Hongkong - China Conundrum and its Inferences
As citizens of a civilised society, we often feel oppressed if any major ordinance is issued by the ruling government without taking consensus of the mass public. As a consequence, people do disagree with reforms and in some cases, they revolt and take to streets to express their displeasure. With this backdrop, we wrote this piece decoding the Hong Kong conundrum and its reverberations.
Before we get into details, let us first acknowledge the history of Hong Kong. It all started by Britishers with the desire of trading tea with China. However, settlements for tea trades were made in silver instead of monetary consideration. Soon, the Britishers ran out of metal reserves, due to which they indulge themselves into illegally smuggling opium and other drugs to China with a condition to accept payment in silver. Such silver was in turn used to buy tea from China, which soon forced both the nations into a war, popularly known as “opium war”. The war was concluded by the Treaty of Nanking (Nanjing) in 1842, which forced China to cede Hong Kong Island and its surrounding Island to Britishers for perpetuity.
The greatest asset of Hong Kong that distinguished it from China was its autonomy. From a single party communist government to a liberal society, Hong Kong as a nation flourished under the Colonial rule of British which led to the title of ‘one country, two systems. Britishers ruled India for nearly 150 years, likewise Hong Kong as a nation was under Britishers popularly known as British Hong Kong for around 15 decades (apart from a brief period under Japanese occupation from 1941 to 1945) until 1997 when it was handed back over to Mainland China.
Well, I could remember from my Class 11th Business Studies guide mentioning political forces as one of the components of macro environment of economy. Let’s take a deep dive into what’s all is happening in the macro environment of Hongkong’s economy because of political influences exerted by China
- Hongkong’s weakening state of affairs is perceivable in its stock indices- i.e. Hangseng. Apart from Increasing protest and violation of human rights, geopolitical tensions can be visible in Hong Kong’s stock market which is clearly showing a divergence as differentiate with leading world indices as shown below. Hangseng has underperformed its global peers and could not emulate their recovery driven on the basis of re-opening of economies after few-months long nation-wide lockdowns and hopes of vaccine development.
- While the international community continues to flight with COVID pandemic, China on the other hand has passed a security law leading to threat on Hong Kong’s autonomy. Interestingly, the law will also apply to non-residents of HK i.e. it applies to all of us. Key highlights of the legislation are: -
- Act of terrorism (including damage to public property) with foreign forces are punishable by a maximum sentence of life in prison
- Beijing will establish a new security office in Hong Kong, with its own law enforcement personnel - neither of which would come under the local authority's jurisdiction
- In addition, Hong Kong will have to establish its own national security commission to enforce the laws, with a Beijing-appointed adviser
- Importantly, Beijing will have power over how the law should be interpreted, not any Hong Kong judicial or policy body. If the law conflicts with any Hong Kong law, the Beijing law takes priority
- Few trials will be heard behind closed doors.
The most likely scenario is that Hongkong’s institutions face gradual decay and that it drifts away from being a globalised financial centre towards one that is more mainland Chinese. If the territory’s government has become a proxy of the Communist Party, it seems rational to worry about how long its independent institutions, including the courts and the central bank, can remain unaffected.
On the other hand, China would be left with more control over a less effective capital market, raising the cost of capital for its firms.
Political tensions in Hongkong increased in the second half of 2019 and it witnessed GDP drop of 1.2% for the year and the country officially slipped into recession. Foreign Direct Investment (FDI) nosedived 47% in 2019 to $55 billion. In the wake of growing concerns around the independence of institutions of the country and the rife impact of Covid-19 on global economy can upend the already precarious position of Hongkong on the map of world trade and commerce.
Now you may wonder what’s at stake when countries collide, especially when there is a history of tensions within them. Before we conclude, here are some facts to be known that depicts Hong Kong’s importance to China:
- Chinese conglomerates account for half of the entities of Hang Seng representing two-third of market capitalization.
- Two-third of investments in or out of China are transacted through Hong Kong
- Hong Kong possesses a free press environment and more importantly an uncensored internet.
You may suppose what’s going to happen with the new ordinance or with the ruthless protests. Well, we don’t know yet, but would love to have your views and debate on it.
Please let us know what do you think about what is in box for Hongkong?
(Views expressed are personal.)
References
https://www.bbc.com/news/world-asia-china-48607723
https://www.bbc.com/news/world-asia-china-52765838
https://hbr.org/2020/06/what-will-happen-to-your-business-in-hong-kong