The ongoing protests in Hong Kong against the Mainland’s requirement that it approve candidates for chief executive have brought sharp criticism from Beijing. The protests have been condemned for breaking the peace and stability, or potentially involving foreign meddling. What economic impacts are associated with the possible outcomes?
There are three main ways in which the Hong Kong protests may be resolved. First, Hong Kong protesters may give in to Beijing, either peacefully or grudgingly. They may decide that stability is more important than democracy, or realize that they have little sway with Beijing’s usual hard line. This would have little impact on the economy. Although embittered, Hong Kong residents would be unlikely to reduce trade and investment relations with Mainland China.
Second, Beijing may strike a compromise with Hong Kong. Such a compromise would attempt to combine democratic procedures with confirmation from Beijing, and would constitute an uncomfortable agreement between Communist and democratic principles. This may come in the form of allowing the public, along with the Nominating Committee, to put forward candidates that are then approved by Beijing. This would be a compromise between Beijing’s desire to approve candidates and proposals put forward by the League of Social Democrats and People Power Lawmakers and the Civic Party that proposed that both the public and the Nominating Committee nominate candidates for the Chief Executive. However, again, in this case, trade and investment relations between Hong Kong and Mainland China would resume as normal.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Third, Beijing may use violence, perhaps real bullets, to crack down, in a Tiananmen-like confrontation. This is the least desirable outcome for both Hong Kong and Beijing, as it would stifle relations between the two regions for some time to come. It would dampen trade and investment with Hong Kong, harm the stock market, which contains a large percentage of Mainland-based companies, and put the Shanghai-Hong Kong Stock Connect program on ice. Currently, trade from the Mainland into Hong Kong measured at $384.8 billion in 2013, direct investment from Hong Kong into the Mainland weighed in at $73.4 billion in 2013, and the market capitalization of Mainland firms listed in Hong Kong amounts to $1.8 trillion. Disruption of these financial flows would cause a serious economic shock to both regions.
Further, the wider economic implications of a crackdown should also be considered. A shock to the China/Hong Kong trade nexus, combined with an arrest in direct investment into the Mainland, would sharply impact the rest of the world, cutting off access to imported goods from China, and rerouting export channels to Shanghai, creating congestion and reducing exported goods to China. A crackdown would also call for an international response, possibly in the form of a trade embargo, as has been implemented against Russia. This would certainly disrupt trade, and would weaken economic ties between China and the West.
Therefore, the first two options are best. The protests are expected to come to a head on October 1, National Day, which celebrates the founding of the People’s Republic of China. The world is watching with bated breath to see whether the Hong Kong protests end without violence, for if they do not, there will be serious ramifications across the globe. The reality is that Beijing cannot approach the Hong Kong issue with a hammer-hard line; the line must be softened for this Special Administrative Region, or else the economic repercussions could be severe.