Today I met with the generals, and the head of my secret police. Discussing conspiracies and prison facilities, for opponents I can never release. And there’ll be no peace – until they’re released. Of course I’m in league with the army, it’s not like I’ve got any choice. They officially adore me and my father before me, but gunpoint has a firm voice. The lyrics to this 2016 song written by Neil Tennant and Chris Lowe, and performed by The Pet Shop Boys pretty much describe what is happening in Hong Kong right now.
Taking a page from Rahm Emanuel, former Mayor of Chicago, the Chinese government is not letting the COVID-19 crisis go to waste. It is using it as cover to dramatically change the power balance in the enclave of Hong Kong. This territory had been granted special rights and privileges when it was returned to China after having been a British colony since 1842, when the Treaty of Nanking formally ceded Hong Kong Island to the British. In 1898, Britain obtained a 99-year lease for the New Territories which were on the Chinese mainland and made up the bulk of the territory of the colony.
China did not renew that lease and in 1984 signed an agreement with the United Kingdom to grant certain freedoms to Hong Kong residents for 50 years following the turnover of the entire colony on July 1, 1997. While there has been some fraying at the edges, the Chinese have basically abided by the agreement and the one-state two systems approach to governing the territory until quite recently. Now, under the cover of COVID, the Chinese Communist Party has begun to assert a greater degree of control on individual liberties in the territory.
Of course, China can do pretty much what it wants to Hong Kong without much to worry about from Great Britain, or for that matter any other country. Nobody is going to go to war with China over what is in effect a Chinese city, and a historical part of the country. However, the threat to the rule of law in Hong Kong will have major economic implications throughout the world.
The most visible impact will likely be a downgrading of Hong Kong as a major financial center. Currently nearly all of the world’s major banks maintain operations in Hong Kong, and the Hang Seng stock index is a world benchmark. The elimination of the territory’s special status will make it less likely that international firms will house their Asian headquarters there, and it is likely that many of the most talented individuals will find a way to leave. This will harm the local economy, particularly now during a worldwide recession. Hong Kong also serves as the main place for business transactions between China and the rest of the world.
The territory has established a reputation as a neutral place for financial transactions to occur in Asia. Currently international accounting rules and an independent judiciary based on British procedures make Hong Kong the perfect place to make transactions with less reputable partners in places like China, as well as in other less savory places like Thailand, Viet Nam and the Philippines. Singapore also competes for this market but it is nowhere near as free and reliable as Hong Kong has been.
In addition, the US and many of the world’s democracies will likely respond by removing special trading status from the territory. Currently Hong Kong is not subject to the tariffs and other restrictions that befall China. Currently, about 1 percent of Chinese exports to the US are booked through Hong Kong, while this does not seem huge, it represents an export value of over $4.7 billion.
Hong Kong could also lose its currency, the Hong Kong Dollar, which is begged to the dollar and is considered to be a major factor in the territory’s reputation for economic reliability.
The loss of entrepot status will have a pretty dramatic direct impact on US companies. There are over 1,300 American businesses in the territory, as well as about 85,000 US citizens working there. But the larger economic impact will be on Asia, and particularly on the Peoples Republic of China, which will lose the ability to use Hong Kong as an access point to foreign trade and capital markets. The appointed government in Hong Kong surely is in league with the army, it’s not like they have any choice, for gunpoint has a firm voice.