Jonathan Fenby

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Recent China research

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China Monitor: The gap between economics and politics widens in Hong Kong


The progress of Beijing’s proposal for political changes in Hong Kong was never going to be easy given the strength of pro-democracy groups in the Legislative Council (Legco) and the wave of protest demonstrations they provoked beginning in September 2014. The central government hoped to win the day with the offer of universal suffrage for 5 million voters in the election of the territory’s Chief Executive in 2017 in place of the current system of selection by a 1,200-strong committee vetted by the central authorities. That, it though, would outweigh the opposition among pro-democrats to the condition that would have restricted the choice of candidates allowed to run. Leung Chun-ying, the current Chief Executive of the Special Administrative Region (SAR), came out strongly in favour of those proposals.

But matters went from confrontation into farce when Legco met today to consider the proposals from the State Council. Pro-Beijing legislators walked out of the chamber in a bid to force a 15-minute delay for a senior member of their group to arrive to vote on the proposal which needed a two-third majority to pass. They failed to hold up proceedings and, in their absence, only eight votes were cast for the proposal and 28 against out of the 70 Legco members.

Political confrontation likely to grow

That is likely to deepen Beijing’s distrust of the former British colony. The State Council and National People’s Congress have both taken an increasingly tough line toward Hong Kong over the past year, insisting on the primacy of the first part of the “one country, two systems” formulation unveiled at the time of the handover to Chinese sovereignty in 1997. However, the pro-democracy demonstrations, while not always popular because of the disruption they caused, showed the strength of “Hong Kong Identity” politics in which people identify with the territory rather than with the People‘s Republic. Polls show that, when asked to name their identity, only 12 per cent of inhabitants say they are simply Chinese with most calling themselves “Hongkongers” or “Hong Kong Chinese”.

The outlook is for increased political confrontation. Today’s vote is likely to embolden the pro-democracy camp - Joshua Wong, the 18-year old leader of the street demonstrations last year, commented today that “We have defeated a bogus voting plan, but we will have to shift from playing defence to playing offense to get the election that we desire.” But that camp is fragmented and has lost ground to pro-Beijing groups, notably the Democratic Alliance for the Betterment and Progress of Hong Kong and its conservative allies who between them hold majorities on all 18 of Hong Kong’s District Councils and are well placed for Legco elections next year. The government conducted intensive lobbying for the Beijing proposals which seems to have had an effect – a poll by the University of Hong Kong reported 47 per cent in favour of the changes and 38 per cent against.

There is no way in which the pro-democrats can hope to force Beijing to accept their demand for an an open selection of candidates or to retreat from its insistence that it will only allow people who “love China” (as the central authorities define it) to run for Chief Executive. That stipulation is essential to avoid Beijing’s nightmare of a pro-democratic candidate standing and winning the election, forcing it either to accept a critical leadership in Hong Kong or annulling the election.

But the impact on business looks limited

To date, the political debate has not affected the SAR’s commercial position as the bridge between the Mainland and the world with a strong legal system, a pro-business environment, freedom of movement and a currency pegged to the US dollar. The growth of Shanghai as a business centre has not seriously dented Hong Kong’s status and the opening of the Hong Kong-Shanghai Stock Connect, together with a similar arrangement with the stock market in Shenzhen has emphasised the importance of Hong Kong’s financial role. However, the territory’s growth since the handover has owed much to the Mainland in the form of retail spending by visitors, property purchases and investment flows. The demonstrations and the hostility shown to Mainlanders by some local residents does not appear to have affected business despite the warning at the time by the local offices of the for big four accounting firms that the occupation of the central business district by protestors would cause “inestimable” losses.

Mainland investment has dropped as a share of the total though still far ahead of that from other sources (see Chart 1 below). However, most of these investments are on their way to other destinations, or on a round trip back to the PRC to qualify for tax breaks. So they are not a reliable guide to PRC involvement in the SAR.

Chart 1: Investment in Hong Kong by country of origin

More significant, the increase in the number of Mainland visitors rose by one-fifth each year from 2009-14 to 6 per cent early this year and then declined after Chinese New Year (See chart below). A further fall is likely, not for political reasons or because Mainland tourists feel less welcome in Hong Kong, but rather as a result of restrictions on parallel traders who come to the SAR to stock up on everyday products which they then sell at a profit back home. Another reason is the weaker yen increasing Japan’s attraction as a destination. The decline will hit retailers but sales had already been slowing down and the major impact has been on the luxury trade from the anti-corruption campaign launched by Xi Jinping. Sales of watches and jewellery were down 16 per cent in H1/15 and rents in up-market shopping centres will be hit as a result of the retailing squeeze.

Chart 2: Mainland visitors to Hong Kong (12mma)
Pearl River Delta schemes to go ahead

Overall, however, Hong Kong’s cross-border links are set to increase. Planners on both sides of the border are working on the development of the Pearl River Delta as both a manufacturing and financial centre - there is recurrent speculation that HSBC may move its headquarters from London to what is planned to be a major banking centre. The Shenzhen stock market is due to join Shanghai in being connected to the SAR, bringing access to its small and medium cap stocks. A high-speed train between the two cities is planned. A new bridge is to be built reaching 20 kms into Guangdong. Hong Kong thus faces the prospect of becoming ever more connected to the Mainland economically while its politics diverge from those of the rest of China, with no local figures able to span the gap. For the moment, the political risk factor is low but it needs to be taken into account by investors dealing with the city perched on the edge of the PRC.