After Occupy: The Future of Democracy in Hong Kong

Anthony is not your typical demonstrator. The 26-year-old is a wealth adviser for a publicly listed Hong Kong firm that works with mainland Chinese investors on global investment strategies. Yet for nearly three months this fall, Anthony and his girlfriend, Mona, joined tens of thousands of protesters in some of the city’s busiest streets to demand a greater say over Hong Kong’s future and to criticize restraints imposed by Beijing.

“We want democracy in Hong Kong,” said Anthony, who requested that his surname not be published for fear of retribution from his employer. Speaking one evening in early November as he and Mona joined the protests after work, he said, “We are tired of a government that continues to serve the interests of a few wealthy real estate tycoons.”

For this bastion of unfettered capitalism, where the traditional pastimes have been getting rich and going shopping, such open dissent is astonishing. Since late August protesters have clogged the streets of Admiralty, the neighborhood adjacent to the central business district that’s home to the government’s offices, to protest China’s decision to effectively narrow the field of candidates for election as the city’s chief executive in 2017. At their peak in early October, the demonstrations drew as many as 250,000 people into the streets, all but shutting down Central, the financial district, for several days and blocking some of the city’s main thoroughfares for weeks.

By early December the protests showed signs of petering out. Three of the founders of the Occupy Central movement, including Benny Tai Yiu-ting, a law professor at the University of Hong Kong, turned themselves in to police and were released after a few hours’ questioning. Anthony and Mona stopped going to the protests, fearing that the movement was getting out of hand. “I tell my mainland Chinese clients that Hong Kong is safe and that it’s all right for them to come to do business here again,” Anthony now says.

On December 7, Chief Executive Leung Chun-ying, whom the protesters had called on to resign, said police were ready for “furious resistance” after obtaining a court order to clear the two remaining protest sites. That turned out not to be necessary. Four days later police moved in, arresting more than 200 holdout protesters outside government offices, removing tents and barricades that had blocked Harcourt Road, the area’s main thoroughfare, and allowing normal traffic to resume for the first time in two and a half months.

Yet even as the barricades came down, the discontent behind the protests remains. Seventeen years after the city’s return to Chinese rule, the special administrative region, as it’s called, is facing its biggest social-political upheaval in decades. Not since the 1960s, when pro-China leftist students took to the streets to demand the end of British rule, has Hong Kong seen such public demonstrations. Discontent with Beijing’s growing influence had been growing even before August, with periodic demonstrations in the heart of Hong Kong. With the students behind the latest wave vowing to continue to agitate for political reforms and the authorities shunning any dialogue, fresh protests could erupt in the run-up to the 2017 elections. If not managed well, political instability could threaten China’s “one country, two systems” formula for Hong Kong, which grants the city self-rule, and diminish Hong Kong’s role as a global financial hub and China’s offshore financial center. It also could reverberate inside China, fanning social tensions on the mainland and provoking a fresh clash between Beijing and the West over human rights.

“A forceful crackdown is the next-to-last thing Beijing wants,” says Gordon Chang, a New Jersey–based lawyer and author of The Coming Collapse of China, a 2001 book that contended that corruption, bloated state enterprises and overextended banks would cause an economic and political crisis in China. “The last thing Beijing wants is for the protests to spread in China.”

The recent protests are economic as well as political at their root, and those tensions show little sign of abating either. Inequality, which helped fuel the Occupy movements in the U.S. and Western Europe three years ago, has surged to such an extent in Hong Kong that even people like Anthony and Mona, who works for a major bank, are unhappy. “We are tired of sky-high property prices — prices so high that we have to save a minimum of five years of two incomes just to come up with a down payment,” Mona said recently.

Hong Kong’s youth today are starkly different from their parents, says Andrew Collier, founder and head of Orient Capital Research, an independent Hong Kong firm that focuses on China. “I see it as a generational culture clash,” says Collier, who arrived in Hong Kong in 1997 as an Asia media analyst with Bear Stearns Cos. and from 2009 to 2011 served as the New York–based president of Bank of China International’s U.S. operations. “Years ago I heard young people declaring their intentions to get a job at no less a global bank than Goldman Sachs.” But with the rapid rise of China, many global firms are offering the best pay to mainland graduates who come to Hong Kong, he adds. “The Hong Kong kids, the same type of kids that a generation ago professed love for Goldman Sachs, are getting squeezed,” Collier says. “They’re saying, ‘The deal we are getting, this isn’t a good deal anymore. We want more input on the decision-making process.’”

Although the protests have not gained much evident support or sympathy on the mainland, perhaps because of Beijing’s strict censorship of any coverage, there is no question that President Xi Jinping is paying attention: The movement poses a potential challenge to the leadership of the Communist Party akin to the student uprising that was stamped out in Tiananmen Square on June 4, 1989. Among the protesters who continued to camp out around Central Government Offices in Admiralty and across the harbor in Kowloon’s working-class Mongkok district were radicals calling not only for direct elections in Hong Kong but actual independence for the city, as well as political reform in China and the end of Communist Party rule there.

Hong Kong officials have refused to hold meaningful talks with the protesters, saying their demands are unreasonable. In media briefings Chief Executive Leung urged the demonstrators to “go home and go shopping.” Hong Kong police have been careful, for the most part, not to crack down too forcefully on the city’s youth, eager to avoid tilting public sympathy back toward the protesters, as they did when officers used pepper spray to disperse demonstrators in October, or provoking criticism from the West. At a press conference with President Barack Obama during the Asia-Pacific Economic Cooperation summit meeting in Beijing in early November, Xi said the Hong Kong demonstrators were breaking the law and warned foreign powers not to interfere, saying that “Hong Kong is exclusively China’s internal affairs.” Obama has expressed his support for “the rights of the people to express themselves” but insisted that Washington was not fomenting the protests.

The cost of violent repression would be steep for China, says Victor Shih, associate professor of international relations at the University of California, San Diego, and an expert on China’s financial sector. Chinese companies have relied on Hong Kong as their primary offshore funding source, with nearly half of the 1,500 companies listed on the Hong Kong Stock Exchange based in China. Banks in Hong Kong have lent “hundreds of billions of dollars” to Chinese companies over the years, he adds. “Any violent resolution to the Hong Kong protests will cause the crashing of all of these assets, resulting in major losses to the Chinese elite and state enterprises,” says Shih, who was born in Hong Kong. “I suspect this has a lot to do with the cautious approach that Beijing has taken so far.”

Since the protests erupted, China’s biggest initiative toward Hong Kong has been to deepen financial linkages with the city. In November authorities in Beijing gave the green light to the first-ever direct stock trading between Hong Kong and China. Shanghai–Hong Kong Stock Connect, which was launched on November 17, allows Hong Kong investors to purchase stocks on the Shanghai Stock Exchange and Chinese investors to buy stocks in Hong Kong, bypassing the existing regime of exchange controls and quota restrictions. The new conduit represents a major step forward in the loosening up of China’s cross-border capital controls. Its introduction surprised many Hong Kong experts, who had thought the pro-democracy protests had derailed long-promised liberalization.

China wants to send a clear message to the world, says Guan Anping, a Beijing-based securities lawyer and an adviser to the central government on economic affairs: “We want to tell Hong Kong people — and the international community — that we want to maintain ‘one country, two systems,’ a system that allows Hong Kong people to rule Hong Kong.” The launch of the Stock Connect program, he adds, indicates that China wants to give Hong Kong more rights and ensure its long-term prosperity. “There is political meaning here in the timing, and I can assure you there will be more benefits to come,” Guan says.

Others are more skeptical of Beijing’s intentions. China is adopting a “softly, softly” approach toward Hong Kong in the short to medium term, but the authorities may gradually tighten their grip over the longer term to prevent future protests or political movements from getting out of control, says Steve Vickers, who headed the Criminal Intelligence Bureau of the Hong Kong police when the city was under British rule and now runs his own, Hong Kong–based risk management consulting firm, Steve Vickers & Associates.

Before the Occupy Central movement, China’s security services, although present in Hong Kong, adopted a low profile. “It seems clear now that everything has changed in this respect and that far greater focus and resources will be committed to Hong Kong by both the State Security and Public Security bureaus,” Vickers says. “The tightening of China’s security apparatus means living in Hong Kong will gradually become more like living in any other mainland city.” Among the areas likely to be affected are academia, the legal profession and the judiciary, and Hong Kong’s currently freewheeling media, he says: “Sadly, in the bigger picture, all that the students and protesters have achieved, apart from bringing attention to themselves and their cause, is to score an own goal.”

Author Chang predicts that China will impose firmer controls on Hong Kong because of worries about “democracy contagion,” as he puts it. He notes that some Shanghai residents recently photographed themselves in People’s Square, in the center of the city, holding placards expressing support for Hong Kong students, then posted those photos online. The photos were removed quickly by authorities and have received virtually no media coverage. In a social media posting, some Chinese demanded the right to vote — and listed their names, daring the authorities to arrest them, Chang says. Occupy also has inspired mainland citizens to hold small-scale copycat demonstrations. Authorities have detained more than a hundred demonstrators in Anhui, Guangdong, Hunan and Jiangxi provinces, as well as in the cities of Beijing, Chong­qing and Shanghai, Chang says. His claim can’t be confirmed, as Chinese authorities haven’t disclosed any such arrests.

The protests could have a negative economic fallout on Hong Kong, some analysts say. The scale of the unrest has tarnished the city’s image among mainland investors and could cause some of these players to look to do business in other offshore centers in the region.

“The Occupy movement will be a drag on Hong Kong, as it is increasingly clear political instability will be an issue here going into the future,” says Hu Yifan, Hong Kong–based chief economist and head of research at Haitong International Securities Group, the offshore arm of China’s second-largest brokerage firm, Haitong Securities Co. “Occupy will give the edge to Singapore, where political stability is a constant.”

Officials and business leaders in Singapore are reluctant to inject themselves into Hong Kong’s political debate. “Quite clearly, when it comes to matters such as these, it is best resolved by Hong Kongers themselves,” says Chew Sutat, head of sales and clients at Singapore Exchange, the company that runs the city-state’s stock exchange. “We don’t have a view either way. What we think is a vibrant Hong Kong market is good for investors in Asia and for Singapore.”

The Hang Seng Index, which hit a five-year high of 25,317 on September 4, fell more than 10 percent by the end of that month, and despite a modest recovery it remained about 5 percent below that peak in early December. So far, though, global bankers say the protests do not seem to have hurt Hong Kong’s standing as a financial center. “There has been a rise in political instability that would increase the risk premium,” says Timothy Moe, Hong Kong–based chief Asia strategist at Goldman Sachs Group. “It is encouraging to see the Hong Kong stock market shrug off the concerns very quickly. So far, there doesn’t seem to be a transmission of political instability into the economy.” Moe notes that there was some impact on the retail sector in the past few months, but growth doesn’t seem to be unduly affected. The economy grew at a 2.4 percent rate in the first three quarters of 2014, down from 2.9 percent in 2013 but up from 1.5 percent in 2012. The consensus among analysts is for growth to accelerate modestly to 2.8 percent in 2015.

Pro-democracy sentiment has been building in Hong Kong for some time. Opposition groups staged a series of rallies earlier in 2014, and on June 29 some 800,000 people participated in a mock poll designed to demonstrate to the authorities that Hong Kong residents were capable of running independent elections.

The immediate trigger for the Occupy Central protests occurred on August 31, when China’s National People’s Congress laid down ground rules for Hong Kong’s first direct election of its chief executive, in 2017. The city’s leader had been selected by an election committee handpicked by Beijing, but in 2006 the Chinese legislature decided that the election a decade hence would be done by universal suffrage. In its latest ruling the Congress set conditions for that election, saying candidates would have to be approved by a committee of 1,200 selected by Beijing.

The announcement provoked an outcry in Hong Kong, with many people regarding the vetting of candidates as an intolerable infringement on their right of self-­determination. The University of Hong Kong’s Tai started the Occupy Central movement to pressure the government to back down and permit unfettered elections. His efforts brought students into the streets by the tens of thousands. Student leaders included Joshua Wong Chi-fung, a wiry, bespectacled high schooler whose passionate oratory seemed at odds with his youth (he turned 18 during the fall protests). Two years earlier Wong had founded Scholarism, a group of high school students that succeeded in defeating Beijing’s efforts to impose a pro-China “patriotic” curriculum on Hong Kong schools. He attacked the planned election rules with equal vigor.

“Since the return of Hong Kong to China in 1997, less than a year after I was born, the people of this city have muddled through with a political system that leaves power in the hands of the wealthy and the well connected,” Wong said during a recent media briefing, repeating comments he’d made in an op-ed published in the New York Times. “Many of us, especially people of my generation, had hoped democratic change was finally coming after years of promises from Beijing that we would eventually have free elections. Instead, in late August, Beijing ruled that Hong Kong’s oligarchy will remain in charge. Universal suffrage became a shattered dream.”

The protesters initially enjoyed broad-based support, but as the demonstrations dragged on for weeks and disrupted traffic and commerce, the public mood shifted. An opinion poll published by the University of Hong Kong on November 19 reported that the overwhelming majority of respondents — 83 percent — wanted the Occupy protests to stop; more than two thirds said the government should clear the protest sites and allow traffic to resume. Tai and two colleagues surrendered to police in early December, saying that the movement was losing its effectiveness. Student leader Wong went on a hunger strike, asserting that it was the only way to get the authorities to negotiate with the protesters, but he abandoned the strike after four and a half days.

Opposition and protest leaders are currently split on the way forward. Tai says he hopes the students will join him and others in forming a coalition that would be a force in the political arena. Many students, however, vowed to find ways to continue their pro-democracy efforts. “We will be back,” read several signs in the protesters Admiralty camp just before police moved in to clear it on December 11.

Although politics inspired the protest movement, the discontent is rooted to a large extent in growing economic disparity, says Paul Schulte, who runs his own, Hong Kong–based independent equity analysis firm, Schulte-Research International. Rising real estate prices, which have tripled in the past decade, are one of the biggest drivers of social unrest, says Schulte, who has lived in Hong Kong for more than a decade and previously worked as chief Asia strategist for Lehman Brothers Holdings and then Nomura International. Although the Washington-based Heritage Foundation has consistently ranked Hong Kong No. 1 for economic freedom, climbing real estate prices have made it difficult for Hong Kong’s middle class to keep up and share in the city’s growing wealth.

Hong Kong’s ever-deepening ties to China have brought a bonanza to the city’s finance, trade, retail and real estate industries. Land prices are effectively set by the government, which controls the supply released for development. In recent years prices have soared to levels that prohibit all but the wealthiest developers from bidding on prime plots. The city’s ten richest men, led by developer and business magnate Li Ka-shing, made most of their money in real estate in the past two decades. They control a combined fortune of about $130 billion, according to Forbes magazine.

Home prices have more than tripled since July 2003, when an outbreak of severe acute respiratory syndrome, or SARS, was brought under control, ending a major property shakeout. In January 2014 the city was judged to have the most unaffordable housing in the world for the fourth straight year, according to a survey of 360 cities by U.S.-based consulting firm Demographia. The survey put Hong Kong’s median home price at more than HK$4.02 million ($516,000), or about 15 times the median household annual income of HK$270,000. Housing in Hong Kong, the survey found, was roughly three times more expensive relative to incomes than in Asian peers including Singapore and Tokyo, which are hardly bargain markets. Housing is so expensive that some 53,000 people live in steel cages stacked on top of one another in the city’s slums, an age-old phenomenon that protesters often cite as a glaring example of the city’s inequality.

In contrast to the housing boom, real wages in Hong Kong have increased by a total of just 3.2 percent in the past decade. As a result, Hong Kong’s Gini coefficient, a measure of income inequality, has risen from 0.518 index point in 1996 to 0.537 point in 2011, according to the Hong Kong Census and Statistics Department. That’s among the highest rates in the world for a developed market. The U.S., for example, saw its Gini coefficient rise from 0.477 to 0.486 during the same period.

“This has been a time bomb ready to go off for a long time,” Schulte says. “The middle class is being squeezed out of the economic pie, and its dream of making it is disappearing. There should be a fundamental shift in policy to help university students, more health care for the elderly.”

Vickers, who advises many global corporate clients and financial institutions, expects Beijing to work with the Hong Kong government to push reforms to address the growing gap between rich and poor, which lies at the heart of public discontent. He is not optimistic, however, that Beijing will give in to protesters’ demands for democracy.

Hong Kong never had democratic elections under British rule. Every governor after 1841, when the U.K. seized the territory after beating China’s Qing Dynasty in the Opium Wars, was appointed by the British monarch. It wasn’t until 1985 that the colonial authorities allowed legislators to be elected through so-called functional constituencies, or groups that represented professions and industries approved by the government. Voting that involved the general population didn’t come until 1991, when a few of the city’s 70 legislative seats were decided by open elections.

In 2006, nine years after Hong Kong’s return to China, the National People’s Congress endorsed the city’s plan to expand the number of directly elected legislators to 30 and promised to introduce elections for chief executive in 2017. Even with the vetting of candidates announced in August, China’s plans for the 2017 elections are “far more democratic than the current system,” says government adviser Guan.

The Chinese learned some key lessons from the British. For most of Hong Kong’s 150 years of colonial history, the U.K. ruled the entrepôt through a group of elites that included the heads of various large conglomerates: the Hongs, some of which remain powerful today, including HSBC Holdings, John Swire & Sons (H.K.) and Jardine Matheson Holdings. The Chinese, in turn, have relied on Hong Kong tycoons, mostly property magnates, chief among them Li, whose family controls Cheung Kong (Holdings), a conglomerate with interests in property, retail, infrastructure and telecoms; the Kwok family, which controls Sun Hung Kai Properties; the Cheng family, which controls New World Group; Lee Shau-kee and family, who control Henderson Land Holdings; and shipping and property magnate Tung Chee-hwa, who served as Hong Kong’s first chief executive upon the city’s return to Chinese rule in 1997.

All of the major property tycoons and their public relations directors declined to comment when asked about the Occupy protests. Only Tung has sounded off in public: At a press briefing on November 10, he announced he was forming a foundation to explore electoral and social reforms, including proposals to build more affordable housing for the middle class. He said he welcomed young people and “democrats” to join his advisory committee.

Hong Kong officials admit to being caught off guard by the protests. Before boarding a plane to fly to Washington for the International Monetary Fund and World Bank annual meetings in early October, Hong Kong Financial Secretary John Tsang wrote on his blog that he hadn’t been sleeping well and that the government had “no experience or psychological preparations” for the “unprecedented” protests. He has been largely silent on the topic lately, saying only that the protests, if prolonged, would hurt Hong Kong’s image as a financial center.

For foreign businesses operating in Hong Kong, the crucial factor for their continued presence is the maintenance of the rule of law, says risk consultant Vickers. Although there’s no evidence of foreign businesses leaving as a result of the Occupy movement, the protests have effectively marginalized the Hong Kong government, he asserts. Beijing’s liaison office in Hong Kong was calling the shots during the Occupy movement, he contends. “This is the fundamental watershed change,” Vickers says. “While the students were fighting for democracy and greater independence, they have brought about exactly the opposite.”

Hong Kong officials declined to grant interviews or respond to questions from Institutional Investor about the crisis and its impact on the city. Local residents can’t help but notice that many of their top officials are often shuttling across the border to Shenzhen or flying off to Beijing to meet with senior Chinese leaders. Terry Wong, a spokesperson for the government, said KC Chan, secretary for financial services and the Treasury, could not grant an interview because he “was traveling to Beijing.”

Hong Kong’s political system stands in stark contrast to Taiwan’s. The island broke away from China after the 1949 Communist revolution and became a haven for China’s former ruling party, the Kuomintang. Taiwan’s leaders initiated political liberalization in the 1990s, allowing the formation of opposition parties and launching democratic elections in 1996.

Politics in that freewheeling democracy are a testament to the fact that not everyone who considers himself Chinese favors the Communist Party and its one-party rule on the mainland. Opposition to President Ma Ying-jeou’s policies of forging closer trade ties with China, apparently fueled by news of the student uprising in Hong Kong, caused the Kuomintang to lose six mayors’ seats in elections on November 30, prompting Ma to resign as party chairman. Taiwanese voters remain highly suspicious of China, which refuses to renounce the threat of a military takeover of the island for the sake of “unification of the motherland.”

Beijing is not insensitive to opposition views in Hong Kong, says government adviser Guan. China’s leaders have “heard the protesters and opposition voices loud and clear,” he says. “If the elections system we propose for Hong Kong is successful, it is even possible that such democratic elections could be expanded to other major cities in China in the future.” China’s economic reforms started on an experimental basis, and political reforms will also unfold as a gradual process, he adds. “Rather than working against China,” Guan says, protesters “should work with us to step-by-step implement political reforms.”

Democratic activists in Hong Kong are skeptical, however, saying the promised political 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, founding chairman of Hong Kong’s Democratic Party, a major backer of the protests, said recently.

Protesters are seeking better representation first and foremost, says professor Steve Tsang, head of the School of Contemporary Chinese Studies at the University of Nottingham in the U.K. “It is the lack of democratic accountability that is allowing the ever-increasing social inequality to take hold in Hong Kong,” says Tsang, who grew up there. “It also makes the middle classes in Hong Kong feel disempowered and frustrated, which is why they are taking actions outside of the existing political structure.”

Chief Executive Leung apparently agrees, although his comments have inflamed rather than pacified public opinion. In an interview with foreign media in October, Leung said that giving in to student demands for democracy would in effect “see poorer people dominate” politics in Hong Kong.

“If it’s entirely a numbers game and numeric representation, then obviously you’d be talking to the half of the people in Hong Kong who earn less than US$1,800 a month,” Leung said. Despite his lack of public relations savvy, the chief executive seems to have the support of Chinese leaders. During the APEC summit hosted by Beijing in November, President Xi said China “fully affirms and supports” Leung’s efforts to maintain social order and safeguard the rule of law.

Despite the tough talk, sources close to the Hong Kong government say senior advisers are working closely with Beijing to draft policy changes in a bid to pacify the protesters.

Regina Yip, a former Hong Kong security chief and a possible contender for chief executive in 2017, has proposed that students be given representatives on the 1,200-­member nomination committee that will chose the candidates for that election. Meanwhile, former chief executive Tung is trying to rally support to revive his plans to build more affordable housing in Hong Kong. Back in 1997, when he assumed office, Tung proposed to build 85,000 apartment units a year — 35,000 by private developers and 50,000 by the government housing authority — for ten years. Public opposition from real estate tycoons forced him to shelve the plan.

The current bribery case involving former Hong Kong chief secretary Rafael Hui, who served from 2005 to 2007, sheds light on how the tycoons wield power in Hong Kong, whose population of 7.2 million is squeezed into urban areas that make up only 15 percent of the territory’s 426 square miles.

According to prosecutors’ allegations and trial proceedings, which are continuing, Hui served as a consultant to the Kwok family’s Sun Hung Kai Properties — which rivals Li’s Cheung Kong (Holdings) as Hong Kong’s largest developer — before becoming chief secretary. He allegedly pocketed millions of dollars for his services and did not publicly reveal his relationship with the company, as he was supposed to do.

“Hong Kong has been run like a medieval city-state,” says Andy Xie, a Shanghai-based independent research analyst who served as Morgan Stanley’s chief economist for Asia from 1997 to 2006. “A business elite at the top has the dominant voice on how wealth and income are created and distributed. Hong Kong’s system encourages people to make money with maximum economic freedom and low taxes.”

Chinese authorities will no longer rely only on the tycoons and the Hong Kong government as their primary sources of information in the city, says Chinese government adviser Guan. “There will be an effort to reach out to the various other interests in the community,” he says. It’s hard to see those efforts appeasing the protesters’ concerns any time soon, though.

Although China’s political influence is the chief target of the demonstrators’ ire, analysts say the country’s economic and financial influence is affecting Hong Kong in ways that exacerbate social tensions.

China’s massive outflow of wealth has been a major factor in the doubling of Hong Kong property prices in the past three years, bankers and analysts say. The Chinese government responded to the global financial crisis of 2008–’09 with a stimulus program involving 4 trillion yuan ($585 billion) worth of bank credit. Anecdotal evidence suggests that some of that money ended up in Hong Kong.

Wealthy mainlanders have bought a lot of property in the city’s Mid-Levels and on the Peak, two of the priciest districts in Hong Kong. Properties in those neighborhoods can sell for as much as $100 million, and it is not unusual for these transactions to be paid in cash up front. Wealth adviser and onetime Occupy sympathizer Anthony says all of his clients come to Hong Kong “loaded with cash” to invest in a wide range of assets, including property.

“A lot of corrupt money has been money laundered into Hong Kong,” says a retired banker from Industrial and Commercial Bank of China with close ties to the government, who spoke on condition of anonymity. “For many corrupt officials and wealthy Chinese, Hong Kong is the perfect place to park substantial sums of their wealth. It is well known that these wealthy individuals buy not just one apartment but dozens of units of the most expensive properties in Hong Kong.”

Chinese media recently reported that as much as 1 trillion yuan, or about one fourth of the stimulus unleashed in 2009, may have ended up in the pockets of corrupt officials and that some of the proceeds may have been “laundered overseas” through Hong Kong–registered banks. Most of the offspring of China’s leaders have diverted large sums of family wealth to Hong Kong, which is renowned as the private banking center of choice among China’s wealthiest, says financial sector expert Shih.

Senior Chinese officials realize that the situation in Hong Kong is complex and cannot be resolved entirely through political repression, according to the former senior banker; he doesn’t believe President Xi ever thought about sending in troops or police to crush the student protests. Xi will not rescind the August 31 decision by the National People’s Congress, the ex-banker adds, but he may consider compromising with protesters’ demands and allowing opposition voices into the candidate-vetting committee — and possibly even allow the opposition to field a candidate of its own in 2017.

Xi’s father, Xi Zhongxun, served as party chief of Guangdong and helped former paramount leader Deng Xiaoping create the Shenzhen special economic zone in 1979. “Xi spent a lot of time in Shenzhen and knows Hong Kong well,” says the former banker. “Xi knows in his heart that he must initiate deep reforms or run the risk of seeing the fall of the Party.”

In the inner sanctums of the Communist Party, top officials have begun a debate about ways to promote democracy, says government adviser Guan. “There is serious talk about political reforms,” he says, “and they include expanding village-level elections to higher levels of the Chinese government.” After crushing student protests in 1989, Deng took political reforms that he himself had proposed off the table and focused instead on economic and financial reforms. Since the late 1990s, however, China has allowed the elections of some village chieftains. Those experiments have remained at the village level, however.

Officials in China’s progressive camp have begun advocating a form of “Internet democracy” that would use public opinion polls at the grassroots level, using mechanisms on offer via major Chinese Internet websites, to influence policy decisions.

“The West prides itself on representative democracy,” says a banker with financial conglomerate CITIC Group Corp. who previously worked as a senior policymaker at the China Securities Regulatory Commission. “But I tell you, representative democracy is fraught with corruption too. In the U.S. and in other so-called democratic countries, political lobbying is a trillion-dollar slush fund industry. We in China will implement political reforms, but we want a system that is less prone to corruption.” Still, China’s Internet democracy “won’t be a democracy that the West would consider to be democratic,” says the former CSRC official, who says that any use of online opinion polls would only be as a “sounding board” for policymakers.

Political reform in China is a mere idea still in its infancy, and it’s far from clear that Beijing will carry out any significant liberalization. It’s also doubtful that Hong Kong’s impatient youth will wait for what will, at best, be reform at a glacial pace. One thing seems certain: Political instability looks set to persist for the long haul.

“All the young people out there are fighting because they love Hong Kong,” says wealth adviser Anthony. “Some people may even be ready to die for Hong Kong.” • •

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Follow Allen Cheng on Twitter at @acheng87.