Why China won’t send the tanks into Hong Kong

China doesn’t need the former Crown colony quite as much as it did back in 1997 when Hong Kong switched from British rule. But the Special Administrative Region remains a valuable conduit for Beijing. One the ruling Communist Party cannot risk undermining.

In the past four decades, China has emerged as the world’s second-biggest economy and an integral part of the global financial system. That rise was facilitated by Hong Kong.

With economic reform still lagging on the mainland, having ready access to Hong Kong’s freewheeling brand of capitalism is vital for China.

Even before the current round of protests, there was little love lost between Hong Kong and China, despite regular government claims of affection for its compatriots in the south.

Hong Kong is perceived as a spoilt, unruly child by many mainlanders, including senior officials.

But a hardline Beijing-led crackdown in Hong Kong would undermine stability in China to a much greater degree than the masked protesters could ever do. The repercussions would soon spill over from Hong Kong into the mainland itself. The resulting negative sentiment would spook investors and compromise China’s ability to trade internationally.

Pressure from US-China trade spat

The US-China trade spat and the blacklisting of telecoms giant Huawei have put Beijing in a bind. Chinese companies have been ordered to become less dependent on foreign money and technology, which means more of a focus on Hong Kong.

Chinese direct investment in Hong Kong totals $620 billion (€556 billion) — 70% more than Hong Kong’s overall gross domestic product (GDP). Of the 10 biggest public listings (IPOs) since 1986, nine were Chinese.

Mainland companies raised $47 billion in equity and $66 billion in bonds on the Hong Kong market in 2017.

Despite years of promises to move in that direction, the yuan is still not a convertible one. Capital controls restrict the movement of financial capital across borders. The pool of yuan deposits in Hong Kong is worth around $100 billion.

Nearly 60% of the mainland’s outbound investment, including projects in President Xi Jinping’s flagship Belt and Road Initiative, are channeled via Hong Kong.

Around half of all companies on the Hong Kong stock exchange are mainland companies, including 50 of the largest state-owned enterprises

Key part of Greater Bay Area Project

It’s not just the financial markets. Hong Kong is an integral part of the “Greater Bay Area,” which includes Hong Kong, Macau and the nine major cities of Guangdong province. The hub has a population of 70 million and has a GDP of $1.5 trillion.

China needs Hong Kong to counter an increasingly grim economic outlook.

The days of double-digit growth figures are over. Data shows growth of industrial output and retail sales — key measures of Chinas economic well-being — slipped in July.

China has made inroads into areas traditionally dominated by Hong Kong, such as container port trade.

And the Communist Party has been building up alternatives, especially in the financial capital Shanghai and the innovation hub Shenzhen but they are not ready to act as a replacement for Hong Kong.

In July, 25 companies debuted on the Shanghai Stock Exchange’s new Science and Technology Innovation Board, also called the STAR market, which is aimed at luring back funds from overseas but also boosting Shanghai’s competitive strengths vis-à-vis Hong Kong.

Hong Kong offers the kind of flexibility that mainland competitors can only dream of and it is a vital source of IPO fund raising for mainland firms. This is underscored by a watertight regulatory environment that is for many investors the best and most open in the region.

Every year for 25 years, the Heritage Foundation has named Hong Kong as the world’s freest economy. By comparison, China ranks 100th in the conservative think tank’s list.

• Hong Kong protests rattle global firms

  Disneyland footfall drops

  The unrest in Hong Kong is prompting people to stay away from Walt Disney’s Disneyland theme park in the city. The US company’s chief executive, Bob Iger, told analysts that visits to the park were significantly suffering because of the protests. “We will feel it in the quarter that we’re currently in, and we’ll see how long the protests go on,” he said on an earnings call.

• Hong Kong protests rattle global firms

  Turbulence at Cathay Pacific

  Hong Kong’s flagship carrier said ticket sales fell in July as fewer people travelled into the city. The protests are also hurting future bookings at the airline. Cathay Pacific found itself into further trouble after Beijing asked the airline to bar crew members who had taken part in the demonstrations from flying into mainland China.

• Hong Kong protests rattle global firms

  Hotel business hit

  Intercontinental Hotels, which owns Crowne Plaza and Holiday Inn chains, said earlier this month the unrest in Hong Kong was hurting demand. Declining tourist and corporate arrivals are also putting a strain on the businesses of Marriot and Wynn hotels, who expect the protests to hit their second-half results.

• Hong Kong protests rattle global firms

  Luxury shoppers stay away

  The unrest has taken a toll on popular luxury brands such as Cartier and Prada, which have built a strong presence in the city to cater to the rising affluent consumers from mainland China. Cartier-owner Richemont said its sales were hit because of store closures and a fall in tourist arrivals, especially from China. Italian fashion brand Prada’s business was also affected by the protests.

• Hong Kong protests rattle global firms

  Retail sales fall

  Retail sales, a key part of the city’s economy, fell nearly 7% in June, hurt by the mass protests. Shopkeepers see a steeper fall in July and August. They say tourist arrivals halved last month.

• Hong Kong protests rattle global firms

  ‘Difficult economic environment’

  Hong Kong Financial Secretary Paul Chan warned on Sunday that the city was entering “a very difficult economic environment” amid weakening trade and slowing growth. He said the protests had hurt Hong Kong’s reputation of being a safe city for tourists and businesses. The city’s leader, Carrie Lam, has already warned of the economic fallout from the unrest.

  Author: Ashutosh Pandey

Rest of the world needs Hong Kong too

Not just China — the rest of the world needs Hong Kong too.

Investors like the “One country, two systems” agreement struck with Britain in 1997, which guarantees its legislative and legal systems as well as its own currency and capitalist economy until 2047.

The central bank, the Hong Kong Monetary Authority, and its corporate regulator, the Securities and Futures Commission, are seen as reliable and sophisticated institutions.

This is why Hong Kong is the base for over 1,500 multinational companies who use it as an easy way into the China market — 60% of foreign investment comes through Hong Kong.

Above all, Hong Kong provides security for investors, including some very senior Communist Party cadres who would not like to see the crisis unsteady the economy. The Chinese leadership has enough investments in Hong Kong apartment blocks and blue-chip stocks to keep the Peoples Armed Police at bay for now.

Article source: https://www.dw.com/en/why-china-won-t-send-the-tanks-into-hong-kong/a-50041265?maca=en-rss-en-bus-2091-xml-atom