Wednesday, November 17, 2010

Hong Kong: Chinese Walls in Hong Kong

Source: International Relations and Security Network (ISN)

Stalled political reform hints that the territory is ever-mindful of developments in China, as Hong Kong booms on the back of Beijing's economic growth.

By Simon Roughneen for ISN Insights

In the run-up to the Communist Party plenum which ended 18 October, there was much anticipation that the authoritarian-ruled economic giant would announce some new political departure - especially after Prime Minister Wen Jiabao intimated in the weeks leading up to the conference that some reform might be necessary to maintain the ruling party's legitimacy. Wen told CNN in a 7 October interview that China "should not only let people have freedom of speech" but "must create conditions to let them criticize the work of the government."

These astonishing comments perhaps generated more enthusiasm than was appropriate, and for China watchers the eventual conference outcome was a disappointment - though perhaps no surprise given the government's shrill reaction to the awarding of the 2010 Nobel Peace Prize to jailed dissident Lia Xiaobo, whom Beijing regards as a criminal. News of Liu's award and Wen's comments were both either censored or omitted by China's state-run media. Meanwhile, the official agenda for the plenary session - the most important gathering on China's political calendar - was the 12th Five-Year Plan (2011-2015) for the country's economic and social development. Vice President Xi Jinping was named deputy chairman of the country's military, possibly presaging his eventual succession to the presidency.

Xi is best known overseas for remarks made on a foreign trip in early 2010 that - like Wen's - were ignored by China's state media, but may have implications for Wen's reformist inclinations: "There are some well-fed foreigners who have nothing better to do than point fingers at our affairs. China does not, first, export revolution; second, export poverty and hunger; third, cause troubles for you. What else is there to say?"

Watching closely

The semi-autonomous Chinese region of Hong Kong is watching closely these political developments (or lack thereof) on the mainland, amid concerns that the "one country, two systems" formula for governing the region was degenerating into something more akin to "one country, one system". In the 13 years since Hong Kong came under Beijing's rule, there has been scant progress toward the implementation of full democracy as expected under the Hong Kong Basic Law, in effect since 1997.

Hong Kong's once-vociferous pro-democracy politicians have been relegated to the electoral fringe, as a consensus on how to manage the region's relationship with Beijing coalesces around business leaders and pro-Beijing politicians that are backing a deal made earlier this summer that retains the same limited voting franchise used to elect the Hong Kong chief executive, currently Donald Tsang. A larger panel of 1200 will choose Tsang's successor - but this number pales in comparison to Hong Kong's population of seven million. The Legislative Council, or Legco, is partly chosen by popular vote, but half the seats are under the control of special interest groups in business and politics.

However, some Hong Kong lawmakers do not want to merely toe Beijing's line, or so it seems, with four Legco members planning to travel to the Nobel award ceremony on December 10, in defiance of China's warnings. Morover, a petition calling for the release of Liu has been signed by tourists from the mainland, and some public celebrations of the peace award are planned.

Listed by the Heritage Foundation and the Wall Street Journal as the world's freest economy, Hong Kong markets itself as the logical place for foreign corporations to start looking at opportunities in China, which recently overtook Japan as the world's second largest economy, and last year passed Germany to become the world's biggest exporter.

Gateway politics

"We are a strategically-located gateway to China," said Rita Lau, Hong Kong's Secretary for Commerce and Economic Development, while addressing a gathering of Irish businesspeople and officials in the city on 24 September.

As China's booming economy means an ever-growing need for raw materials and energy imports, Hong Kong is becoming a hub for mining investment on top of its long-time standing as Asia's main financial center, alongside Singapore. The Hong Kong exchange appears set to top the world's rankings for initial public offerings (IPOs), thanks largely to mainland Chinese companies looking to float there. To illustrate, so far this year 53 companies have raised a combined $23.9 bn from IPOs in Hong Kong, according to data from Dealogic. By comparison, the figures for IPOs in New York and London for the same time-period are $10.7bn and $7bn respectively. Hong Kong's overall size as a stock market, however, remains about half of New York, though it has bypassed London after more than tripling in size since 2000.

Indeed, Hong Kong has its own business interests to look after. Tsang visited a trade show in central China recently, saying he thinks that Hong Kong know-how and investment could blend well with the low land and labor costs on the mainland - perhaps presaging a move away from exports and toward tapping the Chinese market. Directly inland is China's Greater Pearl River Delta region. Home to 55 million people, it would be the world's 12th largest trading entity if it were a country, according to a report by Invest Hong Kong.

A challenge to Hong Kong's role as gateway to China might come from the mainland itself. Shanghai is being built up as a rival financial hub. Though it has a long way to go to match the legal transparency and business structures in place in Hong Kong, it is located on the mainland and has a rapidly growing stock exchange. It serves as a reminder to Hong Kong that the Chinese government wants options. Perhaps the buzz surrounding Shanghai is a reminder from Beijing that it does not want to be dependent on a partly self-governing region with close links to the West, even if Hong Kong's pro-democracy factions are losing traction.

However, all indications suggest that Hong Kong's economic future and likely political alignment going forward will be tied to what happens on the mainland.

Simon Roughneen is an ISN Security Watch senior correspondent, currently in Southeast Asia. His website is