Can Hong Kong be saved?
The handover of Hong Kong from the UK to China was at midnight of July 1st, 1997. This event ended 156 years of British rule in the former colony. In 1841, China ceded the island to the British and subsequently the Treaty of Nanking was signed, formally ending the First Opium War. De-colonization is certainly positive in general, but in the case of Hong Kong, the development since 1997 has not necessarily been positive. It is hardly a surprise given that the previously democratic and capitalistic colony now belongs to China, an oppressive and authoritarian regime.
Watching Hong Kong painful decline is further proof that Taiwan will have to be protected and supported against Chinese aggression in the future. It is also worth noting that in 1997, Hong Kong was a major financial hub with the four largest stock exchange. It was also a global leader of new stock offerings as recently as 2019. The exchange has fallen to the fifth place in 2024, but reality is that Hong Kong is no longer a bastion of dynamism. On the contrary, since China took over, the Hong Kong exchange has had the world’s worst performing major stock market. The Hang Seng index has been basically flat, up only about 5%. Over the same period, the S&P 500 has surged more than fourfold; even mainland China’s underperforming Shanghai Composite has far outdistanced the Hong Kong bourse.
There are several reasons for the problems for Hong Kong. First, domestic politics. For the first 20 years after the handover, its political scene was relatively stable and the communist Chinese ruler more or less left Hong Kong alone. However, this suddenly change under the incompetent leader Carrie Lam, who convinced the Hong Kong leadership to propose an extradition arrangement with China. This sparked huge pro-democracy demonstrations and China responded with the imposition of a new Beijing-centric national security law and shredded any remaining semblance of local political autonomy.
In the spring of 2019 at the onset of the democracy protests, the Hang Seng index was trading at nearly 30,000. It is now more than 45% below that level at 15,750. The free market has been shackled by the deadweight of Chinese autocracy. A second reason, there are many structural problems with the Chinese economy that also impacts Hong Kong, especially debt, deflation, and demography, putting pressure on the property market and local government financing vehicles. These forces have sparked a three-year bear market that has taken the China’s broad CSI 300 index down more than 40% from its spring 2021 peak. Reflecting collateral damage on Chinese enterprises listed in Hong Kong and the city’s China-sensitive services sector, the Hang Seng has fallen 49% over the same period.
A third reason for Hong Kong’s decline is global developments. Since 2018, the U.S. – China rivalry has gone from bad to worse and Hong Kong has been trapped in the crossfire. There is no easy way out for Hong Kong from the interplay between these three developments. Hong Kong has no political discretion to chart its own course. The old, extraordinary energy of the free, democratic business community is gone. Gone is also the strategy and vision of Hong Kong. China has managed to destroy that in a short period of time. For the Chinese leadership, the continuation of the authoritarian system and communist rule will continue to be the most important guidelines regardless of financial consequences. As a result, Hong Kong will continue to exist as a financial Asian hub, but it will no longer be the dynamic and successful place that will attract global investors.
The Chinese authorities even arrested Jimmy Lai, a Hong Kong businessman and politician. He is one of the main contributors to the pro-democracy camp, especially to the Democratic Party. Lai remains imprisoned in solitary confinement at Hong Kong’s Stanley Prison as the Chinese attacks against democracy continues. The world is watching, and the fact is that under Chinese rule, there is no chance Hong Kong can be saved and return to be a key global financial hub. On the contrary, most likely the decline will continue.