The Economist USA - 10.08.2019

The EconomistAugust 10th 2019 BriefingTurmoil in Hong Kong 17

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kets via its port were critical. At the time of

the handover in 1997, the territory’s econ-

omy was equivalent to nearly a fifth of Chi-

na’s. Today the figure is 3%, and its port is

no longer important in shipping goods

from the mainland (see chart).

The structure of Hong Kong’s economy

has changed little in two decades. In terms

of their contribution to the economy, trade

and logistics along with finance are re-

markably similar (22% and 19% respective-

ly). The same old family-run conglomer-

ates in Hong Kong have a lock on property

development, port operators, utilities and

supermarkets. Meanwhile Shenzhen,

across the border, has been transformed

into a hub for new giant tech firms such as

Huawei, Tencent and zte.

The old road is rapidly ageing

Yet Hong Kong remains more important to

the mainland than might at first appear,

and not just as a showcase for how China

acts in a way befitting a country claiming

greater status on the world stage. The para-

dox is that the more autocratic the main-

land gets the more it needs Hong Kong

commercially. Had China reformed its fi-

nancial and legal system, the territory

would be irrelevant to its global business.

Instead the opposite has happened: China

has grown fast and globalised, but not

opened up.

As a result, Hong Kong’s economy is dis-

proportionately useful to China. It has a

status within a body of international law

and rules that gives it seamless access to

Western markets. The status is multifacet-

ed. It includes: a higher credit rating; lower

risk-weights for bank and counterparty ex-

posures; the ability to clear dollars easily;

independent membership of the wto;

“equivalence” status for its stock exchange

with those in America, Europe and Japan;

recognition as a “developed” stockmarket

by index firms and co-operation agree-

ments with other securities regulators.

Cross-border bank lending booked in

Hong Kong has roughly doubled in the past

decade, much of it Chinese companies bor-

rowing dollars intermediated through the

territory. Hong Kong’s stockmarket is now

the world’s fourth largest, behind Tokyo’s

but ahead of London’s (see chart on the

next page). About 70% of the capital raised

on it is for Chinese firms, but strikingly the

mix has shifted from state enterprises to

tech firms such as Tencent, Meituan and

Xiaomi. These firms have specifically cho-

sen not to do mainland listings because the

markets there are too immature and closed

off from Western investors. Alibaba, an e-

commerce conglomerate, is also in the pro-

cess of doing a Hong Kong listing (at pre-

sent it is only listed in New York).

Most Chinese foreign direct investment

flows through Hong Kong. The stock dom-

iciled in the territory has roughly doubled

in the last decade, to $2trn. Hong Kong’s

share of total fdiflowing into mainland

China has remained fairly constant, at

60%. Although the amount of multina-

tional money flowing into and out of China

has soared, most firms still prefer to have

Hong Kong’s legal stamp.

Meanwhile, the number of multina-

tionals with their regional headquarters in

the territory has increased by two-thirds

since 1997, to around 1,500. Hong Kong

hosts the most valuable life insurer in the

world, excluding mainland China, aia,

while a global firm with a big Asian arm,

Prudential, is about to shift its regulatory

domicile to Hong Kong.

This all means that how turmoil in

Hong Kong is resolved matters to more

than just to its own people. Already boards

of multinationals are debating over wheth-

er to move their regional domicile to Singa-

pore. Indeed, one existing weak spot for

Hong Kong is that major American tech

firms, such as Google, Amazon and Face-

book, have set up their regional headquar-

ters in Singapore, perhaps because of

cyber-worries. An executive with a biotech

startup says the company is moving money

out of the territory and considering an

American listing instead.

China will not take action in Hong Kong

lightly: it knows how much is at stake eco-

nomically and how much its biggest firms

depend on the territory, quite apart from

the reputational risk. Yet it also sees the sit-

uation spiralling into a threat to the Com-

munist Party itself—one that America, it

believes, is trying to exploit.

Its evidence for this is that the Ameri-

can government, already caught up in a

gargantuan tussle with China over trade,

cyber-technology and dominance in Asia,

is taking an increasing interest in develop-

ments in Hong Kong. President Donald

Trump called the demonstrations “riots”,

echoing the language coming from Beijing.

Yet his administration is staffed with

China hawks. Many see the protests as a re-

sponse to the way China has undermined

Hong Kong’s autonomy.

Should the party intervene more forc-

ibly, says a senior administration official, it

would be “a tragedy for Hong Kong, bad for

China and the latest act of decoupling from

the free world and regressing to the dark-

ness of the Mao years.” The official likens

Hong Kong’s status, in some respects, to

“West Berlin during the cold war”. “‘One

country, two systems,’” the official adds,

“risks dying a premature death.”

As the present now, will later be past

China knows that America has a formida-

ble weapon to wield in the form of the

Hong Kong Policy Act of 1992, which recog-

nises Hong Kong as a separate legal and

economic entity from China with all the

rights of an open economy. An interven-

tion by the Chinese army might lead the ad-

ministration to declare Hong Kong to be in

breach of the act. This, though, would be a

nuclear option: one that America is likely

to take only in extremis.

In the meantime, Congress, led by Sena-

tor Marco Rubio, is working on legislation

that would, among other things, test Hong

Kong’s system of export controls to make

sure Chinese companies are not circum-

venting rules, as well as ensure that de-

monstrators are not penalised if they seek

American visas, just because they were ar-

rested during the protests.

If it ever happened, intervention by the

Chinese army would not necessarily be in

the form of tanks and blazing machine-

guns. Its deployment would follow a pro-

cess set out in Hong Kong’s post-colonial

constitution, the Basic Law, and a piece of

Chinese legislation called the Garrison

Law. These allow Hong Kong to ask the cen-

tral government for the plagarrison’s help

in maintaining public order. This could, in

theory, merely entail a few discreet units

backing up Hong Kong’s police. It would be

very unlikely to involve the random vio-

lence seen, for example, in 1989 in Tianan-

men: the platoday is far better trained, and

the garrison has been drilling its men in

crowd-control techniques that resemble

those of the Hong Kong police. But avoid-

ing any such eventuality, says one of Mrs

Lam’s advisers, has always been the Hong

Kong government’s “number one” priority.

Having the placome in is “the last thing”

anyone wants to have happen. It would

10 km

Hong Kong

Island

New Territories

Kowloon

Lantau Island

Shenzhen

HONG KONG

Hong Kong

airport Kwai Tsing

container

terminals

River trade

terminal

CHINA

Even bigger brother

Sources: IMF; UNCTAD *Forecast

Hong Kong as % of mainland China

Nominal GDP Ports, container

throughput

0

5

10

15

1998 2005 10 19*

0

50

100

150

1998 2005 10 17