Global Source Partners
What can China lose in Hong Kong?
Andrew Collier | September 2019
Executive Summary
How important is Hong Kong to China? What will happen — if and when the protests end — to the “special” relationship in the Jnancial sector between Hong Kong and the mainland? The argument is often made that China cannot afford to disrupt Hong Kong due to the important role it plays in providing capital for the mainland. We disagree with this due to the small size of capital Kows compared with domestic China and the new channels of US dollar Jnancing.
Possible Protest Outcomes
There has been much debate internationally and in Hong Kong about how the current state of protests end. The options include:
- Gradual dying out of protests, particularly as the city’s 324,000 students go back to University.
- A series of meetings leading to some compromise on both sides.
- Rise in protests and police confrontation as the Carrie Lam administration refuses to offer any compromise solution, leading to a breakdown in law and order in Hong Kong.
- Direct intervention by the People’s Liberation Army. Most people dismiss option four. Military intervention is too threatening to China’s role vis a vis Taiwan, and the West, to allow for a repeat of a “Tiananmen” style crackdown, particularly as the trade war negotiations rage on. In addition, it is widely accepted that it would be difJcult for the PLA to control a city under siege, given that 75% of the land is unoccupied and much of it is rural. In fact, only 25% of Hong Kong’s land is zoned for use, and only 3.8% is residential. If a military conclusion is unlikely, that leaves either a quiet dissolution of the protests, a negotiated compromise, or a breakdown in law and order. Currently, there are a number of attempts by independent groups in Hong Kong (academics, lawyers), to act as a “go-between” with the government and the protestors. It is not clear how much they can do given the intransigence of the Carrie Lam administration. One question that may affect Beijing’s decision whether to intervene more directly is how valuable Hong Kong is to China. Leaving aside Hong Kong’s security and symbolic positions, is Hong Kong still an important Jnancial center for mainland China?
There are four key industries in Hong Kong: Jnancial services (18.9% of GDP); tourism (4.5%); trading and logistics (21.5%); and professional services (12.5%). A downturn in any of these would hurt the mainland but clearly Jnancial services outweighs the others due to its size and importance to China.
Conclusion: Why Care about Hong Kong?
Hong Kong has more symbolic than Jnancial value to China. Security issues in Taiwan, along with concerns in Europe and the U.S., are more important factors to China than capital raising. This is mainly due to China’s increasing Jnancial integration globally.
In addition, there have been longstanding concerns in Beijing that corrupt money has been held offshore in Hong Kong. Beijing would be happy to Jnd a way to increase its control over the city to Kush them out.
To that end, China will inevitably seek to increase its control via the local police force, its own people Jltered throughout various parts of the government, along with a “third force” through its presence in local media and other organizations.
In a sense, the damage has been done by the protests and the reaction by the Hong Kong government. Externally, there will be declining faith in the independence of Hong Kong. This is likely to reduce the independence of the Jnancial institutions, law Jrms and accounting Jrms, that help to foster the viability of the Jnancial system. The question now, is how quickly Singapore, Frankfurt, and other cities can replace Hong Kong.
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