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‘Umbrella Revolution’ Puts Hong Kong Center Stage

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Hong Kong is making headlines across the world, and China doesn’t quite know what to do about it.

The streets of the business district in the Hong Kong Special Administrative Region (SAR) of the People’s Republic of China have been thronged with protesters since late September. They’re a mix of students and ordinary people irate at the Chinese government’s orders that Hong Kong may vote freely for its next leader—but only for the few candidates Beijing approves in advance.

Hong Kong, although under China’s rule since the British negotiated a return of the territory to China in 1997, was promised a “one country, two systems” formula that would allow the former U.K. crown colony considerably more autonomy than other regions on the mainland. Part of that promise was free elections by 2017—but China has changed the rules, and people in Hong Kong are not happy about it. They’re so unhappy that they’re calling for the resignation of Hong Kong’s current leader, Chief Executive Leung Chun-ying.

China’s not too happy either. Instead of its customary crackdown on protests, such as the Tiananmen Square massacre in 1989, Beijing must be very careful how it handles the situation, since Hong Kong—a thriving international business and finance center of long standing—is also well connected. Penetration of telephone and Internet service is both excellent and extensive. Not only are live updates of the protests on the streets of Hong Kong being broadcast to the world at large, but Beijing is having a tough time keeping text and images from the mainland, where they might incite additional protests.

China has benefited tremendously from Hong Kong’s free-market economy. The former crown colony’s stock exchange has become the chief place for mainland Chinese companies to go public, while renminbi-denominated corporate and Chinese government bonds have been issued in Hong Kong and renminbi trade settlement is allowed there. In addition, the growth of tourism from the mainland—from 4.5 million in 2001 to 34.9 million in 2012—ensures that the very public face of rebellion will be exposed to the mainland despite government censorship measures.

Hong Kong’s economy is more service- than manufacturing oriented; still, most of what it imports is re-exported. By itself, it’s the 36th largest economy in the world. It’s important throughout Asia for many reasons, and its high visibility in business insures that its treatment at Beijing’s hands will be closely watched. And Taiwan, another sore spot for Beijing, is among those watching, and possibly advising Hong Kong in its rebellion.

The “Umbrella Revolution,” as it’s called (named for the use of umbrellas to ward off pepper spray and tear gas fired by police), has played havoc with Hong Kong’s businesses, shutting down the financial district and causing many banks—both domestic and international—to shut down their branches during the demonstrations. Protesters have laid in supplies in anticipation of a long siege, and constructed their own barricades to forestall police and military actions.

The demonstrations disrupting National Day and the Chung Yeung Festival holiday continued into “Golden Week,” when many mainland Chinese tourists come to Hong Kong to shop. But demonstrators have blocked access to the central business district, as well as shopping areas tourists frequent. Numerous retailers were closed because of the protests, restaurants had trouble bringing in supplies and public transportation was spotty, if available.

China Central Television, citing business groups, put the economic losses for malls and offices because of the demonstrations at a minimum of HK$40 billion ($5.2 billion). The Hang Seng experienced its biggest two-day loss since February.

The Hong Kong Monetary Authority (HKMA) said in a statement that “[t]he Currency Board mechanism will … function normally to maintain the stability of the Hong Kong dollar exchange rate. The HKMA will also inject liquidity into the banking system as and when necessary under the established mechanism. The payment and settlement systems, including the HKD, USD, EUR and RMB Real Time Gross Settlement (RTGS) systems as well as the Central Moneymarkets Unit will continue to operate normally.”

Worried investors might take some comfort from the writing of Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch Ratings, who said in a report, “We don’t expect the protests to have a rating impact in the short term. It would be negative if the protests are on a wide enough scale and last long enough to have a material effect on the economy or financial stability, but we don’t currently see this as very likely.”

Two factors Colquhoun said that could affect Hong Kong’s credit rating are “basic popular consent” for the former colony to carry out such responsibilities as economic policies and “whether the political stand-off eventually impacts domestic and foreign perceptions of Hong Kong’s stability and attractiveness as an investment destination.”

With all eyes on Hong Kong, perhaps China will show restraint this time. Failure to do so could damage not just Hong Kong’s economy, but China’s as well—and certainly its reputation.