June 12, 2019: Anti-Extradition Bill Protest in Hong Kong. Protestors are surrounding HK Legislative Council building.
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Hong Kong: What China's tough approach means for the economy

The protests in Hong Kong that have been going on for weeks and the tough attitude of the city’s government, which is remotely controlled from Beijing, now make it unmistakably clear to everyone that the coexistence of totalitarian politics and a liberal economy does not work with China, says Kristin Shi-Kupfer.

"One country, two systems" – right from the beginning this magic formula sounded too simple to work. Its unifying magic lay in the fact that everyone involved - from China's CP to the international business community and democracy activists – believed, or wanted to believe, that a stable economic environment would in the end be sufficient to guarantee stability. They were all wrong. The protests in Hong Kong that have been going on for weeks and the tough attitude of the city’s government, which is remotely controlled from Beijing, now make it unmistakably clear to everyone that the coexistence of totalitarian politics and a liberal economy does not work with China. In this respect, Hong Kong is an important lesson for all of us.

It was China's hard-headed pragmatist Deng Xiaoping who came up with the idea of using the formula "One country, two systems" – originally developed to solve the Taiwan question – for Hong Kong: The former British Crown Colony would be able to maintain its capitalist system even within China, while the People's Republic would remain committed to the socialist system. Today it is clear that each side had a different understanding of what this meant from the outset.

Britain's government under Margret Thatcher believed that by signing the 1984 Joint Declaration it was doing the best it could for its former overseas territory. London had only leased it for 99 years. Some likely also hoped that, with growing prosperity over the years, China itself would become more liberal and open. The people of Hong Kong who could not or did not want to leave their city set their hopes on the inertia of existing structures and on the well-trained civil service. The Chinese government, on the other hand, seems to have believed that the inhabitants would be satisfied with the status quo and with the opening up of economic opportunities. And the international business community expected the new Special Administrative Zone to provide them with new business opportunities along with the usual security.

Hong Kong still ranks as the freest economic area in the world

The lowest common denominator for all of them has always been Hong Kong's comprehensive, independent and well-functioning legal system. Rules and treaties counted for something in Hong Kong, corruption was low, the free movement of goods, data and persons protected - for foreign companies as well as for Chinese companies raising international capital in Hong Kong. Hong Kong leads the rankings as the freest economic area in the world – that is so far still the case.

The creeping erosion began when the state-capitalist system of the People's Republic found itself in a crisis and critics there began to talk about the other, free-liberal system in Hong Kong - imitating it in part with workers’ protests and experiments with the separation of powers. This was the moment when Beijing began to intervene increasingly in Hong Kong's autonomy and legal system.

In 2003, when it attempted to introduce a national security law in Hong Kong, the Chinese leadership had to bow to street pressure. In the years that followed, China's CP therefore changed its strategy and worked more covertly. Its influence was only felt by the politically engaged in Hong Kong's media, universities and schools.

When the Occupy movement first emerged in 2014, driven by the hope of universal, free elections or even independence for Hong Kong, the Chinese government once again managed to master the situation by waiting it out, making threats, imposing massive restrictions on freedom and through a continuing siege of parts of the city. It also quickly won over nearly every company, both domestic and foreign, to its side.

By 2015 Beijing was no longer even bothering to pretend. Critical booksellers and publishers in Hong Kong "disappeared" - allegedly because they were involved in financial crimes. The kidnappings were an open breach of the law and a well-calculated demonstration of power by the CCP. At this point, however, the Chinese government was very careful that its actions only marginally affected the economic interests of business. Nevertheless, the impression was now growing that Hong Kong's judicial system would, in the long term, be eliminated. 

The current escalation can be traced back to Beijing's attempt to whip through two amendments to the law for fast-track extradition. This would require the Hong Kong judiciary to extradite to Beijing every "criminal" wanted in the People's Republic - including critical booksellers, for example - with almost no powers of review of its own.

This was the last straw for many Hong Kong residents. The protests became ever angrier as it became clear that peaceful means and moderate demands would elicit no concessions from the Hong Kong government. For the first time since the return of the former crown colony, influential foreign and local companies appealed to the common sense of Carrie Lam, the leader of the Special Administrative Zone and China-loyalist.

Beijing seems keen to avoid pictures of rolling tanks

To date, with support from Beijing, she has shown no signs of giving in. In the meantime, China’s choice of words is becoming increasingly martial: there is talk of "violent unrest" or even a subversive "color revolution", instigated with the conspiracy of the West. In so doing, the Chinese leadership is slowly but steadily approaching the political vocabulary of 1989, only slightly altered. Back then the rhetoric was used to justify the People's Liberation Army’s tough intervention, using machine guns and tanks against the demonstrators on Tiananmen Square.

This time Beijing seems keen to avoid pictures of rolling tanks as far as possible. With good reasons: the economic significance of Hong Kong, particularly as an international financial centre, carries great weight in the People's Republic too. And politically, Hong Kong continues to be of importance as a laboratory for the experiment with the two systems. If this experiment is clearly seen to fail as a result of military violence, that would have devastating consequences for Beijing. The whole world would then look to Taiwan, which China regards as a renegade province. It is possible that China's influence on the island would be lost for good as a result of a violent intervention in Hong Kong.

Last but not least, the sight of tanks rolling along Hong Kong's streets would change the geopolitical balance of power in Southeast Asia for the long term. Neighboring countries there as well as in South Asia, which are already alarmed by China's economic rise, would be all the more resolute in seeking protection from major powers such as the USA or, like Vietnam, even Russia. A Cold War of "many against one" would then be a conceivable scenario.

Nevertheless, a demonstration of power from Beijing is not completely out of the question. Up to now, the Chinese government has always stuck to the rule that nothing – but absolutely nothing – should put the authority of the communist party in question. Despite all the reservations in Hong Kong, Beijing is therefore attempting to undermine the existing legal system so that the CCP alone has the say. This is another reason why Beijing’s rulers are finding the to and fro between open threats and covert provocation – mostly likely in cooperation with the Hong Kong underworld – increasingly uncontrollable. The 1st October marks the 70th anniversary of the founding of the People's Republic. Beijing wants to create peace in Hong Kong by then - and would be prepared to pay almost any price for it.

And another current reason speaks for a tough crackdown: From Beijing's point of view it would be a sign of weakness if it lost face by giving in to the people of Hong Kong. A weakness that the communist leadership cannot and does not want to afford in view of the escalating trade conflict with the USA.

This tricky situation makes it increasingly difficult to work out China's political calculations. One thing is certain: The belief that legal security could guarantee a lasting stable coexistence between totalitarian politics and a liberal economy has been deeply shaken. The resignation of the Cathy Pacific CEO over pressure of staff involvement into the protests, as well as the four big accounting firms KPMG, Deloitte, PwC, EY publicly distancing themselves from the protests, might be just the beginning. Foreign companies must now be asking themselves the question whether they want to go on as before. There is clearly a danger that Beijing could one day put them out of action too.

This article was first published in German by "Manager Magazin" on August 12, 2019.