Wednesday, 8 October 2014

Hong Kong, the golden goose Beijing cannot sacrifice

BEIJING: Hong Kong's democracy protests have stoked fears of retribution from China, but observers say the city is simply too valuable to punish and sideline, even as it faces a long-term challenge from mainland rival Shanghai.

Demonstrators, sometimes numbering in the tens of thousands, have taken to Hong Kong's streets over the past week to demand free elections for the city's leader in 2017, a display of civil disobedience initially met with tear gas from riot police and later attacks by unidentified men.

Large-scale disruption has triggered fears in the semi-autonomous city that Beijing, which does not tolerate any challenge to its rule, may seek to penalise it for the show of popular intransigence.

The greatest threat could be for the leadership to sideline the free-wheeling former British colony in favour of China's emerging financial centre Shanghai, where authorities established a much-vaunted free trade zone (FTZ) a year ago.

"Because Hong Kong is now standing up to China, it is seen as an unreliable partner," said Francis Lun, a financial analyst and CEO of Hong Kong-based Geo Securities.

"This will escalate (the trend) that Shanghai will one day replace Hong Kong as the financial capital of China.

"If the tide changes, there is no going back," Lun added. "It could happen. It could happen very fast."

But experts maintain that Hong Kong is not at risk of being marginalised in the short-term. That would be self-defeating for Beijing, which continually stresses that the city is part of China, and itself uses it as a key economic conduit.

Taking measures to economically punish Hong Kong would just "harden views" in the territory, noted Julian Evans-Pritchard, China economist at Capital Economics.

"Obviously, they're not happy about what's happening in the protests, but they're still trying to model a lot of the (financial) reforms on the mainland on Hong Kong," Evans-Pritchard said.

"So, I don't think they want to set Hong Kong back. It would be silly to have a tit-for-tat."

'I will use you'

Hong Kong was returned to China in 1997 and has its own government and legal system, with its residents enjoying rights and freedoms unknown on the Chinese mainland.

Nonetheless the protests are fuelled by soaring inequality and living costs as well as anger over the cosy relationship between the city government and its financial elite, contributing to a sense of disenchantment among the younger generation.

Hong Kong, known for its open approach to business, was ranked the world's freest economy this year for the 20th consecutive year, according to the Index of Economic Freedom, published annually by the Heritage Foundation and the Wall Street Journal. Mainland China, by contrast, ranked 137th.

Analysts cite Hong Kong's "transparent and fair" legal system as a keystone of the bridge it forms between China and the global financial community.

The city is also a major destination for mainland Chinese investors, with nearly 60 percent of Chinese outbound investment either directed to or channelled through it by the end of 2012, according to China's Ministry of Commerce.

Beijing is moving slowly to open up its capital markets and promote the yuan as an international currency.

But at the same time it is looking to maintain its control over key economic levers -- and foreign firms have lamented the sluggish pace of promised reforms in the Shanghai FTZ.

"Obviously there's a clear preference for China to develop Shanghai," said ANZ senior economist Raymond Yeung. "But that doesn't mean they've already abandoned Hong Kong."

The pro-democracy Occupy Central campaign was first announced last year but officials still pushed ahead with plans for a cross-trading scheme between Hong Kong and Shanghai's stock markets, he pointed out.

"It's too simplistic to think that 'You're naughty, and I don't want to take care of you any more'. The leaders of China today are very pragmatic: 'So long as you can deliver, then I will use you.'"

Narrowing gap

Yet while Hong Kong need not worry about being eclipsed by its mainland rival in the short-term, the dynamic could shift as the territory's full return to Chinese control in 2047 nears.

At that point, Hong Kong will probably still retain some of its "inherent advantages" such as the widespread use of English, Evans-Pritchard said, but may stand to lose others, such as its independent legal system.

"I could see a scenario in the very long run -- after it returns to China in 2047, if basically it loses its special status -- then at that stage you wonder," he said.

"I do think Shanghai will become increasingly important and it could overtake Hong Kong, at least as a domestic financial centre."

For his part Yeung felt Shanghai was unlikely to displace Hong Kong, but added: "Obviously a convergence will be coming, because China is catching up, Shanghai is catching up.

"So the gap between Shanghai and Hong Kong will narrow; this is undoubtedly true." Kong protests,Hong Kong

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