From Gateway to China to Getaway Island?

The recent wave of protests in Hong Kong are making news headlines for a variety of reasons. From the draconian nature of the extradition bill proposed by Mainland China, to the intensity and massive turnout of the protesters, to the violent reaction by the Hong Kong police, everything was captured by television news channels. The subsequent suspension of the extradition law was taken as a sign of victory by the protesters, who then pressed for more. They wanted the Chief Executive, Carrie Lam, to resign. That might have been wishful thinking on the part of Hong Kong citizens.

June 9, 2019 Anti-extradition Bill Protests in Hong Kong; Image: Voice of America Chinese on Wikimedia Commons

What few have bothered to delve into is the relationship this island nation has had with China and how that affects their future, especially after 2047, when they are going to be in a cinch, whether Hongkongers like it or not. This piece in the London Review of Books by Chaohua Wang, a Chinese scholar from UCLA, provides a comprehensive snapshot of the political and social tensions between Hong Kong and Mainland China. However, I would like to explore the economic ties between them in this post.

Since 1841, when the island of Hong Kong was annexed as a military staging post, its fate has been sealed as a satellite state of Mainland China. John Keay, in his majestic and well-researched book, China A History, writes of how Commissioner Lin forced the Portuguese to evict the British from Macao. He says:

“Now baseless, Elliott and his countrymen sailed across the Pearl River estuary to a high and largely uninhabited island composed of uncultivable rock but with a sheltered anchorage. Its name they understood as ‘Hong Kong’.”

Hong Kong Port and Island circa 1865; Image Vallejo Gallery on Wikimedia Commons

The Treaty of Nanking and the start of the Opium Wars turned Hong Kong into a British colony and it was treated as the staging post from where the British could launch their designs on China. It is indeed interesting to note that even two centuries ago, China was coveted for its large market of teeming millions who the British thought were hungry for Lancashire goods. In his book, Asia and Western Dominance, K M Panikkar writes:

“Apart from the annexation of Hong Kong, the main clause of this treaty (Nanking Treaty), on which the entire structure of relationship of China with the Western Powers was to be raised, was the clause opening five ports for trade ‘where the foreign merchants with their families and establishments shall be allowed to reside for the purpose of carrying on their mercantile pursuits, without ‘molestation or restraint’”.

As history would have it, the island of Hong Kong finally returned to China in 1997, with a pledge that Chinese sovereignty would apply from 2047 onwards. However, what often escapes our attention is that in the intervening decades and centuries, Hong Kong developed into the most important sea port in this part of the world, bringing in goods, capital and people from the West. Indeed, the words Hong Kong are said to be the Cantonese pronunciation of the Chinese Xianggang, which literally means “fragrant port”. It had over the years, become China’s most important connection with the outside world. Even after China established its own ports and special economic zones along its south-eastern coast, Hong Kong remains a vital economic link.

Hong Kong had, over the years, become China’s most important connection with the outside world. Even after China established its own ports and special economic zones along its south-eastern coast, Hong Kong remains a vital economic link.

They have a troubled history, though, and a fractious relationship. Because while Mainland China was enduring Mao’s communist policies, Hong Kong was flourishing into a vibrant trading and financial hub. People here had access to Western education, to investment in modern technology and most importantly, to democratic institutions. Western capitalism shone in the harbours of Hong Kong and Chinese leaders would have certainly looked to this island for inspiration at least as far as economic liberalization is concerned. For Hong Kong was then, and now, the gateway to the Middle Kingdom.

No matter how fraught their historical and social ties, Hong Kong and China are joined at the hip, when it comes to their economic and trade relationship. It rather reminds one of Britain trying to leave the EU. As this article from The Economist mentions, Hong Kong is still very important to China, though several larger ports and trading hubs now exist in the Mainland and Shanghai is emerging as a major international finance centre.

The island is the single largest source of FDI into China, as much of the inward investment is routed through it. Hong Kong was the biggest investor in China in 2017. Of the US $1,944 billion invested in Hong Kong as capital stock in 2017, much is attributed to indirect channeling of capital from non-operating companies in tax haven economies. The major investors are the British Virgin Islands at 32.8%, Mainland China as 25.5% and Cayman Islands at 7.9%. Hong Kong was the world’s largest FDI stock host country with US $1,997.2 billion in 2018, just after the US, and the world’s fourth largest investor with US $ I,870.1 billion.

If you look at trade, Hong Kong’s major export market for goods in 2018 was Mainland China at 55%, followed by EU at 9.2% and USA at 8.6%. The export market scenario for services is not very different, with Mainland China once again accounting for 39.9%, followed by USA at 14.3% and UK at 8.2% in 2017.

The island is the single largest source of FDI into China, as much of the inward investment is routed through it. Hong Kong was the biggest investor in China in 2017.

When it comes to capital markets, Hong Kong was the leading stock exchange preferred by companies doing business in this region. However, at a total market capitalisation of US $ 4.19 trillion, it has just recently been overtaken by the Shanghai stock exchange which has a market capitalisation of US $ 4.78 trillion and is ranked fourth largest in the world. In addition, China also has the Shenzhen stock exchange which boasts a smaller market capitalisation of US $ 3.03 trillion. These figures are as of March 2019.

Hong Kong is also the preferred destination for Chinese outward investment. Most mainland Chinese prefer to invest in Hong Kong, especially in property, as they find cultural affinity, rule of law and respect for institutions as well as a certain degree of political stability in the island. That often drives up the property prices in Hong Kong and locals often complain of the high cost of living and accommodation. People to people connections are also strong with Hong Kong attracting visitors from Mainland China in the millions each year.

What is to be done then, with the “one country, two systems” dream that China claims will be a reality soon? How best can the two countries come closer and work together as partner nations, which they already are, in many ways? In this, they do resemble the currently fraught US-China relations – politically and ideologically opposed, but inextricably connected through investment and trade.

A glimpse of China’s plans for Guangdong-Hong Kong-Macau Greater Bay Area from CGTN

One possible answer lies in the grand plans being laid for creating the Guangdong-Hong Kong-Macau Greater Bay Area. Said to comprise the southern provinces around the Pearl River Delta, it promises to be a large hub of innovation and information technology, encompassing everything from healthcare and financial services to mobility and scientific research and development. New age connectivity in the form of 5G mobile networks and high-speed rail will link all the fast-growing cities of the south – close to Hong Kong – to the island nation. Sounds great, so far. Except that according to this article, most Hongkongers (Honkies, they are colloquially referred to, as I just discovered) are resisting it and are not aware of it. I find it strange that in a region that is so well-developed, connected and aware on all counts, citizens are not aware of a regional development plan that will have a huge impact on their lives. Are the governments of Hong Kong and China not doing an adequate job of communicating with their citizens? And what about the media not keeping readers adequately informed?

Victoria Park, Hong Kong protests late into the night; Image: Jc86035 on Wikimedia Commons

I would prioritise this as the most important task for the Carrie Lam government, along with investigating the heavy-handed police action, that Chris Patten has recommended in this article in Project Syndicate. Rather than wait for Beijing to react to the current impasse – and we can be sure their response will be swift and decisive – it would help if Carrie Lam started a dialogue with Hong Kong citizens through the representatives of the protesters. As Chaohua Wang says, the Hong Kong protesters have no leaders at the moment. It is important that they find leaders who can represent their demands and views soon, so that talks can begin. The Greater Bay Area is an excellent way to restart the conversation and to steer it in the direction of positive, constructive developments for the future of Hongkongers. Many of their concerns around rising inequality and cost of living might get answered as well, through this process.

The Chinese system of governance lends itself well to a more federalized integration of Hong Kong into the mainland. As Arthur Kroeber of Gavekal Dragonomics writes in his book on contemporary China, China’s Economy: What Everyone Needs to Know, China is “formally centralized, but in practice highly decentralized.” Quoting a 2004 study by the IMF, he writes:

“…One measure of decentralization is the share of government expenditure that takes place at the subnational level. An IMF study found that, in the period 1972-2000, this figure averaged 25% for democracies and 18% for nondemocracies. For China, the average figure for 1958-2002 was 54% and by 2014, it had risen to a staggering 85%.”

This level of decentralisation suggests to me that China can find better ways to integrate Hong Kong into the mainland economy without having to resort to draconian laws that extradite Hongkongers. Instead, the effort can be on bringing China’s laws and systems to the island in a less disruptive manner. Integrating societies is always a huge challenge as we have seen in Germany as well as in India with trying to integrate North-eastern states as well as Kashmir.

While I completely sympathise with the citizens of Hong Kong, I must say that their methods leave much to be desired. I also fear that their demands will be met with greater force, if they continue on this collision course. The solution, to my mind, is to channel their energies and focus towards clearly articulating their expectations and starting a serious conversation and not to dissipate their protests in a wave of anger and violence.

The Guangdong-Hong Kong-Macau Greater Bay Area Development Plan is an excellent way to restart the conversation and to steer it in the direction of positive, constructive ideas for the future of Hongkongers.

Meanwhile, I also think that Beijing has some walking to do, in order to meet Hong Kong mid-way and find a more acceptable way to introduce Mainland China’s laws into the island, gradually. Perhaps a new set of laws needs to be devised for the island, that take into consideration Hong Kong’s long experience with democratic freedoms. As of now, Beijing seems to think that the US is meddling and fueling the protests which are fast changing into a movement for democracy.

Opposed as they are on ideological grounds, Hong Kong too has to accept its fate as a part of China. It is only a matter of another generation or two, before Hong Kong passes into an altogether different realm and they might as well start preparing for it. With Singapore and Shanghai snapping at its heels, Hong Kong has a lot of catching up to do in the areas of education and technology. In fact, it is reported that many Hongkongers are considering emigrating to Singapore as a way of escaping China’s grip and enjoying a better quality of life.

Instead of looking at a getaway, Hong Kong should consider making a brighter future in the Greater Bay Area and in strengthening its age-old reputation as the gateway, to what will soon be, the world’s largest economy. What an ironic turn of events it would be to see the Pearl River Delta that once attracted British forces, turn into a 21st century innovation and trading hub for China with Hong Kong once again at its centre.

A few wise words of encouragement then, from Lao Tzu:

You are bright,

It is said,

If you see what is small;

A store of small strengths

Makes you strong.

By the use of its light,

Make your eyes again bright

From evil to lead you away.

This is called “practicing constancy”.

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