By William Pesek Bloomberg

Fifteen years ago, China was ecstatic to regain control of Hong Kong and all it represented: freshly minted billionaires, a culture in which corporate chieftains outshine movie stars, and splashy initial public offerings that rival New York and London.

Just before the handover, though, executives and investors fretted over what China would do with the place. Would the Communist Party tie a noose around the city? Or meddle with the transparency and pro-business policies that made Hong Kong unique? As 2013 begins, such fears are returning in ways that should unsettle capitalists everywhere.

An economy that is supposedly the freest anywhere is taking a giant leap backward with a proposal to block access to personal data on company directors. It would conceal residential addresses and full identification numbers that journalists and analysts use to discern who owns or runs what. If implemented, the proposal ensures that the Cayman Islands, and other secretive jurisdictions used to evade taxes, will soon have a powerful competitor in Asia.

Why is this happening now? China is livid over increased media scrutiny of the obscene wealth being amassed by top party officials and has resorted to blocking news websites. This change in law would further cloud an opaque paper trail of ill- gotten gains that find their way into Hong Kong’s first-world financial system. It isn’t mainland peasants, after all, who are speculating on Hong Kong property, but political heavies trying to hide their assets.

Extended Families

Were these policies in place in 2012, Bloomberg News and the New York Times probably couldn’t have tracked the vast wealth accrued by the extended families of incoming Chinese President Xi Jinping and departing Premier Wen Jiabao. It hardly falls into the realm of conspiracy theories to connect the dots. The Communist Party wants to contain the embarrassment of riches and wealth inequality that threaten its legitimacy.

Wall Street’s crisis did immeasurable damage to the Anglo- American consensus on free markets, transparency and liberal democracy. That has left a huge opening for a Chinese model based on mercantilist trade policies, autocratic government, limited press freedom and hazy corporate disclosure. Yet is this really in Hong Kong’s best interest? Or China’s?

If China wants to get short sellers, such as Carson Block of Muddy Waters LLC, off its back, the answer is greater openness and accountability. If companies want steadier, less fickle sources of foreign demand for stocks and bonds, they should give investors full access to their books.

Hong Kong needs to tread carefully on provisions that first appeared in November, largely under the radar screen (they were jammed in the middle of a blizzard of other proposals and re- emerged last week). The city’s 7 million people long reveled in its designation as a business mecca by the Heritage Foundation and the Wall Street Journal’s joint annual Index of Economic Freedom. Hong Kong’s No. 1 ranking must be reconsidered as the city facilitates a bull market in corruption.

Identifying who holds the corporate reins will be much harder in Chinese-speaking jurisdictions, where many people share the same names, with variant English spellings. Consider how difficult it was amid the Bo Xilai scandal to discern where the extended family — which capitalized on the Chongqing politician’s power — began and ended. Following the money is about to get much more difficult.

Last year, tens of thousands took to the streets to protest China’s campaign to force-feed “patriotic education” to Hong Kong’s students. A curriculum devised to stifle independent thinking in an economy that thrives on it is bad enough. The latest steps run “counter to the principles of freedom of speech, freedom of the media and transparency,” says David Webb, the founder of corporate-governance website webb-site.com. They will boomerang and hurt the city’s pocketbook.

Mainland Masters

There is an argument to be made that restricting residential addresses is fair enough, given privacy and security concerns, Webb says. Still, Bloomberg journalists last year found that directors already routinely use business addresses or the homes of associates in their filings. Imagine now.

Tension between Hong Kong’s people and their political masters in Beijing is rising. Pro-democracy lawmakers staged a symbolic effort to impeach Hong Kong Chief Executive Leung Chun- ying after less than six months in office. It came just days after thousands of residents protested anew to demand his resignation amid accusations that he had been or was a member of China’s Communist Party. It’s quite a feat to earn lower popularity ratings than Donald Tsang, his hapless predecessor, but Leung has done just that. The blurring of the lines between China and Hong Kong is a major reason why.

China’s financial system needs to become more like Hong Kong’s, not the other way around. The only way to flush out the corruption and conflicts of interest infecting China’s leadership is greater openness. If regulators get their way, an economy that was supposed to be the world’s gold standard will lose its luster.

(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)

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