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Profits, Politics and Panics

Profits, Politics and Panics: Hong Kong's Banks and the Making of a Miracle Economy, 1935-1985

Leo F. Goodstadt
Copyright Date: 2007
Pages: 326
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  • Book Info
    Profits, Politics and Panics
    Book Description:

    Between 1935 and 1985, Hong Kong's growth seemed unstoppable. The economy flourished despite wars, revolution and Western protectionism to emerge as a world-class manufacturing exporter and an international financial centre. Yet, for bankers, these were troubled years, with bank runs, corporate scandals and the 1983 currency collapse. The crises were avoidable and caused by government blunders as well as the banks' mismanagement. This book offers an absorbing account of a turbulent banking industry which will be compelling reading not only for bankers and corporate executives but for readers interested in government's relations with business and the sources of Hong Kong's economic success. The author recounts the rise and fall of local Hong Kong banks, their disastrous funding of property and share 'bubbles' in the 1960s and their links to gold and drug smuggling. HSBC and foreign banks became the biggest beneficiaries of the post-war industrial boom but were hard hit by the corporate failures of the 1970s and 1980s. The book reveals hitherto undisclosed details of the complex financial relationship with China. Hong Kong's banks supplied the hard currency needed by Beijing during the Cold War and the troubled Maoist era, thus laying the foundations for Hong Kong's current role in financing China's modernisation. The author reassesses the British record and highlights the struggle for autonomy from London's interference. But there are also startling disclosures about the shortcomings of such distinguished personalities as Sir John Cowperthwaite and Sir Philip Haddon-Cave, with costly consequences for the financial system and the community.

    eISBN: 978-988-8052-70-7
    Subjects: Finance

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-x)
  4. Acknowledgments
    (pp. xi-xii)
  5. Introduction
    (pp. 1-18)

    Hong Kong is among the most remarkable of the twentieth century’s economic ‘miracles’. It overcame the constraints on economic progress that beset the rest of China and the Third World after World War II, despite the loss of its traditional Mainland markets and in the face of rampant protectionism in Western countries. An ‘industrial revolution’ transformed the war-ravaged British colony from a coastal trading port into a leading exporter to Western Europe and North America by the 1960s. In the following decade, it made the transition from manufacturing for export to become a substantial international financial and business centre. When...

  6. 1 Mismanaged by Mandarins
    (pp. 19-36)

    Throughout the twentieth century, anti-imperialism and a deep resentment of foreign interference were among the most powerful political emotions of the Chinese people. Before World War II, the nation was bent on reforms to modernise social institutions, industrialise the economy and establish democratic government. Western nations began to lose the privileges they had seized in the previous century, and the expulsion of foreign interests got underway. Opposition to the UK’s role in China was particularly severe, and London began the retreat from its ‘informal’ empire on the Mainland. By 1945, Hong Kong was the last remaining British possession in China,...

  7. 2 Chinese Revolutionaries, Colonial Reformers
    (pp. 37-58)

    In the years between the two world wars, a new China emerged — and a very different Hong Kong. This was a time of political turmoil and economic crisis on the Mainland. Yet, inspired by a surging sense of Chinese nationalism, a reform process gathered momentum, propelled by a nationwide desire for unified government and the radical reconstruction of China’s social and economic institutions, ranging from marriage to the tax system. The growth of large-scale industries and the creation of modern financial institutions offered the prospect of rapid economic development.¹ This national revival was even more powerful politically. It was dramatically...

  8. 3 Post-war Emergencies: From Boom to Bust
    (pp. 59-74)

    When Admiral Harcourt sailed into Hong Kong on August 30, 1945, to liberate the colony from the Japanese and establish British Military Administration, he took possession of a ruined, though not a desperate, city.

    ... at the end of August 1945, the economic life of Hong Kong was dead. The population was greatly reduced in numbers; utilities were barely functioning; there was no food, no shipping, no industry, no commerce ... The people with their native industry and genius for improvisation set themselves at once to the task of restoring Hong Kong to its proper place in the commercial life...

  9. 4 Financial Centre under Siege
    (pp. 75-96)

    The speed with which Hong Kong rebuilt its economy after the Japanese occupation was not just a cause for astonished admiration overseas. Ironically, the colony’s rapid return to business as normal provoked demands from abroad for restraints on its unregulated bankers and traders, and it was to spend the first three decades after World War II in a state of siege. Economic success created new tensions in relations with first the Mainland, then the UK and finally the US. These three external powers made considerable efforts to get Hong Kong to impose controls on its merchants and bankers and its...

  10. 5 Industrial Take-off: Cut-price and Self-financed
    (pp. 97-114)

    When Guomindang rule collapsed and the Chinese Communist Party came to power in 1949, the state took control of the nation’s foreign trade, and foreign investment was to be eliminated. The historical foundations of Hong Kong’s prosperity vanished. The colony’s economy did not disintegrate, however. Instead, it transformed itself into a manufacturing centre whose exports were soon to be regarded by the UK, the US, Germany and Canada as a major threat to their own domestic producers. This new lease of life came as a surprise to observers because, as a distinguished academic commented in 1956, the colony had few...

  11. 6 The Rise and Fall of the Chinese Banks
    (pp. 115-128)

    In the 1950s, there seemed to be no limit to what Chinese bankers could achieve. The Hang Seng Bank, incorporated in 1952, overtook its local and foreign rivals, including two British note-issuers, and it had become second in size only to HSBC by 1964. The following year saw the downfall of the Hang Seng Bank, which only survived the bank runs of 1965 because it was taken over by HSBC. Its rapid rise and abrupt demise mirror the fortunes of the local Chinese-owned banks as a group.

    This chapter starts with a discussion of the colonial administration’s banking policies between...

  12. 7 A Dangerous Business Model
    (pp. 129-144)

    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-legal privileges which colonial officials granted them. Their decline was rapid but inevitable. These bankers had clung to their past glories. Adjustment to the economic transformation of Hong Kong after World War II had proved too uncomfortable a challenge for...

  13. 8 An Avoidable Crisis: The 1965 Bank Runs
    (pp. 145-162)

    As 1965 opened, banking was enjoying a boom, and prospects looked excellent for the economy as a whole. A newspaper headline captured the bullish outlook: ‘Prosperity is around the corner. Banking office openings establish record in 1964’.¹ A month later, two banks had failed, runs had begun on other local Chinese-owned banks and the banking industry was under threat.² To the astonishment of bankers, bureaucrats and businessmen, Hong Kong’s banking was to be brought to the verge of collapse that year.³

    This was an avoidable crisis. The vulnerable sectors of the banking industry would have been obvious from even a...

  14. 9 From Banking Crisis to Financial Catastrophe
    (pp. 163-182)

    The closing decades of the last century saw no let-up in the pace of Hong Kong’s economic expansion. Between 1970 and 1979, the economy in real terms doubled in size, and by 1985, it was three times larger than it had been in 1970 (see Table 1). Behind this remarkable performance lay an economic transformation as rapid and as dramatic as the industrial take-off after World War II and from which Hong Kong emerged as a leading international financial centre and a prosperous post-industrial society. There was also a drastic change in the colony’s relations with the Mainland between 1970...

  15. 10 Colonial Money and Its Management
    (pp. 183-200)

    A stable banking industry and sound financial markets need more than just a robust regulatory régime. They cannot be achieved without effective monetary policies because a government’s management of monetary affairs affects the operations of the entire financial system. In Hong Kong, however, the colonial administration consistently refused to accept responsibility for monetary policy. Officials insisted until late in the 1970s that active management of monetary affairs was unnecessary and potentially dangerous. They were convinced that the economy was self-regulating and that the financial system had an automatic adjustment mechanism. This view was widely held throughout the British Empire and...

  16. 11 The Exceptional Colony
    (pp. 201-212)

    The management of Hong Kong’s finances was an issue which provoked constant mistrust of the colonial administration, not just among the public at large but also among the government's hand-picked appointees to the legislature. It proved almost impossible to convince the community that Hong Kong’s reserves — the government’s budget surpluses and other assets, together with the funds that backed the note issue — remained under the ownership, management and control of Hong Kong even when invested abroad. One popular rumour was that visits by British royalty were a cover for the covert removal of Hong Kong assets.¹ In the early 1980s,...

  17. Conclusions — A Political Deficit
    (pp. 213-222)

    Hong Kong’s economic ‘miracle’ was not based on abrupt breaks with the past or ‘revolutions’ in production processes and business techniques. The miracle lay in the surprising quality of its performance by comparison with other Chinese cities, British colonies and the rest of the Third World. Hong Kong’s enduring feature between 1935–85 was its success as an ‘enterprise’ economy. The underlying business model for Hong Kong society was so resourceful and resilient that trade and production prospered even under the most adverse circumstances. Growth was largely incremental, and previous chapters have shown how each period of turbulence facilitated an...

  18. Notes
    (pp. 223-290)
  19. Bibliography
    (pp. 291-310)
  20. Index
    (pp. 311-315)