Last Monday, Dr. Tim Horner was joined by Fred Young, Assistant Professor in Economics, to talk about the ongoing protests in Hong Kong. The highlight of their talk is on our YouTube channel, and the synopses of both Dr. Horner and Young are included below. Check out the video!

Horner’s Summary

GlobalSmackDown 18 Nov 2019 Hong Kong

The story is unfolding in real time. It’s almost morning now in Hong Kong but the night before saw a ratcheting up of force used by Hong Kong special police force as they try to squelch the protests. In the last 48 hours the intensity has focused on the last of the student protestors inside Hong Kong Polytechnic University (HKPU).  Students are in effect trapped inside the University. They are being told that they must come out and surrender themselves to the Hong Kong police. Protests are still happening around the university police but there is growing concern about what will happen to the students inside. The Hong Kong government, still being led by the highly unpopular Carrie Lam, considers protesters to be rioters. If they surrender they face up to 10 years of imprisonment. There is no sign that they are going to give themselves up at this point.

What started out months ago as containment and the occasional skirmish, has escalated to constant barrages of teargas, beatings, and rubber bullets. In fact, last night, footage was posted of police using live ammunition to scatter protesters that were trying to stop an ambulance from taking away a 20-year-old woman. Two days ago the police threatened the use of live ammunition if protesters continued to use bricks, Molotov cocktails, and even bows and arrows.

This is a continuation of the “Umbrella Movement” began in 2014 when Hong Kongers protested the restriction on their choice of leaders to only those candidates approved by the Chinese government. This turned into a demand for universal suffrage. But the list of demands and demographics have grown. Now the demands have more to do with universal human rights and the protection of the protestors.

What started out as a 50-year experiment in 1997, when the British government handed Hong Kong back over to the Chinese government in a “One Country (China), Two System (China and Hong Kong)” system, has all but completely dissolved. It is nearly impossible to imagine a scenario where Hong Kong and Beijing could sit down, work out their differences, and return to the terms of the 1997 agreement. Meanwhile, H.R.3289 – Hong Kong Human Rights and Democracy Act of 2019, which threatens trade sanctions against Hong Kong for Human Rights violations, sits awaiting a Senate vote.

Young’s Summary

I. Genesis, evolution, and current status of 2019 Hong Kong protest “movement”

A. Historical political economic context matters:

1. History: Throughout its history, Hong Kong has not governed its own affairs, with governance controlled by the Imperial Dynasty up until British colonial rule for 155 years, including 4 years of Japanese occupation during World War II, and 22 years by the Central PRC government since 1997.   2047 marks the official end of the Basic Law that establishes “One Country, Two Systems,” after which Hong Kong will be subject to complete administrative control and jurisdiction of the PRC Central government.  Needless to say, most Hong Kongers thirst for the right to choose and elect their own leaders; independence is only embraced by a thin radical minority.

2. Exco & Chief Executive: At present, Hong Kong has full administrative control over its own economic affairs including monetary policy, currency, taxation, import-export policy as well as legislation, judiciary, immigration policy and other key elements of governance with the exception of (1) military affairs and defense as well as (2) diplomacy and foreign affairs for which the PRC Central Government is responsible.

The Chief Executive, presently Carrie Lam,  is directly appointed by the Central People’s Government after a non-binding election by a committee of 1,200 people selected by the Central People’ Government, not Hong Kong’s residents.  In other words, the CE is not popularly elected nor is it likely that the PRC would ever allow that, one of the protesters’ five demands. The Executive Council (“ExCo”) is analogous to Hong Kong’s cabinet and ultimately is also appointed by the Central Government, not surprisingly consisting primarily of pro-Beijing business elite.

Legco is a legislative body comprising 70 members, 35 of whom are directly elected through five geographical constituencies while the other 35 are indirectly elected through interest-group-based functional constituencies (FCs) with limited electorates. (In other words, appointed by ExCo – which has a strong pro-Beijing bias).  What Hong Kong’s people want most is the right of universal suffrage, the ability to elect their own leaders, a right that is enshrined in the Basic Law, Hong Kong’s equivalent of a constitution agreed upon by the UK and PRC in 1984.

B. Ethnicity vs. Nationality:  Identity matters. What does it mean to be “Chinese”?

Prior to but especially after the Handover in 1997, increasing numbers of PRC nationals traveled to and settled in Hong Kong, resulting in a spike in real estate prices, competition for rooms in maternity wards, as well as competition for jobs, spaces in secondary and tertiary schools, and HKSAR allocated resources in general.  The clash of PRC vs Hong Kong cultures, languages (Mandarin vs Cantonese) in addition to vastly different culturally accepted norms and behavior, have challenged the integration of Mainlanders to Hong Kong and further polarized the population.

The difference between ethnicity and nationality is critical:  While Hong Kongers identify as having Chinese ethnicity, they largely do not identify as residents of the PRC, preferring rather to refer to themselves as residents of Hong Kong, not the PRC.  Hong Kong residents require a travel document to visit the PRC and PRC residents also require a travel permit to visit Hong Kong.  For the time being, that will not change and there will continue to be a hard border between the HKSAR and the PRC.

C. Extradition Law: At first the protests were exclusively focused on opposing Carrie Lam’s proposed Extradition Law, with nearly universal opposition by Hong Kong residents, evidenced by upward of 2.5 million residents joining the protest march on 15 June 2019.  Following a month of protests which became increasingly violent, divisions in Hong Kong materialized, with the main rift being between a pro-Beijing “blue” minority and the majority of Hong Kong residents “yellow” that oppose the excessive use of police force as well as continued opposition to the Extradition Law.

In spite of the Extradition Law being officially withdrawn in October, the growing use of violence, vandalism, and extreme protest tactics have further divided Hong Kong’s population.  By October and November protests do not consist of large scale non-violent marches of hundreds of thousands that receive “parade permits” by the government but rather smaller pop-up unauthorized demonstrations that inevitably result in clashes with HKPF.

D. Income Inequality:  While Hong Kong is one of the fastest growing and most affluent economies in the world, that wealth is not evenly distributed. The Gini co-efficient, a measure of income distribution, rose sharply from .434 in 1996 to .539 in 2018, meaning that Hong Kong society is becoming even less egalitarian than ever before. (Compare with .45 for the US and .39 for Taiwan) Hong Kong has the world’s third largest concentration of individuals worth more than $30 million, behind London and number one New York. However, the wealthiest 10 percent of households earn nearly 44 times more than the poorest 10 percent who make an average of HK$2,560 ($328.20) per month.

In spite of government efforts to alleviate poverty, the city remains among the most inequitable in the world, with over 30 percent of city households, or around two million people, living in subsidized public housing.  Illegal rooftop structures abound and many live in extremely small flats or 16 square foot “cages” that exist in even the most densely populated areas.  Home prices have surged more than 137 percent since the financial crisis in 2008, propelled by high demand coupled with an acute supply shortage, low interest rates, and large flows of money from the Mainland.

Many key Exco and Legco government positions held by the wealthiest with close PRC business connections, popular suffrage remains distant and Extradition Law was simply the spark which ignited an already volatile, unequal society.  When most Hong Kong residents wax sentimental for the previous colonial administration, clearly the current PRC-appointed administration has an extreme credibility problem

II. Political Economic Context

A. US-China relations context:   It is also critical to place Hong Kong protests within the proper political economic context.  At present the US – China relationship is frayed; a trade war has exacerbated the difference between two polar opposite economic systems.  If anything, Hong Kong’s economic model more closely resembles that of pure free market economics and is in sharp contrast to China’s state-led, planned command economy.

From both a political and economic perspective, the rivalry and competition between the US and China has devolved into what many characterize as Cold War 2.0 – strategic, diplomatic, economic, and cultural rivalry on a large scale.  Exacerbated by tariffs and trade friction, both economies have cooled substantially in terms of GDP growth with no immediate end in sight to a US initiated trade war. Even before the protests started in June, Hong Kong’s economy and stock market both suffered sharp declines.

B. Xi – Trump relations:  Because their relationship and distinctive decision making process, US-China relations hinge largely upon Xi-Trump relations. In June at the G20 summit, Trump indicated to Xi that he would remain silent regarding protests in Hong Kong if China would finalize a trade deal with the US.  From the outset, the US State Department has been conspicuously silent on Hong Kong protests, not only eschewing criticism of the Hong Kong government but also not directly supporting the protest movement.

House Resolution “H.R.3289 – Hong Kong Human Rights and Democracy Act of 2019” was passed by the Senate on 19 November the day after the Smackdown, but with or without Trump’s signature, the Act lacks substance and ultimately will have minimal impact on Hong Kong’s current protest movement.  Trump tweets that he hopes both sides will reach a compromise and that “I hope it works out for everybody including China. I hope it works out peacefully, nobody gets hurt, nobody gets killed.”

In addition to the G20 meeting, in a June phone call with Xi Jinping, Trump promised that he would remain silent over the ongoing pro-democracy protests in Hong Kong while trade talks were still ongoing.  Transcripts of the call have not been released and has been stored in the same code-protected server with the Ukraine call at the center of the impeachment inquiry as well as calls made to Saudi Arabia  and Putin.

US government officials not permitted to publicly support pro-democracy protests in Hong Kong and current administration policy remains in stark contrast to the U.S.’s long-running stance on advocating for human rights in China.  Trump, the “transactional president” faces an election in 2020, an ongoing impeachment inquiry, and a slowing economy and thus is in a considerably weaker position to negotiate a trade deal.  By comparison, Xi Jinping has no term limits and thus little incentive to compromise. Rather his strategy indicates that he prefers to run out the clock on the last quarter of the Trump administration.

Hong Kong-related Trump tweets:

“Somebody said that at some point they’re going to want to stop that. But that’s between Hong Kong and that’s between China, because Hong Kong is a part of China. They’ll have to deal with that themselves. They don’t need advice.”

“I know President Xi of China very well. He is a great leader who very much has the respect of his people. He is also a good man in a ‘tough business.’ I have ZERO doubt that if President Xi wants to quickly and humanely solve the Hong Kong problem, he can do it. Personal meeting?”

III. Impact and Implications of Hong Kong protests

A. Economic Impact:  Six months of protests have taken a devastating economic toll on Hong Kong.  Capital markets have lost well over $60billion in value and the over the past week the Hang Seng index declined by 5%.  Retail and hospitality markets are down 40 to 60% and tourism, a key constituent of Hong Kong’s GDP has plummeted.  The overall impact of the protests is far deeper and widespread than the 1997 Asian Financial Crisis as well as the 2003 SARS epidemic.

B. Business environment:  Since the protests are not the impact of a pathogen outbreak or contagion from an Asian economic crisis, in the near future the protests will likely have a profound impact on perceptions of the Hong Kong business environment and its political economy.  Investors may think twice about basing their China headquarters in Hong Kong and instead could channel investment or operations to other Asian markets such as Singapore or Taiwan.

C. Political: The political implications of Hong Kong’s crisis go far beyond the impact of the 2014 Umbrella Movement or Occupy Central, based upon “Occupy Wall Street” which were largely peaceful, with police preserving law and order and not provoking conflict with protesters.  In 2019, protesters insist upon their “Five Demands, Not One Less”, namely:

1. Complete withdrawal of the extradition bill from the legislative process

2.  Retraction of the “riot” characterization for the 12 June protest

3. Release and exoneration of arrested protesters:

4. Establishment of an independent commission of inquiry into police conduct and use of force during the protests

5. Resignation of Carrie Lam ; implementation of universal suffrage.

The last demand initially called for Carrie Lam to step down; however, since July that demand has evolved into a call for universal suffrage, thus changing the current system in which

(1) the Chief Executive is selected by a 1,200-member Election Committee, and

(2) only 30 of the 70 Legislative Council seats are voted upon by residents; the remaining seats are appointed by ExCo. (ExCo itself is appointed by the Central Government and thus is nearly unanimously pro-Beijing.)

IV: Endgame: Resolution

There are two likely outcomes, one peaceful scenario, one violent.  Regardless of whether the protests end with peaceful compromise or violent suppression by either the HK Police Force or by PLA troops, the response of the international community will be limited.   Comparisons to 1989 Tiananmen protests are facile; the prevailing circumstances are entirely different, and following 30 years of economic growth, China now plays a critical, indispensable role in the global supply chain.

As a result, any application of economic sanctions will be limited and far less effective than in 1989, a time when China was pushing to become a member of the WTO and the economic sanctions that followed the PLA’s 1989’s quashing of protests had a widespread, crippling effect on China’s then-emerging economy. By contrast, 30 years later, China is in a far more powerful position both politically and economically and can withstand almost any sanctions that are applied.

Neither protesters nor the HKSAR government demonstrate a willingness to compromise nor have they ever negotiated.  From the outset, the protest movement is noteworthy because it intentionally lacks a leadership structure and is largely social media crowd-sourced. Democratic Party legislators do not speak for the Legislative Council, nor do protesters agree with any form of compromise unless the Five Demands have been met.

It is worth noting that on Monday alone, the day of the Smackdown, 1,458 canisters of tear gas, 1,391 rubber bullets, 325 bean bag rounds, and 265 sponge bullets were deployed in a single day.  Needless to say, at present in November 2019, the protests are far from over with no immediate end or resolution in sight.