Our Opinion: 2019
Hong Kong protests are an urgent warning to Beijing
The protests that have shaken Hong Kong will not threaten China’s grip on power. But the country’s leaders will need to learn the right lessons to head off bigger problems in the future.
The increasingly violent protests that have been shaking Hong Kong for the last seven months are not solely about democracy or freedom of speech. Instead, they are driven by a much broader set of frustrations that represent perhaps the biggest challenge that China faces in the decades ahead.
That’s not because these protests are set to spread into mainland China – they’re not, regardless of what happens in the next few months and how they are finally resolved. There is virtually no sympathy for the Hong Kong protestors among Chinese, who mostly see them as unpatriotic, ungrateful and too willing to overlook how their territory’s privileged position within China has allowed them to grow wealthy much faster than the rest of the country.
However, in the longer term, the same factors that are driving unrest in Hong Kong could well emerge in China. Indeed, the experience of other countries that have managed a high level of economic success suggests that this is quite likely, unless China learns from their examples and adapts its economic development to head these problems off.
To understand why, it’s necessary to look at the foundations of the Hong Kong protests. The immediate trigger was the government’s attempt to pass a law that would allow people accused of crimes in jurisdictions with which Hong Kong does not have an extradition treaty to be extradited on a case-by-case basis. One consequence of this would be that suspects could be extradited from Hong Kong to mainland China.
The fact that this law became so controversial was a surprise to almost everybody outside Hong Kong. Most people may be surprised to hear that there is currently no extradition arrangement between Hong Kong and China – not even for clear-cut serious criminal cases like the one that was the direct pretext for the proposed law (which involved a man from Hong Kong who had committed a murder in Taiwan, fled home and confessed to the crime, but could neither be prosecuted in Hong Kong nor extradited to Taiwan under current laws).
The reason why allowing extradition to Taiwan almost unavoidably means allowing extradition to mainland China is that China considers Taiwan to be a rebel province that is part of its territory. So politically neither Beijing nor Hong Kong’s top leadership, who are effectively selected by Beijing, were willing to countenance a Taiwan-only extradition law. And the reason why an arrangement that covers the mainland is so controversial is that Hong Kongers believe that it would make it possible for China to pursue political activists based in Hong Kong, thereby undermining the principle of “one country, two systems” under which Hong Kong is supposed to enjoy substantial autonomy and political freedom until 2047 (the 50th anniversary of its return to China). Hence the explicit goal of the protests quickly became not just about the proposed law, but also about demands for greater democracy in Hong Kong.
However, while there are many people in Hong Kong who are deeply concerned about democracy, and while there are real fears about the territory’s special rights being eroded, the reason why it has been possible to get millions of people onto the streets of Hong Kong for such a sustained period is that this builds on deep-rooted anger about how well the territory’s economic system is working.
Hong Kong is extremely wealthy: it has a GDP per capita of $64,000 in purchasing power parity (PPP) terms – which adjusts for the difference in the cost of goods and services between countries – compared with $46,000 for the UK. But this wealth is very unequally distributed.
For the average Hong Konger, the costs of living – especially housing costs – are unpalatably high. There is a widespread view that a small number of people have grown rich at the expense of the wider population, largely through their role in a dysfunctional property market where a small cartel of property developers have privileged access to the territory’s limited supply of land. Problems with monopolies and oligopolies also exist in a number of other sectors, but the issues in real estate are particularly obvious and egregious, so housing tends to be the focus of the most anger.
Investing in Hong Kong is a brave decision at the moment. The benchmark Hang Seng index is down by 12% since the beginning of April, even after a recent bounce. Many smaller stocks have fallen far further. There should be opportunities if you can look through the effect the protests are having on the economy and take a medium-term view on what these companies’ prospects may be when things quieten down. However, that assumes that things don’t get worse before they get better.
Anybody who is confident about what happens now is deluding themselves. News reports suggest that China is planning to remove Carrie Lam as chief executive in the next few months and replace her with a new face who may be better placed to bring about some sort of reconciliation. This could mean policies aimed at tackling the protestors’ underlying grievances (though almost certainly not concessions on most of their demands, such as direct elections for the next chief executive).
Property stocks have been among the major losers, but it shouldn’t be assumed that there are any bargains there on a medium-term view. It is clear that tackling the high cost of housing is one of the key steps that the government could take to improve Hong Kongers’ standard of living. So, Beijing may well insist on major changes that will undermine the system that has been so profitable for the property developers for so long. More generally, any monopolistic companies that contribute to a high cost of living might find themselves under pressure to trim margins and spread the wealth around a bit.
The most interesting area for bargain hunting is probably retail, which has taken a big hit: not just from lower domestic consumption, but also from fewer shoppers from the mainland (who are hugely important for many retailers and who no longer feel welcome) and foreign tourists put off by the protests.
This damage will not be undone quickly: earnings for this year will be dire. But on a long-term view, some offer the prospect of sizeable capital gains and/or decent dividends when conditions improve.
19th November 2019