Greater China

Ahead of the pomp and pageantry, which was on a scale unprecedented in modern Chinese history, Chinese president Xi Jinping spent eight minutes highlighting just how far China had come from 70 years ago, when Mao Zedong declared communist rule on the steps of Tiananmen. “No force can stop the Chinese people and the Chinese nation from forging ahead,” Xi said.

That very day in Hong Kong, nearly 2,000km away, tens of thousands of demonstrators took to the streets in defiance of a police ban. Violence ensued as protestors clashed with police. A teenager was shot and injured, reportedly as he tackled an officer. Hong Kong’s hospital officials report that more than 100 people were injured in the clashes. The nasty turn of events triggered an angry mob that tore up roads and started fires in a night-time rampage.

The anger and frustration among Hongkongers that have boiled over since June show no signs of abating, even as Beijing reasserts its authority over the territory and its ambitions for a reunified China, which includes Taiwan, Hong Kong and Macao. In his speech on Oct 1, Xi pledged to “maintain the long-term prosperity and stability of Hong Kong and Macao”, according to a translation, but he also said China remained “committed to the strategy of peaceful reunification, and ‘One Country, Two Systems’.” He added that China would “advance peaceful development of cross-strait relations, unite the whole country and continue to strive forward the complete unification of our country”.

Amid the turmoil, capital is taking flight. An Oct 1 report by Goldman Sachs estimated that as much as US$4 billion ($5.5 billion) in Hong Kong dollar deposits has been moved from Hong Kong to Singapore as at August. Earlier, the Hong Kong Monetary Authority said local-currency deposits were down in August by 1.6% from the previous month, the biggest drop in more than a year. Meanwhile, the Monetary Authority of Singapore reported that foreign currency deposits at both domestic and international banks operating in Singapore rose to a record $12.8 billion as at August; the bulk of that increase took place in July and August.

Hong Kong is already facing a recession. The protracted protests have exacerbated the risks from slowing global growth and the trade war, and economic indicators are worrisome: Exports have been on a decline for 10 months, falling 6.3% y-o-y in August, while imports fell 11%. Retail sales in Hong Kong slumped 23% y-o-y in August, while visitor arrivals fell a steep 39% from the year before. Sentiment even among home-owning locals is deteriorating: Some have been reported to be selling their homes at discounted prices as holding cash becomes an urgent priority.

One country, two peoples

In 2017, in a speech in Hong Kong inaugurating Carrie Lam’s government, Xi said: “The destiny of Hong Kong has always been intricately bound with that of the motherland.” Referring to the 1997 handover, Xi said it “marked a major step forward towards the complete reunification of China”.

Pointing out that the territory’s “constitutional basis” comprises both HKSAR’s Basic Law and the constitution of the People’s Republic of China, Xi said: “Hong Kong has been reintegrated into China’s national governance system since the very day of its return. The central government exercises jurisdiction over Hong Kong in accordance with China’s constitution and the Basic Law of the HKSAR.” In noting Hong Kong’s economic progress and strength as a financial hub, Xi said “One Country, Two Systems” provided the “best solution to the historical question of Hong Kong”, and that it has proven to be a “workable solution welcomed by the people”.

Significantly, Xi also highlighted development as a priority in the territory. “Development, an abiding pursuit, is crucial for Hong Kong’s survival, and it holds the golden key to resolving various issues in Hong Kong,” he said. “More focus should be given to development. Teenagers want to grow up happily. Young people want to bring out the best of their talent. People in mature years want to be successful, and the seniors want to enjoy their golden years.”

The protests in Hong Kong underscore the sentiment underlying those remarks.

Now in their fourth month, the protests were triggered by a piece of proposed legislation that threatened the territory’s autonomy, given the deep distrust in China’s legal system and procedures. The extradition bill has now been withdrawn, but the anger and frustrations underlying the protests remain: Middle-class and poorer Hongkongers are simply fed up with the way they have been forced to live — out of reach of the world’s costliest housing and under the shadow of a rising China. Some demonstrators have said they had “nothing to lose”.

Yet, authorities in Beijing have also been attempting to redirect the protestors’ rage towards the territory’s tycoons — particularly Li Ka-shing, the richest man in Hong Kong. As one observer put it, Hongkongers cannot get through a day without giving Li — whose business empire spans property, telecoms and utilities — a dollar in one way or another. Indeed, Li reportedly had US$3 billion shaved off his net worth between July and August, as a result of the disruptions in Hong Kong.

In August, Li took out full-page advertisements in Hong Kong newspapers with stark but cryptic messages advocating peace, joining his peers in calling for an end to the protests. In early September, he called on “those at the helm” to give young people, seen at the forefront of the protests, “a way out”. But he was later strongly criticised for those comments by Beijing’s political and legal affairs commission, which published an article condemning Li for being “lenient” on the protestors, and suggested that it should be him instead, as a major real estate developer, who should be giving Hongkongers a way out, through affordable housing.

In fact, New World Development, owned by the family of the late property tycoon Cheng Yu-tung, has pledged to give away three million sq ft of its farmland reserves for social housing. The first plots of land, in the New Territories, will be offered to a non-governmental organisation to build 100 apartments by 2022. The company’s announcement came after Chinese state newspaper People’s Daily, in a Sept 13 commentary, criticised Hong Kong’s real estate companies for hoarding land and said it was time they “released the greatest goodwill”.

Interestingly, New World has been one of the better performers on the Hang Seng Index, even as it reported a 22% decline in earnings for the financial year ended June 30. Its shares are up 1.5% since the beginning of the year.

Commercial stakes

As recognised by Xi, Hong Kong has progressed and prospered to become a key international finance centre. Yet, that has been precisely because of the liberties it enjoys under its special system of governance. Hong Kong’s Basic Law, established by the governments of the UK and China as part of the handover, protects the fundamental rights of residents, such as freedom of speech and freedom of assembly. It also guarantees that the provisions of the International Covenant on Civil and Political Rights, International Covenant on Economic, Social and Cultural Rights, and International Labour Conventions are in force. All that has allowed Hong Kong to negotiate trade and investment agreements, particularly with Western markets, separate from China.

While much of Hong Kong’s prosperity has been as a result of being a gateway to mainland China, it is also clear that Beijing cannot afford for Hong Kong’s status as a financial hub to slip, particularly as its own economy is buffeted by the trade war with the US. First, the bulk of the foreign direct investment that the mainland receives is channelled through the territory. Meanwhile, Chinese banks hold assets worth US$1.1 trillion in Hong Kong, equivalent to roughly 9% of China’s GDP. Also, about three-quarters of offshore Chinese renminbi-denominated transactions are processed in Hong Kong.

Then, Hong Kong is one of the world’s most open markets for raising capital and debt. The Stock Exchange of Hong Kong scored the world’s highest number of IPOs last year, beating out the bourses in the US, with 133 new listings that raised more than US$33 billion. Chinese businesses have tapped the market for access to foreign investment and growth; the top 10 largest listings in Hong Kong last year were Chinese companies, including smartphone maker Xiaomi, infrastructure group China Tower, Ping An Healthcare and Technology Co and Haidilao, as well as state-owned Shandong Gold Mining Co. There are more to come. In June, Alibaba said it was mulling a secondary listing in Hong Kong.

Finally, Hong Kong is also where wealthy Chinese have parked their assets. According to the Hong Kong Securities and Futures Commission report released in July, about 14% of the total assets under management for the private banking and private wealth management business were sourced from mainland China. Assets held under trusts in Hong Kong amounted to US$553 billion; about one-fifth of those are located on the mainland.

Ultimately, the Basic Law, and the freedoms it enshrines, expire in 2047. It remains unclear what Hong Kong’s trade status will be after that. Meanwhile, amid the unrest, some US lawmakers have threatened to amend the 1992 US-Hong Kong Policy Act, which allows it to be treated as a separate customs area. Indeed, the 2019 Hong Kong Human Rights and Democracy Act, which would require the US to certify annually that the territory still has the autonomy needed to enjoy the special trade status, has been gaining traction among US lawmakers. Beijing has criticised it as a tool to contain China’s ascent, which it may very well become, should the situation in Hong Kong deteriorate.