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Hong Kong’s Pro-Democracy Protests Carry Economic Undertones

Rising inequality and unaffordable housing are helping fuel the demonstrations that threaten Hong Kong’s standing.

Before boarding an airplane to Washington last week for the annual International Monetary Fund and World Bank meetings, Hong Kong financial secretary John Tsang told journalists he hadn’t been sleeping well. The Hong Kong government had “no experience or psychological preparations” for the “unprecedented” protests that have taken place in the city recently, he said.

For the past three weeks, Hong Kong has been a city under siege. As many as 200,000 protesters — mostly high school and college students — have massed on the city’s streets to demand democratic reforms, blocking roads surrounding the government’s headquarters and a few other key locations and bringing Asia’s financial hub to a virtual standstill. The unprecedented protests, in a city that for 20 years has been named by conservative think tank Heritage Foundation as the “freest economy” in the world, came as a shock. Scenes of police hurling tear gas grenades against the protesters on September 28 shattered perceptions of Hong Kong as a prosperous, peaceful city in which people focus only on making money.

A former British colony that reverted to Chinese rule in 1997, Hong Kong has never had democratic elections. A bastion of unfettered capitalism and press freedom, the city has served as the financial hub of China and the rest of Asia. Protesters, however, said that’s not enough: They want to freely elect the city’s chief executive, who since 1997 has been selected by a committee of 1,200 members chosen by officials in Beijing.

Though mostly peaceful so far, the protests — if they drag on — threaten Hong Kong’s position as a global financial center, Tsang contends. “The rapid pace of developments over the past week was completely beyond everybody’s expectations,” he wrote on his blog before leaving for Washington. “It’s hard not to be concerned that more serious chaos would happen. To be honest, I persistently didn’t sleep well.”

Analysts share Tsang’s worries. Hong Kong’s benchmark Hang Seng index has fallen 8 percent since the protests broke out, and analysts who previously were bullish on Hong Kong have changed their stance. “We now have a ‘sell’ on Hong Kong equities, at least through the end of the year,” says Paul Schulte, CEO of Hong Kong–based independent research firm Schulte Research International. That call was an extraordinary shift for Schulte, who has been bullish on Hong Kong equities for most of his more than 22 years in Asia, including four years as the Hong Kong–based chief Asia strategist for Lehman Brothers and later for Nomura International.

The protests, which have escalated anew this week after the government backed out of talks to seek a resolution and ordered police to pull down student barricades, arose in response to an Aug. 31 decision by the Standing Committee of the National People’s Congress of China to allow Hong Kong citizens to directly elect their chief executive beginning in 2017 but to limit their choice to candidates vetted by a committee appointed by China.

The decision caused an uproar among Hong Kong’s opposition parties, which have been pushing for unrestricted universal suffrage since the city’s return to Chinese rule. Under British rule, Hong Kong never had democratic elections. Every governor since 1841, when the U.K. seized the territory after beating China’s Qing dynasty in the Opium War, had been appointed by the British monarch or by Parliament. It wasn’t until 1985 that the U.K. allowed legislators to be elected through so-called functional constituencies, or groups that represented professions and industries. Popular voting didn’t come until 1991, when the British authorities allowed the public to directly elect 18 of the 60 legislative seats. In 2006 China’s Congress promised that the city’s chief executive would be selected through general elections in 2017, although it didn’t specify the details of the nomination process.

Democratic activists in the city, however, say democratic reforms are too slow. “China should respect the aspiration of Hong Kong people to develop democracy and to safeguard individual liberties, human rights and the rule of law,” Martin Lee, the founding chairman of Hong Kong’s Democratic Party, said recently. “She should also respect the wish of Hong Kong people for greater participation in the government of Hong Kong.”

The real cause of the explosive protests is more economic, in the form of rising inequality, than political, contends Schulte. In the city of 7.2 million, where per capita income is $33,000, roughly 1.3 million live below the poverty line, earning less than $5,580 per year. Rising property prices are also fueling discontent, he says.

Hong Kong had the most unaffordable housing in the world for the fourth straight year, according to a survey of 360 cities by U.S.-based consultancy Demographia in January. The survey indicated that Hong Kong’s median home price was more than HK$4.02 million ($518,000), nearly 15 times the median household income of HK$270,000.

The key problem, Schulte says, is that Hong Kong’s economy is dominated by a “cartel” of real estate tycoons. “There should be a fundamental shift in policy to help university students, more health care for elderly,” says Schulte, who notes that housing is so expensive that some 53,000 people live in steel cages stacked on top of one another in the city’s slums. “The government should immediately close all the cages and relocate people to humane living conditions. They should announce massive investments for more low-cost housing. More important, Hong Kong needs an antitrust law to end oligopolies, especially in property.”

Hong Hao, a mainlander who is chief strategist at BOCOM International Holdings Co., the Hong Kong securities arm of China’s Bank of Communications Co., says he sympathizes with the demonstrators’ desire for reforms but says their protests put Hong Kong on a collision course with China. The city needs economic reforms even more than political reforms to maintain its lead over rival Chinese cities, he argues.

“Hong Kong has been a dynamic exchange of Asian culture and Western democracy,” Hong says. “The years of confluences from the East and the West have resulted in a vibrant trading harbor like no other — until recent years, when the growth of some Chinese cities such as Beijing, Shanghai and the neighboring Guangzhou and Shenzhen are slowly rubbing away some of the shine from this Pearl of the Orient.”

Financial services and trades have always been Hong Kong’s strength, yet Hong noted that Hong Kong’s total market capitalization is now lagging behind Shanghai’s, and its trading advantages are being eroded by many Chinese ports. “Failing to establish an expertise in technology, like its closest regional competitor, Singapore, Hong Kong continues to rely heavily on services that account for 70 percent of the city’s GDP while losing manufacturing competitiveness due to high rent and rising labor costs.”

The future isn’t bright for Hong Kong unless all of its people — including the protesters — and its government build a consensus that works with China’s long-term development goals, rather than against them, Hong says. “With the mainland’s influence continuing to gain and without a comprehensive competitive strategy, Hong Kong will likely continue to struggle with its ambivalence between economic dependence and cultural autonomy,” he says.

Financial secretary Tsang and other government officials have their work cut out for themselves in seeking to calm protesters while carving out a strategy to narrow the yawning social and economic divide that threatens Hong Kong’s prosperity and peace. There could be many more sleepless nights ahead.

Follow Allen Cheng on Twitter at @acheng87.

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