In this episode, Genevieve Feely chats with Tess Newton Cain to unravel the Pacific Islands Forum meeting in Tuvalu. Non-resident ASPI fellow Sofia Patel returns to Australia to discuss gender and counterterrorism, PhD life, and Brexit with Lisa Sharland. And Louisa Bochner interviews Bonnie Glaser, director of the China Power Project, to get her take on the implications of the ongoing demonstrations in Hong Kong.
Protests continue to rock Hong Kong. Throughout the summer—and now pressing into autumn—demonstrators have blocked city streets, shut down the airport and fought running battles with police.
Sparked by an anti-civil-liberties bill, the unrest is undergirded by shifts in the economy coupled with stalled political reform. For many citizens, there’s nothing left to lose but a future to win. It’s therefore unsurprising that, despite the government’s concession to withdraw the bill, no end is in sight.
Hong Kong is missing, but sorely needs, a bold program to move forward. This program should not simply aim to patch over the immediate crisis, as do current proposals, but rather seek to remake society, the economy and politics in a way that is inclusive and flush with vibrancy, opportunity and hope.
The foundation of a reform program must consider the structure of the Hong Kong economy.
In the 1980s, Hong Kong began an economic transition from manufacturing-based to finance and services. As companies moved to China in search of cheaper labour and resources, financial, producer and consumer services assumed an increasingly larger share of the economy.
From 1980 to 1997, for example, manufacturing fell to 6.5% of total GDP, while services rose to over 85%. Over the same period, the percentage of the Hong Kong workforce in manufacturing fell from almost half to less than 10%, while the portion employed in services rose to nearly 80%.
Widening inequality is a major consequence of this transition. Despite the replacement of one sector with another, the majority of jobs created have been low skilled and low paid, and often serve a professional elite that takes home a far greater share of earnings. Corporate dominance and shrinking economic opportunity have resulted in the largest wealth gap in nearly five decades.
This economic trend is compounded by politics. Hong Kong’s governing body is only partially elected by popular vote, while the majority of seats are given by appointment or by a vote of corporate bodies.
This ensures that democratically elected representatives have a limited ability to legislate, while non-democratically elected members can shape policy and dictate legislation. Furthermore, the chief executive is appointed by Beijing after being nominated by a select board of business and pro-China groups in a non-binding forum.
In short, the people of Hong Kong have very little say in how their society is run or in the policies that affect their lives and livelihoods.
The direct result has been the diminishment of social services and economic opportunity in favour of a corporate system benefiting a handful of conglomerates. Housing support has been slashed and public housing privatised. Unemployment benefits have been cut, welfare services reduced, and hospitals overburdened.
Meanwhile, no-bid contracts are being handed out to conglomerates, luxury housing gets built on land reserved for technology and industrial parks, and monopolies flourish alongside cartels that suppress competition. Democratic lawmakers have tried to stop these developments but are consistently vetoed.
This economic and political context has led to widespread dissatisfaction and outburst.
In the past few decades, at least four major protests have rocked the territory and shaken government leadership.
In 2003, massive demonstrations overtook the city. In 2010, protestors surrounded the legislature, and in 2014, demonstrators blocked traffic for 77 days. Now, citizens have occupied the streets for over three months and counting.
That being the situation, the task at hand is to put forth a program that not just speaks to the political immediacy with the single demand of a popular vote, but also addresses the underlying structural malaise. A comprehensive set of reforms is needed that works to democratise the economy, redirect social programs and give greater voice to the citizenry.
On the economic front, measures must be taken to open the economy to more people in more ways. This can be done by increasing access to capital and land, while simultaneously establishing incubation centres and development parks with innovative programs that facilitate collaboration and competition.
A precondition for success is the reinvention of the market economy: existing oligarchies, cartels and price-fixers must be dissolved and free and fair competition encouraged. Simultaneously, independent labour and consumer unions must be allowed to operate and organise.
In order to encourage experimentation and exploration, social programs should be restored and strengthened. Services such as public housing, health insurance, retirement and unemployment benefits are essential now more than ever as people find themselves in precarious positions. This will also alleviate the fear of failure in the transition to a new, more inclusive economy.
Politically, people must have a say in decisions that affect their lives and the future of their society. Hong Kong already has the necessary political infrastructure in place; it just needs to chart a path to universal suffrage.
This program would be informed by a vision of opportunity and universal aspiration. It would seek not just to address the immediate problems, but to ensure that each Hong Kong citizen has the ability and equipment to raise themselves up and live a greater life.
The Hong Kong protests have Xi Jinping in a bind. For all the talk of China’s power and the power of the president-for-life within China, he has faced no good choices in the Hong Kong crisis. Whatever the outcome, whatever action Xi takes to try to end a standoff now entering its fourth month, China looks like suffering a significant loss.
Two broad and diametrically opposed scenarios are available to Xi and a government in Hong Kong that it appears he has dictated to throughout the crisis: either pursue an escalating strategy of coercion that results in heightened confrontation with protesters, and possibly serious bloodshed, or seek an accommodation with them.
The best case for Xi is that the protesters tire, and in the case of the young, return to their studies. After another weekend of clashes that saw barricades on fire in Hong Kong Island’s central business district and protesters launch attacks on the police headquarters, this seems an unlikely rescue.
If Xi does decide to employ the first scenario, he risks doing considerable, and perhaps permanent, damage to an important range of interests associated with the ‘one country, two systems’ formula that has set the framework for rule in Hong Kong since the British departed in 1997.
If he adopts the second scenario, he risks undermining the stature of his leadership and emboldening a range of forces in mainland China, Hong Kong and elsewhere who object to the increasingly heavy-handed approach taken by the Chinese Communist Party since Xi assumed the leadership in 2013. This could be an ‘emperor has no clothes’ moment; the youth of little Hong Kong standing up and showing Chinese state power to be wanting.
So, either way—coercion or compromise—Xi’s options for a way out look unattractive. All have deleterious consequences.
One thing seems clear. It is Xi who is setting China’s strategy. Next to the trade dispute with the US, it’s hard to think of another issue that could occupy his mind right now as much as Hong Kong.
On the other side, the combination of mass peaceful marches, blockades of public facilities and street confrontations since June has severely tested the mettle and capability of authorities. With calculated disruptions, like the closure of the Hong Kong airport terminal, it has struck directly at the lodestone of Hong Kong life—its vibrant, free-wheeling economy—and stretched the resources of the police.
In the process, the confidence of protesters has grown. They have moved beyond opposing an extradition law to reviving a call for genuine democracy. They want accountability in the form of the resignation of Hong Kong chief executive Carrie Lam and an investigation into police conduct. They also demand the implementation of long-promised direct elections for their government based on a fully democratic franchise.
Despite the arrest in recent days of some prominent protest leaders and democrats, they can reasonably calculate that political opportunity for the moment is with them. This raises the bar for a resolution.
In the meantime, Chinese paramilitary police perform mock riot-suppression exercises across the border, stirring fears that mainland forces could join in a security crackdown. It’s possible these displays of force are no more than an act of intimidation, a case of what Mao Zedong referred to as ‘draw the bow, but not discharge the arrow’.
Xi does have at his command a state apparatus with long experience of strategies to coerce and co-opt opponents. He can employ a combination of inducements, propaganda, psychological intimidation, arm-twisting of opinion leaders, and physical suppression of protesters.
In the event he does decide to use force, he could invoke Article 18 of the Basic Law, Hong Kong’s constitution, which gives Beijing the power to declare a state of emergency and impose China’s national laws to deal with any threat to ‘national unity or security [that] is beyond the control of the government’ of Hong Kong.
Since the crisis erupted, it has been widely suggested that Hong Kong is of declining relevance to the Chinese economy.
There’s a lot of truth in that. But it needs to be qualified. Hong Kong, either as a trading or financial hub, has an enormous role to play in maintaining China’s economic health.
Because of the size of its re-exports and own consumption, Hong Kong is the fourth biggest trading partner with the mainland after the US, Japan and South Korea. It is the largest source (or gateway) for overseas direct investment in the mainland, accounting for a cumulative US$1.09 trillion in capital inflow in 2018. Of all overseas-funded projects in the mainland, 46.3% were tied to Hong Kong interests.
The local economy was already slowing sharply before the onset of the protests, caught in the midst of the US–China trade dispute. It now risks slipping into recession. A summary of the economic fallout shows steep declines in many of the traditional drivers of growth.
Even without a brutal repression of the protests, the damage is probably done. It’s hard to see confidence in Hong Kong being quite the same, especially as it gets closer to the end of the one country, two systems guarantee in 2047. Property, rated among the least affordable in the world, might start to increasingly suffer a ‘2047 discount’. The pattern of Hong Kongers taking out precautionary residency abroad, as they did in the lead-up to 1997, might resume, depriving the territory of some of its best brains and entrepreneurial talent.
The 3,955 foreign companies that currently use Hong Kong as a regional headquarters or representative office location (85 of them Australian) may choose to rethink their presence. A number of them already are considering a move to places like Singapore. They will be troubled by the resignation of Cathay Pacific’s chief executive following threats from Beijing over the consequences for the airline of allowing its employees to support protest activities.
China’s relations with Taiwan are another casualty. This time last year Beijing looked like securing a win in cross-strait relations with the election of a president more sympathetic to reunification. In the wake of the extradition law fiasco, the popularity of the Democratic Progressive Party’s Tsai Ing-wen has soared, establishing her as the favorite to be returned in January elections.
Of course, significant violence would make things much worse. But a political accommodation also looks like a hard act for Xi to pull off.
If Beijing were to authorise a dialogue between the Hong Kong government and the democrats and protesters, it might encourage critics to question the Chinese leadership’s competence or omnipotence. If a small place like Hong Kong, its sovereign territory, can stand up to Beijing’s authority and win concessions, how would that be interpreted in other restive parts of the country, or among regional countries that have their own disputes with China?
The same set of facts could be interpreted another way. China could portray dialogue, a willingness to listen to and act on some of the grievances of the protesters, as proof of its confidence as a great power as it prepares to celebrate 70 years of the People’s Republic in October.
Rather than turn Hong Kong into another running sore like Xinjiang, Xi could choose to uphold the spirit and substance of one country, two systems with the same pragmatism as the father of modern China, Deng Xiaoping. A tactical retreat would potentially allow him to adopt the high moral ground in his widening trade conflict with Donald Trump.
Right now, it’s hard to see that happening. The room for compromise has diminished. The Hong Kong crisis is unlikely to end well for any interested party—the Chinese leadership, the people and government of Hong Kong, and foreign countries with material interests there, not to mention the half a million Hong Kong residents who are citizens of Western countries.
Scenes of protesters with sticks chasing police through Hong Kong streets and police officers pulling out their guns and pointing them at protesters show that the Hong Kong authorities are losing control of the city. And that’s probably just what leaders in China want the world to see at this point.
Beijing manages internal dissent ruthlessly and adeptly. Step one is to identify and isolate critical voices and individuals before they have a chance to gather support or join together. That’s where the massive internal security apparatus of the Ministry of Public Security and Ministry of State Security, enabled by high-tech surveillance systems fed by government and corporate data, come in.
Step two is to clamp down rapidly and violently on protesters who have managed to organise despite state surveillance and arbitrary arrest. Such protests routinely arise over corrupt deals between provincial government official and land developers that displace local residents from their properties, although labour unrest because of dangerous or simply oppressive working practices in Chinese enterprises is also a cause. That’s where the standing police force and the heavily armed paramilitary of the People’s Armed Police come in, along with operatives of Chinese security agencies.
Step three is done simultaneously with the other manoeuvres—and it’s about ruthlessly suppressing reporting of protests and of the underlying grievances that are causing them. The Chinese Communist Party’s control of information allows this to be quite successful in mainland China, and also helps limit the news about protests that leaches into the outside world.
Step four, which is also done concurrently with the other measures, involves government officials threatening retaliation against individuals’ families if they persist in ‘making trouble’. People who are brave enough to risk their own safety are often not so willing to put their loved ones at risk, so this is an effective tactic. We’ve seen it used in Australia by Chinese government operatives threatening Uyghurs to not speak up if they don’t want family back in Xinjiang punished.
But the normal Beijing playbook for managing dissent has just not worked in Hong Kong, for four main reasons. First, the protest movement in Hong Kong is what Beijing truly fears—a mass movement whose scale is undeniable. And there’s no clear leadership group Beijing can arrest or intimidate to decapitate the protests, although the authorities have continued to arrest those they think might be important.
On top of this, the protesters have been incredibly innovative in shifting the nature, location and tactics of the protests, making containment impracticable. They’ve drawn on international sources of inspiration, as we saw with the kilometres-long ‘human chain’ on the weekend, which echoed the ‘Baltic Way’ protests in 1989 that helped topple Soviet rule in Estonia, Latvia and Lithuania.
And lastly, the protests have been broadcast virally by multiple eyewitnesses through social media and have been covered extensively in the international media. Pretending they’re just by a small group of extremists or about low-level issues, which has worked in the curated information environment of mainland China, just hasn’t washed with international audiences and governments.
So, we’ve got to a point where the playbook needs to turn a page. As I see it, Chairman Xi Jinping and his politburo colleagues have three options. The best—and most unlikely—path for Beijing to take is to do what a representative government would: engage with the people of Hong Kong to listen to their views and act on them. That sounds incredibly naive and idealistic I know, but the option is open to Beijing. It would demonstrate a maturity that might shift the increasingly bleak assessments people across the world are making of China and maybe give Xi a chance to salvage some credibility for his offer to take his China Dream to the world.
It’s now well beyond the time when Hong Kong’s chief executive, Carrie Lam, could engage with the people of Hong Kong on some of the core grievances they’re expressing and have any hope of being listened to, so it’s up to Beijing. Xi could do this by being the adult in the room. He could politely disown Lam’s disastrous handling of the protests while also expressing concern about the protesters’ methods, then use that space to do some of what the protesters want, in a way he controls.
That would mean appointing a respected Hong Kong figure to hold a public inquiry into police violence during the protests, as well as inquiring into violence by protesters. Providing some kind of amnesty for individuals involved would be wiser than laying charges against officials and protesters. Xi could also unilaterally withdraw the extradition bill and commit to no further action on it under the ‘one country, two systems’ commitment. While he could be reassuring about keeping Hong Kong’s political and legal structures in place over coming years, the bottom line would remain the 2047 timeline for Hong Kong to assimilate into mainland China.
The second path open to Xi is to continue to give no ground to the people of Hong Kong on any of their grievances and to simply wait the protesters out. That option would require him to keep control of the security forces so that they don’t escalate further in violence even in the face of attacks by protesters. And it would require an assessment that the protests will lose momentum over time—which hasn’t happened to date. It might be attractive as an approach between now and the 70th anniversary of the founding of the People’s Republic of China on 1 October.
The most likely course from the politburo, though, is a simple, repressive and violent one. Hong Kong matters most to the old guard in Beijing as a symbol of control—theirs or the people’s. Sure, Beijing has tried the normal playbook to manage things, and it has failed. But the reason Xi hasn’t taken steps to de-escalate the confrontation between the Hong Kong people and the police through politics (listening and negotiating) is that doing so would cede a level of control from the party to the people, and send a message that this might be possible in other parts of China.
As we saw with references to ‘colour revolutions’ by senior party members in the past few weeks, their fear of a mass people’s movement that ousts the CCP is real. The Hong Kong protesters’ use of Eastern European precedents like the human chain stokes those fears.
So, what Xi and his party colleagues see as at stake in Hong Kong is their personal futures, along with the future of CCP rule in China itself. That is the logic that brought Deng Xiaoping to order the People’s Liberation Army to massacre its own people in the streets of the capital 30 years ago, when Eastern Europe was convulsed with its own people’s movements.
And it’s this same voice of self-preservation and continued control that is likely to be loudest within the CCP as the protests continue. Beijing is driving the course of events in Hong Kong to this conclusion by refusing to engage with the Hong Kong people’s grievances—and Xi surely knows that. This refusal is creating a more pressurised, intense and desperate environment between the protesters and the authorities, which is leading inexorably to a violent conclusion.
That may be just what Beijing wants. And the party leaders’ excuse would be that events on the ground got so chaotic that they were left with no option but a lethal intervention. They should be held to account for creating the environment in which such bloody logic can be paraded as a justification.
It’s now time for the international community to step up to prevent a foreseeable massacre that will further cleave China—and other authoritarian regimes—from the rest of the world.
In this episode, ASPI’s Marcus Hellyer talks to the authors of the US Studies Centre report that’s been making waves around the Indo-Pacific about US strategy and readiness in the region.
Marcus and ASPI senior analyst Malcolm Davis discuss the news that Australia will support US-led coalition operations in the Strait of Hormuz, and Tom Uren and Elise Thomas from ASPI’s cyber team talk through their analysis of the Chinese influence campaign to undermine the Hong Kong protests that was uncovered on Twitter and Facebook.
Hong Kong’s role as China’s window to the world of unfettered capitalism is highlighted by its massive investment in Australia, where it is the fifth largest source of foreign capital.
Hong Kong investors own nearly $120 billion in Australian assets, or almost double the holdings of Chinese investors, and ranking only behind the United States, the United Kingdom, Belgium (representing a large proportion of EU investment) and Japan.
The Hong Kong stake has been rising rapidly, increasing 87% over the past five years which is faster than any of the other top 10 investors in Australia. China’s investment in Australia has risen by only 28% in that time.
Hong Kong companies have about $16 billion in direct investment in Australia, with the traditional conglomerates that have dominated the Hong Kong economy for many decades having significant assets. CKI Infrastructure Holdings, which is part of billionaire Li Ka-shing’s legendary empire, owns a large slice of Australia’s electricity assets.
However, Hong Kong’s investment in Australia is dominated by its funds managers and banks, with ‘portfolio’ holdings, such as investments in the share and bond markets, accounting for more than half of its total holdings.
It is likely that helping to bankroll the Australian government’s budget deficit has been the big attraction. Total Hong Kong holdings of Australian bonds (both public and private sector) have shot up 111% in the last five years to $47 billion.
The Australian Bureau of Statistics shows Chinese investors held only $1.5 billion in Australian debt securities at the end of last year, but it’s likely that a large share of the Hong Kong stake has been purchased on behalf of the Chinese government and other investors.
China uses Hong Kong to channel its investments around the world and a large share of the capital that flows into China goes through the Hong Kong financial system.
While Hong Kong residents value their separation from the Chinese state, the International Monetary Fund says Hong Kong is increasingly integrated into the Chinese economy. The IMF has done the numbers on China’s concept of a ‘Greater Bay Area’, encompassing Hong Kong, Macau and the nine major cities of China’s Guangdong province, showing it makes up an economy with a population of 70 million and has a GDP of US$1.5 trillion—about the same as Australia’s.
It’s just 27 kilometres from Hong Kong to China’s booming technology hub at Shenzhen, with the trip taking around 15 minutes in a Chinese bullet train. Hong Kong’s integration into China’s infrastructure advanced further last year with the (long-delayed) opening of the world’s longest sea bridge across the Pearl River delta to Macau and Zhuhai prefecture.
However, it’s the financial linkage underwritten by British common law and a reputation for transparent and honest regulation that gives Hong Kong an importance to the Chinese economy that far outstrips its relative size (its population is 7.4 million).
The US Heritage Foundation has placed Hong Kong at the top of its global economic freedom ranking for each of the last 25 years, praising its management of trade, monetary policy and government integrity. ‘A high-quality legal framework provides effective protection of property rights and strongly supports the rule of law,’ it says.
Under the ‘one country, two systems’ agreement struck with the United Kingdom in 1997, Hong Kong will keep its legislative and legal systems as well as its own currency and capitalist economy until 2047.
The Hong Kong Monetary Authority—its de facto central bank—and its corporate regulator, the Securities and Futures Commission, have a good standing globally.
More than 1,500 multinational companies have chosen Hong Kong as the base for their regional headquarters. About 60% of foreign investment in China and a similar share of its outbound investment is channelled through Hong Kong.
The total stock of Chinese direct investment in Hong Kong is US$620 billion, about 70% more than Hong Kong’s GDP. A large share of that is reinvested in markets around the world on China’s behalf, including in Australia.
Hong Kong’s funds management industry is ballooning in size. Its assets have risen from US$2.3 trillion to US$4.0 trillion since 2016, almost double the size of Australia’s managed funds (including superannuation).
Chinese companies use Hong Kong to raise capital. The IMF records that mainland companies raised US$47 billion in equity and US$66 billion in bonds on the Hong Kong market in 2017.
About 420 mainland companies are listed on the Hong Kong Stock Exchange with a combined market value of US$1.5 trillion. This includes about 50 of the largest Chinese state-owned enterprises.
Analysis by the Peterson Institute for International Economics found Hong Kong’s lack of capital controls and greater international exposure makes it a desirable base for the global expansion of Chinese companies.
Listing is faster and easier in Hong Kong than on mainland exchanges, while its financial infrastructure lowers operating costs. Its regulatory structure focusses on prudent minimum standards and transparency.
‘Neither Shanghai nor Shenzhen is likely to win this competition with Hong Kong, at least over the short term,’ the PIIE said.
Hong Kong’s financial centre has also been critical to China’s plans for building the renminbi as an international currency. The pool of RMB deposits in Hong Kong is approaching the equivalent of US$100 billion.
Some observers contend that Hong Kong’s value to China as a financial centre is so great that it would not imperil it by sending its own police or military into the territory to put a halt to the protests there. ‘Putting these protests down with the army would not reinforce China’s stability and prosperity. It would jeopardise them,’ The Economist editorialised this week.
However, it’s also possible that China would see the protests themselves as endangering the territory’s financial standing, particularly if critical infrastructure such as Hong Kong’s airport is threatened.
The Hong Kong government has scrapped the extradition bill that’s been at the heart of mass public protests. The backdown on plans to allow criminal suspects to be turned over to Chinese courts might dissipate the size, but not the anger, of future crowds as Hong Kongers seek to cap their victory by pressing for a range of demands, including the resignation of chief executive Carrie Lam.
It also will allow foreign governments to heave a sigh of relief that they can avoid being drawn into another messy row with China. But this is likely to be only a temporary reprieve for both Hong Kongers and those governments with a stake in the territory’s prosperity and stability.
The cancellation of the extradition bill looks like a small tactical victory in the midst of a continual erosion of the freedoms conferred on Hong Kong in the handover from the UK in July 1997. The reason the extradition bill has caused the gravest crisis since then is that it’s emblematic of the existential threat Hong Kongers legitimately feel to their way of life.
The ‘one country, two systems’ guarantee negotiated to facilitate the handover of the former colony to China comes to an end in 2047. Uncertainty over what will happen next has been a strong undercurrent in the protests.
Planning for the ‘year 2047 problem’ is on the minds of Honger Kongers and has the capacity to increasingly influence some basic financial decisions like whether to take out a mortgage. A survey in January found that 51% of those aged 18 to 30 were thinking of leaving.
Tensions over the nature of future rule are likely to build the closer Hong Kong gets to that day of reckoning. And so too is the problem Hong Kong poses for Western governments.
The history of international relations is replete with examples of small places and small disputes stirring up big problems. Hong Kong, with a population of just 7.4 million, has the potential to cause outsized trouble for several countries. It could easily become another flashpoint with China in a region dotted with trouble spots.
So far, the reaction of Western governments to the protests has been muted. Although the police were accused of excessive force, no fatalities were recorded in the clashes. That has reduced the pressure for an outspoken response in foreign capitals. But the situation could quickly shift. The police, one of the most respected public institutions in Hong Kong, has lost a lot of credibility. Now, video spreading on social media shows bands of thugs beating young protestors on the way home from a demonstration on Sunday. The episode underscores the high risk of violence escalating and spilling over into the wider society.
London warned Beijing to abide by the terms of the 1984 Sino-British Joint Declaration. The declaration set the framework for Hong Kong’s Basic Law and has the status of an international treaty. But China, which has questioned the declaration’s continuing relevance, accused Britain of ‘gross interference’.
Britain is not the only Western country with a direct interest in what happens in Hong Kong. One hundred thousand Australians live there. Close to the same number of Hong Kongers live in Australia. The territory hosts 120,000 alumni of Australian universities. With more than 600 Australian businesses maintaining a presence as part of a $170 billion bilateral investment relationship, the Australian Chamber of Commerce is the second largest international chamber in the so-called Special Administrative Region.
Canada has by far the biggest number of foreign citizens living in Hong Kong—300,000. Hong Kongers have already started trickling back to Canada in the past couple of years.
The US has 85,000 Hong Kong–based citizens, but the main issue for Washington is its economic stake. The US ran its largest worldwide merchandise trade surplus (US$31.1 billion) with Hong Kong in 2018, a fact that doesn’t figure in public discussion of the US–China trade dispute. The US Commerce Department estimated that exports of goods and services to Hong Kong supported 188,000 US jobs as of 2015.
To understand what could go wrong in future years, one only has to appreciate what works well now. As the US State Department noted in its latest annual review under the US–Hong Kong Policy Act, Hong Kong, in contrast to the mainland, operates an extraordinarily free and open economy. For 25 years running, the Heritage Foundation has ranked it the world’s freest.
It is unaffected by China’s tough cybersecurity law; it enjoys open access to the internet; it operates its own customs, immigration and law enforcement; it participates separately in multilateral organisations and agreements, including the World Trade Organisation and APEC; it is able to negotiate certain bilateral agreements, such as the 26 March free trade agreement with Australia; and it has its own currency and monetary authority autonomous from the People’s Bank of China.
Most importantly, it has a separate judiciary based on the English common law. It appoints non-permanent foreign judges from common-law jurisdictions to the court of final appeal, which provides enormous confidence in the judicial system for local residents and foreign investors alike.
How much will survive before and after 2047 is a matter of conjecture. The Basic Law simply states that the ‘previous capitalist system and way of life shall remain unchanged for 50 years’.
If those freedoms are substantially eroded, China risks sparking an exodus of businesses and people. In that event, the relationship between China and several foreign governments would be severely tested. How hard should those governments push human rights when they relate directly to the interests of their own (dual) citizens?
China demonstrated disdain for Hong Kong’s ‘independent’ judicial status even before the extradition law was proposed. Some who have offended Beijing have simply been kidnapped and dragged across the border. It’s clear China’s President Xi Jinping and the Chinese Communist Party place more weight on asserting central government authority than on avoiding any collateral damage to the Hong Kong economy.
The pugnacious attitude is already exacting a price on other Chinese priorities. Taiwan now believes that no dual-system formula with the mainland can be trusted.
The prospects of Taiwanese President Tsai Ing-wen, of the Democratic Progressive Party, winning national elections in January have been significantly boosted. The revival of the party’s fortunes, with its strong record of asserting Taiwan’s separate identity, parallels growing concern about Hong Kong’s political freedom.
Tsai rejected the idea of one country, two systems, pointedly referring to it as the ‘Taiwan consensus’. That puts her at odds with the opposition Kuomintang, which backs the ‘One China’ formula of the 1992 consensus.
The risk of heightened tensions between China and Taiwan is another way a deteriorating situation in Hong Kong can complicate the China policies of Western governments.
Yet any appeals to Beijing to exercise enlightened self-interest seem likely to be ignored. Western countries must plan for a scenario in which they have to absorb both the damage to a key economic relationship and a wave of escaping Hong Kong residents. Flight from mainland oppression is deeply embedded in Hong Kong’s DNA. The next wave of refugees could be on a larger scale than in the countdown to the handover.
The best prevention is to guarantee life beyond 2047 under one country, two systems. But Beijing shows little appetite for concessions. It has backtracked on promises to eventually allow direct elections for the chief executive.
The erosion of political liberties is pronounced under Xi’s presidency; ‘red lines’ limit freedom of expression, with a series of actions in the past year against those advocating a separate Hong Kong identity.
The trend will be to curtail rather than enlarge political freedom. The stage is set for a growing divide between Hong Kongers and the mainland.
There are great risks of escalation if protestors radicalise by taking their demands beyond the boundaries of the one country framework.
On 3 July, Joshua Wong, a repeatedly jailed activist, sent a Twitter message to 228,000 followers, quoting John F. Kennedy: ‘Those who make peaceful revolution impossible will make violent revolution inevitable.’
Only compromise can make the one country, two systems formula work beyond 2047. But neither Beijing nor many of Hong Kong’s young pro-democracy activists appear capable of finding that middle ground.
The proximate cause of the recent public protests in Hong Kong, which culminated on 16 June with an unprecedented 2 million people in the streets, was an ill-advised extradition bill to allow the transfer of criminal suspects to China—and which many fear would erode the legal firewall separating the semi-autonomous territory from the mainland.
The anger was further stoked by the apparent arrogance of the city’s unelected chief executive, Carrie Lam, in initially refusing to back down from the plan, and by the clear use of excessive force by police firing tear gas and rubber bullets against mostly young demonstrators on 12 June.
But the extradition bill was only the spark. The larger source of popular anger in Hong Kong is the growing sense that, just over two decades after the former British colony was handed over to Communist China, the territory’s distinct identity, its autonomy and its freedoms are slowly being eroded. Hong Kong, many locals fear, risks becoming ‘just another mainland city’.
That erosion of Hong Kong’s identity and autonomy has taken many forms. And it has been a deliberate long-term project by Beijing’s Communist leaders and their local allies.
Mandarin Chinese, the official language of mainland China, has overtaken English and many fear may soon overtake Cantonese, the distinct and colourful local Chinese dialect. Students at Hong Kong Baptist University last year staged a protest over a new requirement that all students pass a Mandarin language proficiency test in order to graduate. Mandarin is increasingly being spoken in hotels, restaurants, shops and university campuses as the number of mainland visitors, long-stayers and students has soared.
Locals also complain about that growing mainland tourist influx, which they feel is overwhelming local services and shops. They have asked, unsuccessfully, that the local authorities limit the numbers.
There has been a steady erosion of the physical distance and boundary between Hong Kong and the mainland. A new 55-kilometre bridge and tunnel system connects Hong Kong to Zhuhai, via Macau. A high-speed train has cut the travel time from Hong Kong to Guangzhou to just an hour. Another controversy erupted when the Beijing-appointed local government decided to allow mainland immigration authorities to set up a passport control station at the train’s terminus, deep inside Hong Kong’s Kowloon peninsula. Critics claimed the decision effectively shifted the land border south and gave China an official foothold inside the city.
In addition, there have been several often ham-handed attempts to try to instil a sense of Chinese patriotism and national pride in resistant Hong Kong youth. A proposed ‘patriotic education’ curriculum was mostly shelved after massive street protests by parents. The local government is now proposing new laws to criminalise disrespecting the Chinese flag and the national anthem. Those bills were prompted by local youth booing the anthem and making rude gestures during soccer matches between teams from Hong Kong and neighbouring Guangzhou.
Some young people at those matches unfurled British flags and chanted, in English, ‘We are not China! We are Hong Kong!’
In essence, since the 1997 handover, Chinese officials in Beijing have felt that Hong Kong, and especially its young people, were lingering under Western influence, were insufficiently patriotic and needed to be induced, or forced, to love the motherland. After the 2014 Occupy movement, which lasted 79 days and paralysed the city, they also felt that Hongkongers’ penchant to protest represented a direct threat that needed to be contained before it could filter across the border.
Hong Kong’s young people have responded to these efforts at more control by becoming increasingly hostile to the mainland and asserting a sense of separateness—called ‘localism’. Support for Hong Kong independence, once a fanciful idea, has steadily grown. In the election for the local legislature in 2016, a number of young ‘localists’ won seats, though they were later barred from taking office after deliberately botching their oaths and refusing to swear allegiance to China. Other ‘localists’ have been disqualified from running.
In a late 2018 poll by the University of Hong Kong, only 15% of respondents said they would identify themselves as ‘Chinese’, and the figure was just 3% for those aged between 18 and 29. Some 40% of respondents preferred the term ‘Hongkonger’.
At the 9 June protest march (which drew 1.3 million people, according to organisers) and the 16 June march a week later, which topped 2 million, some young people carried signs that read, ‘Hong Kong Is Not China Yet’.
Caught in the middle are the local Hong Kong leaders anointed by Beijing under a system designed to present a fig leaf of local autonomy. The chief executive is appointed by a carefully chosen ‘selection committee’ of 1,200 mostly pro-Beijing loyalists. But the real power rests with the Chinese government’s ‘Liaison Office’, whose top official has become increasingly visible and who regularly consults with local leaders on key decisions.
So Hong Kong’s local leaders, like Lam, are wrestling with a dichotomy—a local population increasingly asserting their separate identity and protective of their traditional freedom, versus a Chinese Communist leadership under President Xi Jinping intent on bringing Hong Kong more firmly under its control.
The hated extradition bill has been shelved, unlikely to be revived again anytime soon. Lam has emerged shaken and humbled, and has been forced to publicly apologise while also refusing protestors’ demands for her resignation.
The uproar, the rollback of her controversial bill, and her initial tone-deaf response—she at first seemed to refer to the protestors as spoiled children—have left her a badly weakened and unpopular leader. Many in Hong Kong are speculating that she won’t finish the remaining three years of her term, and almost certainly won’t be allowed a second.
Lam answers to China’s leaders in Beijing, not to the people of Hong Kong, and China is unlikely to let her resign anytime soon because to do so would be too humiliating a defeat at the hands of people power. She would become the fourth failed leader in a row; two of her predecessors couldn’t complete two terms because of protests, and the third went to prison for corruption.
The real problem is that any future Hong Kong leader is forced to serve two masters—China’s Communist rulers in Beijing, and the people of Hong Kong. They must try to implement China’s long-term integration agenda on a resentful and restive population that is willing to take to the streets to resist. That dichotomy leaves Hong Kong set for a turbulent and uncertain future.
The world has been riveted by the protests raging in Hong Kong against the city government’s proposed law to allow the extradition of criminal suspects to mainland China. About one million people—roughly one-seventh of the former British colony’s population—took to the streets on 9 June to denounce the draft law, and another large protest on 12 June resulted in violent clashes between demonstrators and police.
Yet, despite the massive protests, the Chinese government is determined to get its way. Instead of withdrawing the proposed law, Hong Kong’s Beijing-controlled leaders have fast-tracked the bill and scheduled it for a vote in the city’s legislative council at the end of this month. Its adoption would be a calamity not only for Hong Kong, but also for China.
The proposed extradition law would violate China’s pledge to adhere to the model of ‘one country, two systems’ in Hong Kong. And by giving the authorities in Beijing a convenient legal tool to grab individuals deemed to be ‘enemies’ of the Chinese state, the legislation would imperil the liberty of Hong Kong’s citizens—and of foreigners residing there.
Although the draft law doesn’t formally apply to political offences, this will offer no protection in practice. Under the Chinese legal system—which is controlled by the Chinese Communist Party—the distinction between political offences and conventional crimes is hopelessly blurred. Increasingly, in fact, the Chinese party-state persecutes human-rights activists by accusing them of criminal, not political, offences. Common charges include ‘running an illegal business’ and ‘picking quarrels and provoking trouble’.
If the proposed law is adopted, the mainland authorities will be able to arrest anyone in Hong Kong easily, by charging the target with an extraditable crime. Given the low threshold of proof—prosecutors would not need to provide evidence beyond probable cause—the protection against politically motivated extradition requests is frighteningly slim.
At the same time, however, China’s leaders should be aware that the outside world is watching these developments with great alarm. Unless the Chinese government backs down, the United States, in particular, will most likely take steps to make it pay dearly.
Since Hong Kong returned to Chinese rule in 1997, Western governments have maintained special economic privileges to help bolster confidence in the city. In 1992, the US Congress passed the US–Hong Kong Policy Act, in order to continue treating the city as a separate entity from mainland China. The law grants Hong Kong economic and trading privileges, such as continued access to sensitive technologies and the free exchange of the US dollar with the Hong Kong dollar.
But such benefits are contingent upon China fulfilling its commitments under the 1984 Sino-British Joint Declaration on Hong Kong, which set out the terms of the city’s future handover. Among other things, China pledged to maintain Hong Kong’s high degree of autonomy, freedom and rule of law for 50 years.
The US–Hong Kong Policy Act has teeth to deter China from violating its commitments. In particular, it explicitly empowers the US president to issue an executive order suspending some or all of Hong Kong’s privileges if he or she determines that ‘Hong Kong is not sufficiently autonomous to justify treatment under a particular law of the United States’. In making such a determination, the president should consider ‘the terms, obligations, and expectations expressed in the Joint Declaration with respect to Hong Kong’.
Even a cursory reading of the act should make it clear to China’s leaders that their actions in recent years have already seriously jeopardised the city’s status as an autonomous entity. Such actions include the abduction of five Hong Kong–based book publishers, the disqualification on dubious grounds of democratically elected city legislators and the imprisonment of pro-democracy activists. For the US, the passage of the extradition law could well be the last straw.
The unfolding confrontation between China’s leaders and Hong Kong’s citizens will provide fresh ammunition to US hardliners who have been advocating an aggressive stance against the Chinese government. Revoking Hong Kong’s privileges would advance that goal, because it would significantly hurt China.
After all, as the Sino-American economic cold war escalates, and rising regulatory and legislative hurdles make it harder for Chinese companies to raise capital in the US, Hong Kong will become immensely valuable to China as an offshore financial center. But if the US decides to withdraw Hong Kong’s privileges on the grounds that Chinese actions no longer justify treating it as a separate entity, the city’s value as a financial center will be fatally impaired. China’s companies will have less access to capital, and the valuations of Chinese state-owned enterprises listed on Hong Kong’s stock exchange will fall.
Even if the US doesn’t take this punitive step, China will reap what it has sowed. The likely passage of the extradition law will irrevocably tarnish the rule of law in Hong Kong and its attractiveness as an international commercial hub. Unless China’s leaders are prepared to accept these disastrous consequences, they should withdraw the bill before it’s too late.
Earlier this month, an estimated 100,000 Hong Kong residents gathered in Victoria Park, to mark the 28th anniversary of China violent repression of pro-democracy protesters in Beijing’s Tiananmen Square. As the South China Morning Post noted, the event in Hong Kong was the only large-scale public commemoration of June 4, 1989, permitted on Chinese soil. And, to the attendees, the Hong Kong demonstration reflected growing frustration, not only with China’s leaders, but also with their own.
On the surface, little has changed since the United Kingdom returned Hong Kong to China 20 years ago. But, in reality, China now exercises near total control over Hong Kong’s management.
China no longer believes that local leaders can competently govern the Hong Kong ‘special administrative region,’ no matter how sympathetic they are to the Chinese Communist Party (CCP). China learned that lesson from the tenure of Tung Chee-hwa as Hong Kong’s chief executive from 1997 to 2005, and that of Leung Chun-ying from 2012 to 2017. Neither was able to earn the support of Hong Kong’s residents.
In Leung’s case, a first term riddled with crisis and scandal caused China to lose confidence in his ability to lead. In December 2016, three months before the 1,193-members Election Committee was to vote for a new chief executive, China told him not to stand for a second term. Despite being seen as a pro-China ‘hawk’ and a staunch supporter of the CCP, Leung was deemed unfit. Carrie Lam, a former chief secretary of the Hong Kong civil service, and at the time, Leung’s number two, was pushed into the candidacy.
Her election marked the second time since the handover from the British that a deputy replaced a CCP loyalist. The first time was when Tung, Hong Kong’s first chief executive, resigned midway through his second term, in favor of his second in command, Donald Tsang, after Tung’s unpopular policies and divisive personality provoked unprecedented mass demonstrations.
China originally assumed that Tung, a shipping tycoon educated in England who was well known among elites in Hong Kong and Western capitals, would be an ideal successor to the last British governor, Chris Patten. But Tung was a tone-deaf political leader. He chose to ignore the fact that Hong Kong was built by refugees from China, comfortable with British rule, and was always fidgety about China’s politics.
Tung (and later, his protégé, Leung) also misunderstood his mission. China’s leaders didn’t want another compliant ‘patriotic Chinese City’ on China’s soil. They had plenty of those already. They wanted to retain Hong Kong as a dynamic capitalist showcase—one that remained as politically quiescent as before the handover.
It is not clear who—Tung or Leung—was a more divisive leader. Both claimed, without providing evidence, that ‘hostile’ foreign forces, seeking to pry Hong Kong away from China, were behind the city’s many troubles.
Tsang’s administration was calmer, but his cozy relationships with real-estate tycoons resulted in an unusually restrictive zoning policy that exacerbated Hong Kong’s housing-price problem. He currently is on bail, appealing a conviction for accepting favors from a developer.
Hong Kong’s leadership vacuum has only widened the city’s political, economic, and generational fault lines. Today, many young people, feeling ignored by the China-friendly leadership, are openly discussing independence and self-rule, alarming the CCP.
Who can blame them? Sky-high property prices, the result of years of policy failures, have destroyed any chance for educated young people to buy homes. Meanwhile, many parts of the mainland have economically surpassed Hong Kong, which, in 1997, was China’s most advanced, modern city.
That inertia is clearly visible in Hong Kong’s economic statistics. For example, income inequality in 2016, as measured by the Gini coefficient, was the ninth worst in the world, only one notch better than Zambia. Mainland China, meanwhile, ranks in the middle of the pack, at 90th place.
Even when compared to Singapore—traditionally dismissed by Hong Kong residents as an excessively taxed authoritarian city-state, compared to their own low-tax laissez-faire economy—Hong Kong comes up short. The most recent World Economic Forum report lists Singapore as the world’s second-most competitive economy; Hong Kong ranks ninth. Moreover, in 2016, Singapore’s per capita GDP, measured by purchasing power parity, was $87,100, or about 50% higher than Hong Kong’s.
These numbers should serve as a warning to local leaders that their governance leaves much to be desired. Adding insult to injury, the 2017 UN World Happiness Report ranks Singapore 26th, while Hong Kong is 71st—not much higher than China, which was in 79th place.
Hong Kong remains important to China’s leaders, politically and economically. Hong Kong is a world-class financial hub, and the Hong Kong dollar is the only convertible Chinese currency, making the city indispensable to China’s capital needs. Hong Kong is also the first stop for capital flight by China’s elite families and corrupt officials.
China’s rulers must learn from the departed British: pay attention to the views of the ruled—not just loyalists on the political payroll. If China and its local proxies continue to ignore what protesters are really shouting about, incompetent loyalists at the helm will be the least of their worries.