Hong Kong in Crisis
The reason is simple.
What China does next tells the West just how far China’s ‘modernisation’ has come.
Hong Kong is proud of its democracy.
It has freedom of speech and the freedom to challenge the government. Something the Chinese do not.
However, the protests taking over Hong Kong today are different from any others in its history.
At the root of these protests is the fact that the people of Hong Kong want to maintain their democratic society.
They do not want the authoritarian rule of China hanging over them.
And as Jim explains below, there’s a chance the Hong Kong protests could end up worse than Tiananmen Square.
Until next time,
Hong Kong in Crisis
Jim Rickards, Strategist
I’ve been visiting Hong Kong for over 35 years.
My first visit was in 1982 and my most recent was last May.
All large cities change over time. New districts are developed.
New buildings are erected and some old ones torn down.
Cities on the water, like Hong Kong, can use landfills to build more land and transform colourful (if dangerous) dockside alleys into sleek convention centres and hotel districts.
None of that is unexpected, especially in dynamic cities like Hong Kong.
Under new management
In the 1980s and 1990s, I routinely described Hong Kong to friends as the most energetic city in the world after New York.
Yet in addition to physical infrastructure (which changes), cities have a kind of soul or zeitgeist, which is less susceptible to change.
St Mark’s Square in Venice, the Louvre in Paris and the Houses of Parliament in London are all defining and, if not eternal, at least help to keep a place rooted over time.
My visits to Hong Kong in the late 1990s and early 2000s were characterised by the same energy and dynamism I had encountered decades earlier.
The ‘two systems’ seemed to work well together.
Yet as China’s growth ‘miracle’ gathered steam from 2002-2007, a legal heavy hand and gloomy administrative culture directed from Beijing descended on Hong Kong. You could feel it in the air…
Hong Kong no longer a free market
At first, I noticed the lack of energy.
The city was still rich and active, but there was a ‘business as usual’ attitude that was less driven than the energetic venue I had always known.
Then I noticed a more depressed attitude among the bankers, investors and event planners I associated with.
They still made money, but the typical upbeat smile had been replaced with a more worried look.
This was accompanied by a rise in street protests against the heavy hand of Beijing on matters such as free speech, government autonomy and the relative importance of Hong Kong in the Chinese master plan.
Clearly, Shanghai had come into its own as the financial centre of China, so Hong Kong’s special role had been greatly diminished.
The starkest evidence of change came during my last visit.
I was presenting to a group of elite policymakers and property developers at the prestigious Asia Society local headquarters.
At one point, one of the local elites took me aside, looked over his shoulder and at a near whisper said, ‘Be careful what you say. Chinese agents are everywhere.’
Global investors are accustomed to treating Hong Kong as a bastion of free markets and fair dealing.
Those assumptions are no longer true, as Beijing begins to treat Hong Kong as just another piece on a chessboard of market manipulation and geopolitical ambition.
What developments can we expect now that the freewheeling Hong Kong we knew from 1960-2005 has come to an end?
Troops on the border
The unrest in Hong Kong is another symptom of the weakening grip of the Chinese Communist Party on civil society.
The unrest has spread from street demonstrations to a general strike and shutdown of the transportation system, including the cancellations of hundreds of flights.
This social unrest will grow until China is forced to invade Hong Kong with 30,000 People’s Liberation Army troops now massed on the border.
This will be the last nail in the coffin of the academic view of China as a good global citizen.
That view was always false, but now even the academics are starting to understand what’s really going on.
The situation in Hong Kong today is eerily reminiscent of the days leading up to the Tiananmen Square massacre on 4 June 1989.
In both cases, a particular cause for complaint gave rise to demonstrations, which soon grew and led to wider demands for political liberty and justice.
Tiananmen started as a demonstration against inflation, which drew college students and housewives.
At its height, over one million protestors were active in Beijing, while demonstrations sympathising with the Tiananmen protestors appeared in over 400 Chinese cities.
Tiananmen Square is immediately adjacent to the Forbidden City and the Chinese leadership compound, so the demonstrators posed a potential threat to the government itself.
Finally, hard-line Communist Party leaders ordered tanks and troops to attack the demonstrators.
No one knows the exact number killed, but estimates range from the low thousands to the tens of thousands.
The entire incident has been covered up and is never mentioned in official communications or taught in Chinese schools…
Could it be worse than Tiananmen Square?
The current Hong Kong demonstrations began on a small scale to protest a proposed law that would allow extradition of Hong Kong people to Beijing for trial on charges that arose in Hong Kong.
This would deprive Hong Kong people of legal protections in local law, and could subject prisoners to torture and summary execution.
The demonstrations grew exponentially and now involve hundreds of thousands of protestors.
The list of demands has also grown to include more democracy and freedom, and adherence to Hong Kong’s rule of law.
Project Syndicate recently explained the protests in detail, but then points to the unpleasant choice facing the Communist Party leadership.
If Beijing tolerates the protests, they may lead to greater autonomy for Hong Kong at a time when Beijing is trying to strengthen and centralise its control.
If Beijing cracks down on the protestors, it will have another Tiananmen Square massacre on its hands with two important differences.
Hong Kong is a major city and will not be as easy to control as a confined square in Beijing.
And the rise of social media, mobile devices and live streaming guarantee that Beijing will not be able to hide or cover up any atrocities.
The jury is out on which path the Communists will take.
Whether the Communists offer concessions or proceed with a bloody crackdown, one thing that is certain is that the decision will be made soon.
Every day of continued protests makes the Communists’ hold on the situation more tenuous and difficult to maintain.
Investors should expect a resolution of this issue by late September at the latest.
Unfortunately, the resolution may not be the peaceful one hoped for but another bloody massacre.
All the best,