary concern. What they care about are the rules of the game. Very subtle changes in these can have a huge bearing on a wide range of national interests.
Following China's economic rise over recent decades and emergence as a global power, there has been much speculation about a ‘gathering storm' in Sino-US relations. Academic and policy debate has raged over whether China and America can avoid the ‘Thucydides Trap'. This is the theory first posited by the ancient Athenian historian Thucydides in his History of the Peloponnesian War between Athens and Sparta (431–404 BC) that the fear of a rising power challenging the leadership of an incumbent power would inevitably lead to war. Indeed, in the majority of instances where a rising power has challenged the supremacy of the dominant power over the past five hundred years, war has followed – as in the case of Germany versus Great Britain in 1914.1
In the euphoria of the years following the end of the Cold War, such a conflict between two major powers was almost unimaginable. And yet, in the wake of the 2008 Global Financial Crisis (GFC), we have seen a return to populist and nationalist politics, including the open expression of appalling prejudices, that had previously been unknown and regarded as unthinkable to my generation in the liberal democracies of the West. Brexit and the Sino-US trade war are conspicuous examples of this phenomenon, where public opinion and government policies have been heavily influenced by economic factors. At the time of writing, the full long-term effects of the Covid-19 pandemic are yet to be known, but tensions have been escalating.
This book is an attempt to synthesise the financial and economic factors that have brought us to our current predicament, analyse the geopolitical realities underlying financial markets today, and to suggest some solutions that balance