When Great Britain returned Hong Kong to China in 1997, the deal hinged on the “One Country, Two Systems” principle. Under the arrangement, China retained sovereignty over the city but granted it freedoms people on the mainland do not enjoy.
It was and continues to be an awkward system, though necessary at the time. China was less than a decade removed from the Tiananmen Square protests, which it mercilessly crushed with troops and tanks. For the Communist Party leadership, assuring Hong Kong would retain some measure of independence helped mollify international opinion.
But historic, colonial grievances aside, China needed Hong Kong more than the territory needed it. Hong Kong was a major commercial city with a transparent, legal system that attracted foreign capital, something the poor Communist country desperately needed.
In some ways, things haven’t changed. Despite enormous economic growth over the past decade, China still relies on Hong Kong to grant its heavily state financed, opaque economy some degree of legitimacy.
China can brag about its economic prowess but the country still has a problem with capital formation. Though Shanghai has emerged as a major global financial center, its nascent stock market has struggled with volatility, unclear rules that change on the fly, and fraud. Such conditions don’t inspire confidence among foreign investors.
Why do you think Chinese tech giants Alibaba, Baidu and JD.com went public in the United States while Xiaomi, Meituan-Dianping, and Tencent listed their stock with the Hong Kong Stock Exchange?
In 2014, Shanghai and Hong Kong debuted Stock Connect, which allowed mainland and global investors to more easily trade in companies listed on both exchanges. Investors around the world applauded the move as allowing investors to access China’s economic growth under the blanket of Hong Kong’s trusted financial system.
“We do not think Hong Kong will be marginalized due to the rise of Shanghai,” Goldman Sachs said in a report. “As long as the ‘one-country, two systems” framework remains in place in Hong Kong, we think Hong Kong will remain the only Chinese city (or Special Administrative Region) where the regulatory and judicial frameworks are aligned with Western practices.”
“Assuming ongoing policy support from China and the determination for the Chinese government to reform its financial markets remains in place,” the report said, “we believe Hong Kong has the necessary qualities to retain its status as a leading financial hub, specializing in connecting China to the rest of the world.
But here’s the problem: when it comes to the rule of law and transparent financial markets, Hong Kong has continued to live up to its end of the bargain. China not so much.
China has abandoned financial reform in favor of President Xi Jinping’s efforts to consolidate power and promote a strongly nationalistic foreign and economic policy. China’s walk back from opening its markets is one reason the country and the Trump Administration’s have engaged in a damaging trade war.
Far from becoming more democratic, China has doubled down on authoritarianism. President Xi has not only imprisoned dissenters but also business, military, and political leaders he views as rivals under the guise of an anti-corruption campaign. It’s not uncommon for people to disappear, only to reemerge weeks later to publicly “confess” their crimes. China’s censors continued to vigorously police the Internet.
It’s no wonder that hundreds of thousands of people have recently taken to the streets in Hong Kong to protest a proposed law that will allow authorities to extradite citizens to China. And most of the protestors were born well after the Tiananmen Square massacre.
China has long described its economic system as “Capitalism with Socialist characteristics,” an awkward mashup of one party control and free markets. ‘One Country, Two Systems’ is no less contradictory and the inherent tension between those terms is finally coming to bear.
I’d like to think China wouldn’t send tanks and soldiers to put down protests in Hong Kong. For one thing, the city is not Beijing. The 1989 protestors posed a legitimate threat to Communist Party control. And though the country’s capital, the city is a bit of a backwater, especially compared places like London and Paris.
Hong Kong remains a vital financial center and China’s life line to international capital. A violent crackdown will no doubt cause economic turmoil. But Xi’s nationalistic rhetoric may force the president to do something drastic, especially if the protests persist and grow larger.