Look again. The abrupt removal of Liu on May 28 and his apparent detention in Beijing have highlighted problems that are qualitatively different from what has happened before. Indeed, the sordid affair calls into question the success of China's strategy of floating key companies on international stock exchanges. And it shows the weakness of Hong Kong's claims to be the international financial window for China.
Liu lived a charmed life in Hong Kong. His residence, according to the prospectus issued at the time of the bank's initial public offering last summer, was on the 30th floor of The Mayfair, one of the city's swankiest apartment buildings. As the head of the second-largest bank in the territory, Liu wielded enormous power. His office sat high in another of Hong Kong's most striking buildings, the signature headquarters designed by famed Chinese-American architect I.M. Pei.
KING OF THE HILL. Liu's credentials were impressive, too. He was a member of the Exchange Fund Advisory Committee, which helps the Hong Kong Monetary Authority (HKMA) manage the territory's massive foreign currency reserves. Among other high-profile positions, he sat on the board of Hong Kong Exchanges & Clearing Ltd., the territory's futures and stock exchange. At the time of the bank's IPO, he chaired the Hong Kong Chinese Enterprises Assn. The bank even issues its own currency, one of only three in Hong Kong to be given that right. Liu, in short, was at the center of the Hong Kong economy.
All that came to an end when Liu was abruptly summoned back to Beijing a day ahead of the bank's annual meeting. This was the first meeting since the bank went public in Hong Kong last July. The new CEO gamely insisted that Liu's transfer was routine. Yet, two weeks later, on June 10, the bank announced that Liu was under investigation in connection with a serious loan scandal.
Bank of China is the first mainland bank to list in Hong Kong and the first of the Big Four banks that dominate the Middle Kingdom to list at all. It has had problems with everything from embezzlement to top-level corruption, but as part of the public offering, it set in place a series of procedures to become something close to a modern financial institution. Under former Chairman Liu Mingkang, who was recently shifted to Beijing to become the country's chief banking regulator, the bank and its mainland parent introduced sweeping reforms designed to improve everything from loan procedures to corporate governance. The added transparency was supposed to help boost performance.
TOO LITTLE, TOO LATE. It's impossible to determine the veracity of the allegations against Liu. Bank of China officials say they don't know his whereabouts, and he was unavailable to comment for this story. Repeated calls for to the Bank of China for comment weren't returned, nor would the HKMA comment. But whether or not Liu is guilty matters less than the way that the whole affair has been handled. Virtually all the players have come off looking bad.
First, the Bank of China has fallen far short of its stated standards. Its officials either deliberately lied about Liu Jinbao -- or didn't know the truth about his being recalled. It's hard to say which is more damning. Indeed, underscoring the lack of transparency in the institution, numerous officials at the bank refused even to confirm his age (he was 49 at the time of last July's IPO).
It's Hong Kong authorities, however, who have most dramatically fallen down on the job. The HKMA has been slow off the mark in fulfilling its regulatory duties. It waited until June 11 to announce that it had asked the Bank of China to allow an external auditor to report on the bank's control system. Only on June 13 did the HKMA say it had received a letter from Liu, dated May 28, resigning from the Exchange Fund Advisory Committee. No reason was given. Hong Kong Exchanges & Clearing made a similar announcement the same day, saying Liu had resigned "due to personal reasons." Repeated efforts to reach HKMA for comment were unsuccessful.
NO BACKBONE. All in all, Hong Kong authorities have seemed helpless to deal with a problem that cuts to the core of the territory's financial markets. You can draw parallels with the local government's inability to deal with SARS in the early days. That, too, was seen as a mainland issue. But both episodes show how little control Hong Kong has over its own destiny -- and how its claim to be different from the mainland are eroding. This is troubling.
If Hong Kong wants to be China's window on the world of international finance, it needs to uphold international standards. These are not international standards that are being upheld. They're not even Hong Kong standards. As seen in the Bank of China case, they're designed to accommodate Beijing.
The obsequiousness with which Hong Kong is bending to oblige its political masters in Beijing cannot be allowed to seep into the financial arena. Hong Kong can still salvage its reputation. But the HKMA and other official bodies are going to have to demonstrate a stiffer spine than they have to date. Clifford is Hong Kong bureau chief for BusinessWeek. Follow his China Journal column every week, only on BW Online