Tea Leaf Nation

Report: Hong Kong Becoming 'Mere Second-Tier' Chinese City

The financial center’s specialness is in ever-greater danger.

HONG KONG -- Hong Kong is losing its edge as a global financial and commercial center, and the territory's economic clout will be overshadowed by China's major cities by 2022. That's the argument in an August 27 report released by Trigger Trend, an independent Chinese research firm based in the southern metropolis of Guangzhou. The report emerged just days before Beijing declared it would not countenance open nominations in the planned 2017 popular election for Hong Kong's chief executive, and its findings are likely to stoke further anxiety about the former British colony's economic and political future.

In the wake of Beijing's decision, Hong Kong's democracy advocates now face a hard choice between carrying out what some have called a "nuclear option" to occupy the city's Central financial district en masse, which could disrupt businesses, or swallowing what they call a "fake election" for the Chief Executive, the head of Hong Kong's government. Either way, Beijing says it does not plan to yield to acts of civil disobedience in the special administrative region, even if protests make investors or business owners jittery.

In taking a hard-line stance against granting true democracy to Hong Kong, the Chinese government has made clear to the rest of China -- as well as Taiwan, which Beijing considers a rogue province -- that threats of civil disobedience will not lead to political concessions. The central government probably also believes that it can now cast a menacing shadow over Hong Kong with its increasing economic weight. The report by Trigger Trend does not appear to be commissioned by the Chinese government, but the report's conclusions have been widely publicized in mainland media and align nicely with the central government's unspoken message to Hong Kongers: The special administrative region is no longer very special.

To bolster its claim, the report states that Hong Kong's annual GDP growth rate has hovered around two percent in recent years, while major regional centers in China have been growing at over seven percent per year. Hong Kong's 2013 GDP, at an estimated $261 billion, already pales in comparison to Shanghai's, at $354 billion, and Beijing's, at $317 billion. The report also states that at the time of its handover from the British in 1997, Hong Kong's GDP was 15.6 percent of China's national total; by 2013, the city's share had shrunk to 2.9 percent.

According to Trigger Trend, if current growth rates continue, the southern cities of Guangzhou and Shenzhen as well as the northern municipality of Tianjian will likely overtake Hong Kong in terms of GDP by 2017. Inland metropolises such as Chongqing, Chengdu, and Wuhan will catch up by 2022. "In the ranking of Chinese cities by economics, Hong Kong may become a mere second tier city" by 2022, the report warned.

As the mainland's foremost commercial city, Shanghai is often seen as Hong Kong's direct competitor. Shanghai announced the establishment of a free trade zone (FTZ) in Sept. 2013, setting up tariff-free ports and offering tax and policy breaks to foreign investors. While the Shanghai FTZ has so far offered more hype than substance, Hong Kong's policymakers have warned that its businesses must be prepared for competition. Some in Hong Kong, particularly members of its business community, have also bought into the logic that the fight for democracy harms the territory's economic competitiveness, or at least presents a serious distraction from the issues that concern Hong Kong residents' livelihoods, like employment and social welfare.

But Hong Kong's position as a global financial center rests on more than just the size of its GDP. The city boasts superb infrastructure, a well-established legal system, and a cosmopolitan culture that no mainland city, including Beijing or Shanghai, has yet been able to replicate. In 2012, the Economist Intelligence Unit, a research outfit, ranked Hong Kong the fourth-most competitive city in the world, far ahead of Beijing (ranked 39th) and Shanghai (ranked 43rd). Hong Kong is also a much wealthier city in terms of per-capita income than its mainland peers. What's more, it remains a golden goose for China in terms of its function as a gateway to international investment and human capital. Investors, expatriates, and new immigrants flock to Hong Kong because the city is perceived to be more livable, with safer food, cleaner air, freer media, and a fairer judiciary than Chinese metropolises.

The hard data on Hong Kong's decline in economic clout relative to the mainland may be undisputable, but it remains a first class global city on the strength of its soft power. Hong Kong's ability to maintain its advantages is largely based on its relative political autonomy from China and the strength of its civic institutions -- the very things that recent rumblings from Beijing imperil. Should it lose its uniqueness, Hong Kong's future as a second tier city in China is all but assured.   

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Tea Leaf Nation

Democracy is Contagious

What message does civil unrest in Hong Kong send to the rest of China?

Want a simple method for understanding top-level decision-making in China? Assume that the decision was made with the end goal of keeping the Chinese Communist Party (CCP) in power. While imperfect, it's the easiest way to explain why the CCP does what it does. It also offers a simple grading system for China news: the more a story touches on issues that threaten the survival of the party -- corruption, rural discontent, democracy movements, fissures in the CCP  -- the more crucial they are to Beijing. 

That's why the seemingly mundane updating of Hong Kong election rules -- which curb democracy in Hong Kong -- is a hugely important story. On Aug. 31 the National People's Congress, Beijing's rubber-stamp parliament, announced its long-awaited official position of candidates for Hong Kong's chief executive: a nominating committee loyal to Beijing must first approve them, and only two or three will be allowed to run in the next election, in 2017. The announcement, which if implemented would effectively bar opposition candidates from appearing on the ballot, led to protests by pro-democracy activists in Hong Kong. 

Beijing is demonstrating its dominance over Hong Kong. In 1982, during negotiations over the fate of the then British colony, Chinese leader Deng Xiaoping reportedly told British Prime Minister Margaret Thatcher that the Chinese could easily take Hong Kong by force: "I could walk in and take the whole lot this afternoon," Deng said. Thatcher replied, "There is nothing I could do to stop you," she said, "but the eyes of the world would now know what China is like." Beijing had promised that Hong Kong, which returned to the mainland in 1997, would be eligible for "universal suffrage" by the 2017 elections; it now appears to be breaking that promise. Like Deng's 1982 statement, Beijing's decision is a reminder of who calls the shots in Hong Kong, international opprobrium be damned. 

International opinion about China -- which has a much smaller effect on the CCP's ability to maintain power -- matters far less to Beijing than domestic opinion. And while Beijing is trying to communicate that it has Hong Kong firmly under control, discontent in Hong Kong could send a worrying message to people throughout China.

The implicit social contract between the CCP and the Mainland citizens it governs is that in exchange for relinquishing their rights to meaningfully participate in politics, Beijing will ensure economic prosperity and national revival. 

Hong Kong tests that assumption: under what Beijing calls "one country, two systems," the 7.2 million citizens of Hong Kong, while part of China, are granted far more leeway in freedom of assembly and speech than their compatriots on the mainland. Its citizens enjoy a per capita income of nearly $40,000, great schools, extremely low tax rates, and some of the best social services and healthcare in Asia, if not the world. If even Hong Kongers chafe under Mainland rule, then doesn't a student in Beijing or a day laborer in the northwest region of Xinjiang have a far more legitimate cause to complain and protest?  

Choosing the opposite strategy, and placating Hong Kong by allowing it to choose its own chief executive, could lead to too many nightmarish scenarios for the CCP. Hong Kongers could elect someone who made important policy decisions without consulting Beijing, or someone who enacted policies that made Beijing uncomfortable. Even worse, what if the people of Hong Kong elected someone who wanted to declare independence from the Mainland? That would be catastrophic for a leadership obsessed with China's territorial integrity. Better for Beijing to prevent fair elections now -- that's far easier than deposing a popularly elected leader or managing an independence movement. 

Furthermore, democracy is contagious. If Beijing allowed Hong Kongers universal suffrage, it would be more difficult to argue that other parts of China didn't deserve it. Already, there are grumblings in the nearby region of Macau, whose roughly 600,000 citizens enjoy a similar amount of freedom to those in Hong Kong. If a similar movement emerged on the Mainland, this would be far more worrying for the CCP. "What if Shenzhen, which is not far away from Hong Kong, also asked for the same thing?" Ding Xueliang, a professor of Political Science at Hong Kong University of Science and Technology, mused to Bloomberg.

Beijing could crack down on Hong Kong, but it needs to be careful not to push too hard -- that risks alienating the majority of Hong Kongers who aren't bothered by the status quo. More importantly, Beijing is very wary of the message communicated to Taiwan, the self-governing island of roughly 23 million people claimed by China. For decades, Beijing's paramount foreign policy goal has been the reunification of Taiwan to the mainland. Probably the most likely way for that to happen would be a situation similar to Hong Kong -- whereby Taiwanese would enjoy significant autonomy and a wide range of political freedoms. But the more Hong Kongers suffer, the more difficult it will be for the CCP to make the case that Taiwanese should voluntarily join the mainland.

To be sure, troubles in Hong Kong at this stage are far from an existential threat to the CCP. But Beijing will want to handle this very carefully. 

--with research by Bethany Allen-Ebrahimian