Home Editor's Pick Hong Kong-China Unrest and the Implications for China’s Economy

Hong Kong-China Unrest and the Implications for China’s Economy

by internationaldirector

Hong Kong (HK) has often grabbed global headlines, but lately, it has been doing so for the wrong reasons. The island has been gripped by protests over an extradition bill that seemingly would empower mainland China at the expense of HK locals. The Fugitive Offenders and Mutual Legal Assistance in Criminal Matters Legislation (Amendment) Bill 2019 was proposed following a murder case in 2018. After the murder, a Chinese suspect in Taiwan could not be extradited due to the lack of an extradition treaty. In order to avoid similar situations in the future, the HK government proposed a legal arrangement. However, an amendment to the bill included not only Taiwan but also China as one of the partners of the extradition treaty. Under this amendment, suspected offenders who are in HK can be extradited to the mainland. Such an amendment was viewed with much concern by civil and political leaders of HK society because the move would undermine the current one-country, two-systems symbiotic relationship it has with China. Furthermore, they argued that the amendment would lay the groundwork for further subversion of the civil rights guaranteed by the HK’s constitution (Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China).

In order to understand the gravity of this movement, it is important to understand its evolution.

History of discontent

Sentiment has been growing in HK over the years that the Chinese mainland has been abusing the sovereignty that was promised to HK during the 1997 handover from the United Kingdom. Such agitation came to light during the failed Umbrella Revolution of 2014Currently, the island is indirectly ruled by the mainland, as only half of the seats in the Legislative Council are democratically elected, with the chief executive being selected by the election committee. Due to this situation, work on conditions for democracy—enshrined in the HK constitution (Basic Law)—has come to a halt since the handover. Furthermore, the Basic Law is set to expire in 2047, and the lack of progress on democratic reforms may lead to the colonization of HK citizens by their Chinese “masters”. This ticking time bomb of discontent hit the detonation point when the HK government mishandled the introduction of The Fugitive Offenders and Mutual Legal Assistance in Criminal Matters Legislation (Amendment) Bill 2019in early 2019.

Mistakes in introducing a controversial bill

After the introduction of the bill, a group of legislators started a filibuster campaign. In response, Secretary for Security John Lee initiated the second reading of the bill in the Legislative Council, hence bypassing the committee that was supposed to inspect the bill. Therefore, the bill that threatened to violate the sovereignty of the island was introduced in a forceful manner. As a result, protests broke out, which in turn were suppressed brutally.

Hong Kong has been in a state of emergency since October 1. Recently, the protestors have divided into peaceful and violent factions. Some factions have even gone ahead and published news advertisements inviting British and American intervention on the island. And Chinese troops may enter the fray to avoid an escalation of the disorder. Before considering further action, the Communist Party of China needs to revisit the importance of Hong Kong to its economy.

Importance of HK to the Chinese economy

At the time of the reunification in 1997, Hong Kong stood at around 18.4 percent of the Chinese economy. With the rise of the mainland economy, that figure has fallen to 2.7 percent. However, HK is worth more than its weight when it comes to finance and banking. It would not be an understatement to say that HK is the financial conduit through which China interacts with the rest of the world. This is because Chinese authorities like to maintain strict control over financial institutions on the mainland. This control discourages foreign financial investment in China. In contrast, Hong Kong is one of the freest countries in the world, with strong laws protecting the rights of financial institutions. As a result, HK has become a global financial center with strong banking and asset-management markets; financial firms either access the market for their own funding, giving China more global financial power, or use it as a base to launch investments to the mainland. Therefore, China enjoys the control over financial institutions without suffering from the consequences of lower financial inflows.

HK also serves as a launching pad for foreign investments of Chinese firms in other countries. China’s stock of investments in HK crossed $600 billion in 2018. Many firms further invest these funds into foreign subsidiaries and partnerships; outbound foreign direct investment is channeled via HK because it offers good professional services that are backed by a world-class regulatory regime.

HK also helps channel the world’s funds into Chinese companies. The Stock Exchange of Hong Kong (SEHK) houses 421 Chinese companies that have a combined valuation of US$1.54 trillion. Out of these, 250 are partially owned by the Chinese state, while 171 red-chip firms (firms that are based in China but were incorporated outside of China) are controlled by it. Some of these companies are extremely important to new Chinese plans—including Alibaba, which was expected to raise nearly $20 billion in its upcoming initial public offering (IPO). Any future listings on the SEHK will retain the advantages of a faster registration, global exposure, cost-reducing financial structure and transparency-promoting regulatory system. Currently, none of the cities on the mainland can provide a similar level of service.

Apart from pouring wealth into the country, HK also plays a role in the internationalization of the renminbi. According to the Hong Kong Monetary Authority (HKMA), HK is the “global hub of off-shore renminbi business”. This claim is substantiated by HK’s $92-billion renminbi certificates and deposits business. Such internationalization has received approval from the mainland, as was seen when the People’s Bank of China (PBOC) used the Hong Kong Monetary Authority’s (HKMA’s) Central Moneymarkets Unit (CMU) a total of four times. This was done to manage liquidity and exchange rates in offshore renminbi markets.

Of course, HK is more than just a financial center.  Many of the sanctions placed on China in the recent trade war do not apply to HK. Furthermore, HK has always been a “soft power” symbol for China, whereby the open society of HK has stood in stark contrast to the seemingly inhumane one-child policies of the mainland. This is especially true nowadays, with the uproar over the treatment being doled out to Uighur Muslims.

All of these advantages will remain with China if it positively manages the current HK grievances. However, if it fails, the mainland will suffer political, social and economic consequences.

The fallout from a Hong Kong revolt

For starters, the economic consequences are obvious. The internationalization of the yuan (renminbi) would come to a halt. This is because China has managed to maintain control of its exchange rate while at the same time making the yuan one of the International Monetary Fund’s (IMF’s) SDR (Special Drawing Right) currencies. This allows yuan-holding nations to pay their debts to the Washington-based body in yuan. HK is a global financial center, and as China moves from a net-lender economy to a net-borrower economy, it will increasingly need a city such as HK to channel funds into the ageing country. Even if China were to find an alternative to HK as a global financial center, trouble in HK would raise the country-specific risk premium for China. It is pertinent to mention that due to the size of the Chinese economy, a minor increase in the country’s risk premium would lead to a massive increase in the required debt profile. Moreover, HK itself could see a recession if the protests are not quelled soon.  

The political consequences would be severe both nationally and internationally. Nationally, the unrest could start a chain reaction. The mainland has many of its own latent political land mines waiting for a chance to explode. These include the Uighur Muslim problem in the far-west province of Xinjiang as well as the rural-vs-urban divide and the corruption charges that have never been fully addressed. Internationally, Beijing needs a crystal-clear image to avoid political uproar over One Belt One Road’s (OBOR’s) expansion into new countries. Furthermore, violent suppression of the current protests could also provide Washington and allies with the opportunity to intervene on humanitarian grounds. This intervention could be hard—ramping up hybrid warfare, or it could be soft—launching sanctions related to human-rights violations.

The social implications of unrest in HK are immediate as well as long-term in nature. In the short term, the event will erode trust in the Chinese government. The symbols of HK resistance against the Chinese could become rallying cries for future dissidents. In the long term, HK protests would break the narrative of the Communist Party that champions its system above that of Western democracy. With recent democratic crises in the West, such as Brexit, this would be the ideal time to show a stark contrast between the stability of the East’s system vs the turmoil in the West.


How to solve the crisis? Mainland China could be removed as one of the extradition partners in the bill. Doing so would help China continue to access the many gifts that HK brings. Perhaps it can take advice from the great Chinese philosopher: “Ruling a big country is like frying a small fish”. Be a little careless, and you will end up burning the fish.


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