The Hong Kong cri­sis that isn’t

Financial Mirror (Cyprus) - - FRONT PAGE - Mar­cuard’s Mar­ket up­date by GaveKal Drago­nomics

Over the weekend, 700,000 in­hab­i­tants of Hong Kong, China’s dom­i­nant in­ter­na­tional fi­nan­cial cen­tre, voted in an un­of­fi­cial ref­er­en­dum call­ing for full democ­racy and uni­ver­sal suf­frage in the ter­ri­tory from 2017. The poll comes a week be­fore a pro-democ­racy move­ment known as Oc­cupy Cen­tral With Love And Peace has threat­ened to block­ade key roads in the city, bring­ing the main fi­nan­cial district to a halt un­til Bei­jing agrees to al­low gen­uine elec­tions for the ter­ri­tory’s leader. The protest has prompted a firestorm of crit­i­cism, with Bei­jing loy­al­ists pre­dict­ing monster traf­fic jams, bil­lions of dol­lars in lost busi­ness, a mar­ket melt­down, ri­ots in the streets, ram­pant crim­i­nal­ity, and even the China’s People’s Lib­er­a­tion Army be de­ployed to re­store or­der.

Hap­pily, the most ex­treme of these warn­ings are wildly ex­ag­ger­ated. The chance that the PLA will be called out is van­ish­ingly small. Its de­ploy­ment would be a pub­lic re­la­tions dis­as­ter for China, evok­ing mem­o­ries of how the Tianan­men Square protest in 1989 was crushed. The prob­a­bil­ity of any vi­o­lent trou­ble be­yond a few scuf­fles with the po­lice is re­mote. De­spite talk of ‘fringe el­e­ments’, Hong Kong democ­racy pro­test­ers are a peace­able bunch.

Nev­er­the­less, given the apoc­a­lyp­tic tone of much of the com­men­tary ahead of the Oc­cupy Cen­tral demon­stra­tion, it is nat­u­ral for in­vestors to won­der about the pos­si­ble ef­fects on Hong Kong’s fi­nan­cial sec­tor and as­set mar­kets should the protest suc­ceed in bring­ing the city’s busi­ness district to a halt or pro­voke a heavy-handed re­sponse.

Fol­low­ing the high turnout for the weekend’s poll—al­most 10% of Hong Kong’s pop­u­la­tion—there is clearly a siz­able chance that next week’s block­ade will at­tract more demon­stra­tors than the 10,000 the or­gan­is­ers had orig­i­nally tar­geted.

That griev­ance has been height­ened in re­cent weeks by Bei­jing’s pub­li­ca­tion of a white paper on Hong Kong’s gov­er­nance, which de­clared in no un­cer­tain terms that Bei­jing is in charge. It ac­cused lo­cals of be­ing “con­fused or lopsided” in their un­der­stand­ing of the “one coun­try, two sys­tems” for­mula un­der which the for­mer Bri­tish colony has re­tained a large de­gree of au­ton­omy ever since its re­turn to Chi­nese sovereignty in 1997. Par­tic­u­larly galling was the white paper’s in­sis­tence that Hong Kong of­fi­cials, in­clud­ing judges, must above all be Chi­nese pa­tri­ots, a la­bel gen­er­ally un­der­stood to mean Com­mu­nist Party sup­port­ers.

This per­ceived at­tack on the in­de­pen­dence of Hong Kong’s ju­di­cial sys­tem and the city’s rule of law has mag­ni­fied an­ti­main­land sen­ti­ment which has been ris­ing in re­cent years. Again, how­ever, these com­plaints ap­pear ex­ag­ger­ated. Bei­jing has no in­ten­tion of un­der­min­ing the rule of law that un­der­pins Hong Kong’s fi­nan­cial cen­tre, one which has be­come the main con­duit for cap­i­tal into and out of the main­land.

In 2003, fol­low­ing a 500,000-strong march against main­land-backed se­cu­rity leg­is­la­tion, Bei­jing re­sponded with mea­sures to open the main­land mar­ket to Hong Kong businesses. In the sum­mer of 2007, af­ter an abrupt 13% slide in the city’s stock mar­ket, reg­u­la­tors in Bei­jing re­acted by promis­ing to al­low main­land in­vestors to buy stocks listed in Hong Kong’s mar­ket; a pledge that trig­gered a 55% rally in lit­tle more than two months.

In the event, that scheme was still-born. But any protestin­duced slump in the mar­ket over the com­ing weeks could well prompt sim­i­lar mea­sures. Bei­jing has al­ready promised a sig­nif­i­cant two-way open­ing of the Shang­hai and Hong Kong stock mar­kets from Septem­ber that will al­low main­land in­vestors more free­dom to buy stocks in Hong Kong and vice versa. As it stands, the ini­tia­tive should boost vol­umes in Hong Kong, and any additional re­lax­ation of the main­land’s in­vest­ment re­stric­tions in Hong Kong’s favour could well prove bullish for the lo­cal mar­ket.

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