National Post (National Edition)
WHY CHINA NEEDS A STABLE HONG KONG,
Tough love prescribed for unruly territory
Hong Kong’s protesters are “sprouts of terrorism,” and their violence must be severely punished, according to Beijing. The Chinese Ambassador to the U.K., Liu Xiaoming, underscored this sentiment Thursday, saying that China will “never allow a few violent offenders to drag Hong Kong down a dangerous road.” But any crackdown by paramilitary forces from mainland China would throw the City’s role as the most important Asian financial hub into jeopardy. Will Xi Jinping really put this status at risk?
Demonstrations began as opposition to a bill allowing extraditions to mainland China, but have turned into the biggest challenge to China’s authority over Hong Kong since Britain handed the territory back in 1997. Under the “one country two
systems” principle, Hong Kong continues to have its own governmental system, legal and economic model. However, some of the City’s residents believe Beijing is chipping away at promised democratic freedoms.
Considering the violence, losses in the Hang Seng have been relatively subdued — it’s down about 11 per cent in the last four weeks — for the simple reason that most companies listed in the index do not do business in Hong Kong. They are mostly Chinese banks and other state-owned entities.
The shares that have been hardest hit are Hong Kong-facing businesses, especially shopping and other property groups. This is where the potential for a bounce exists should a peaceful compromise be reached. Property acts as the foundation of the city’s economy and current events will hit demand. The nine largest real-estate companies listed in the territory have lost about $75 billion in value since April, according to Refinitiv data. Other losers so far have been airlines and luxury-goods companies. In the short-term, Hong Kong’s economy may be heading for a recession, but an even bigger concern is that Hong Kong’s standing as a safe, well-managed commercial hub will be damaged irreparably should a violent crackdown materialize. Under these circumstances, the “one country, two systems policy” would clearly lie in ruins. Would this be an acceptable price for this assertion of political authority?
There are rising figures in the Chinese government who are believed to favour asserting full control over the territory. This comes as the economic importance of Hong Kong to China diminishes as the mainland economy grows. In the Nineties, Hong Kong generated about a quarter of China’s total GDP, this has now fallen to around 3 per cent. It’s also getting easier to purchase Chinese-listed equities following the launch of the London-Shanghai Stock Connect Scheme and through trackers after two of the world’s main index providers — MSCI and FTSE — began including Chinese mainland shares into their indices in May this year.
The importance of Hong Kong to China is not merely about the size of its economy. The city acts as a bridge to the rest of the world and helps funnel money into the Chinese mainland. Its legal system and financial markets are also invaluable to connect the country with the rest of the world. This means it is more valuable to China in its current form than the territory’s GDP would suggest. Any violent crackdown would actually do significant damage to China.
The most likely outcome is that protests will subside without much lasting economic damage, as was also seen following the 2014 “Umbrella Movement” democracy protests. There was a similar movement in equity prices then — and it proved a good buying opportunity for brave investors wishing to dip their toes into HongKong facing equities at the time.
However, although a resolution is the most likely option, we clearly live in uncertain times. The Chinese threats seem severe, but they are being aggressive to try and frighten the protesters into submission. They know that an escalation would result in capital and expatriate flight, a collapse in the property market and it would almost certainly mark the end of the territory’s glory days as a financial hub boosted by its global workforce. So for these reasons, a Tiananmen-style outcome is not the most likely, but the risk of such a disaster persists. If China ultimately decides direct intervention is necessary, investors will take flight and the market consequence will be severe.