Hong Kong is not another Ukraine

The Greater Bay Area’s third-biggest city is increasingly seen by the central government’s propaganda organs as being in the throes of a “Colour Revolution”. This might turn out to be a  strategic mistake, as the nametag could motivate protesters to behave more radically. Those protests in Europe, which became known by the color of the protesters’ symbols – Ukraine got it going with the Orange Revolution – were focused, committed and widely seen as being on the right side of history: popular uprisings against corrupt dictators masquerading as democrats. And, most important, they largely succeeded. Is this what Beijing wants Hong Kong’s youth to look up to?

The situation in Hong Kong is not the same. This is a city within a country. Here, the protesters’ aims are set against the vast majority of the rest of China, their demands are incongruent, and the ranks of the extremists are dwindling as they engage in senselessly violent acts that turn off the mainstream. By comparing them to a movement that toppled unpopular leaders – often fleeing by helicopter in the middle of the night – Xinhua is, perhaps unwittingly, painting the protesters as revolutionary heroes and emboldening them.

In any case, investors fretting about what comes next for China’s dominant international hub (still) should not pay these official commentaries much notice. They are aimed at a mass audience. Better to consider the potential scenarios of what lies ahead now that the protests appear to have passed into a more radical stage.

It is possible that these protests continue to become more violent. As efficient as the Hong Kong police may be, this is a tough city to keep orderly against protesters adopting guerrilla tactics. The lack of firearms available here is a godsend, but there are many other ways that small, well-funded groups could wage a campaign of extreme violence against the government. In other words, brace for things to get worse. Declining numbers among these hard-core protesters are reassuring; but intensity levels are rising. 

Moreover, as was seen this week at the start of two days of strike action, schoolkids and office workers are joining peaceful protests, which are showing little sign of flagging. This is not likely to run out of steam as classes resume and summer holidays end, which is what had previously been hoped for by the authorities. In other words, brace for further disruptions to daily life.

However, it does not appear likely that there will be intervention from Beijing, under any circumstances, despite the Xinhua thunderclaps. It is clearer now that the downside for China to suppress protests in its SAR by sending in troops vastly outweighs the upside. Even if there is foreign influence at work among the protesters, sending in troops would cause a shock in the global community that would be extremely hard to repair, and would set back China’s much larger plans for economic reform and development. 

There are hundreds of millions of Chinese citizens who are counting on those plans to continue. Despite what may appear to be happening between the US and China in stalled trade talks, China is not going to close up shop again like it did in 1965. Neither is it going to behave like the thugs that used snipers to suppress protests in Kiev in 2014. It has both the discipline and the motivation not to do so. Pay no heed to Carrie Lam’s advisers hedging their bets by discussing emergency powers. Freedom of the press and freedom of capital flows are in no danger here, for the foreseeable future.

That also does not mean Beijing is likely to allow Hong Kong to collapse, either. Despite all the hedging work going on in Shenzhen – which is what any prudent leadership would be doing – Hong Kong is vitally important to China. This is both from a practical and a symbolic viewpoint. The central government has the means and motives to support Hong Kong through the worst of the turmoil to come.

Practically speaking, there are two main reasons to expect Beijing’s continuing support for Hong Kong. One, the Renminbi is not yet ready to be freely floated: China’s convertible currency is the Hong Kong dollar. Two, Shenzhen is not yet ready to handle international arbitration cases based on a foundation of common law that would satisfy any global business decision-maker: Hong Kong is still where much of China’s global business needs to be contracted. 

Symbolically speaking, no leader worth a page in the country’s history could possibly allow themselves to be blamed for “losing” Taiwan because of an impulsive decision to break the “One Country, Two Systems” principle, regardless of how many clauses in the Basic Law might legitimize intervention. Sending in troops to Hong Kong would likely give Taiwan reason to tear up the ROC Constitution and formalize independence, which in turn would likely trigger war in the Taiwan Strait. Risk that for putting out fires in Hong Kong? Not likely.

Having said that, the methodology behind Beijing’s support is likely to change. Drastically. Unlike in 2003, when all the central government had to do was let go of restraints on the flow of mainland tourists and investment into Hong Kong, now it needs to get more hands-on and proactive. 

Top of the to-do list in addressing the protests’ underlying causes is surely the large-scale construction of social housing. This will require breaking down barriers to fundamental economic reform – something the Hong Kong bureaucracy has proven incapable of doing on its own. Interestingly, SCMP chose today to publish an analysis of the problems caused by concentrated property ownership in Hong Kong. The article doesn’t go nearly deep enough into examining how much of the economy is in the hands of the city’s five richest families, but any scratching is welcome at this time, as Beijing must be mulling how to break up the oligarchy that runs this city’s commercial life once and for all. 

In so doing, as has been seen in some cases already, such as Cathay Pacific, the corporate sector is going to have to disavow itself of the notion that privately owned companies have no role to play in achieving social – or political – ends. This city is no longer going to be a bastion of the Washington Consensus. It is a Chinese city, and One Country is going to have to start shaping Two Systems more in its image. Where Shenzhen has been tapped as China’s pioneer of Socialism with Chinese Characteristics, Hong Kong will need to be its pioneer of Capitalism with Chinese Characteristics.

That doesn’t mean there won’t be mountains of money to be made here for investors who figure all this out. In the coming years, the Greater Bay Area has by far the rosiest economic prospects compared to any similarly sized region on the planet. As we wrote recently, Korea was passed on the global economic rankings at the of 2018, and Canada will be next in December this year as the GBA leaps into 10th place. Hong Kong is only one part of the GBA plan. It is an important part, but it is not going to be allowed to hold the GBA back from achieving its potential. Too much is riding on the GBA masterplan’s success. 

The key question is who will stand in front of the cameras to lead the central government’s efforts to fix Hong Kong. Is it possible Beijing will do what the real leaders of Ukraine’s then-government – in Moscow – did back in 2014? Will they realize the only way to take the sting out of these protests is to remove the symbol of what the protesters stand against? We would not dismiss this possibility, especially if it was simultaneously announced that the government would roll out a massive “New Deal” social-development spending program under her successor. 

We won’t likely have to wait long to find out. All will surely be revealed sometime in the next month, ahead of the October 1 National Day and, more importantly, ahead of the traditional October Policy Address of the Chief Executive. 

Stay tuned. Keep calm. And carry on looking for investing opportunities.

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