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Politics looms over Hong Kong in 2017

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2017 is displayed at the Hong Kong Convention and Exhibition Centre during New Year celebrations in Hong Kong, China 1 January 2017. (Photo: Reuters/Bobby Yip).

In Brief

Difficulty reconciling divergent views of the ‘one country, two systems’ policy continues to challenge Hong Kong. 2016 began with China arresting book sellers who broke no Hong Kong laws and ended with China reinterpreting the Basic Law, allowing for the expulsion of elected members of Hong Kong’s Legislative Council (LegCo).


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Both booksellers and LegCo representatives had promoted views about the ‘one country, two systems’ principle that were unacceptable to Beijing.

The Basic Law, Hong Kong’s mini-constitution and the law of the land in Hong Kong, derives its legal basis from Article 31 of the Chinese constitution (which allows for the establishment of special administrative regions) and the Sino–British Joint Declaration (which transferred sovereignty of Hong Kong to China). The Basic Law was promulgated by the National People’s Congress (NPC), but the relative importance of the two legal bases has been an important point of disagreement.

China’s recent reinterpretation of the Basic Law was a demonstration that in realpolitik terms, Hong Kong’s constitution is a national law of China that can be amended by the NPC. But this move was not without political consequences: it was precisely the assertion of this power by the NPC in 2014 that sparked Occupy Central and the Umbrella Movement.

The Hong Kong government proved remarkably deaf to those local concerns. Consequently, their expression has become increasingly extreme, with some now advocating actual independence.

March 2017 will see the ‘election’ of a new Chief Executive. The incumbent, CY Leung, has already announced he will not seek another term. Publicly, Leung cited family commitments, but there is speculation that Beijing lost faith he can successfully lead Hong Kong or receive sufficient votes from the 1200 Election Committee members. The remaining candidates are in a contest over who can best balance widely divergent interests.

They must get Beijing’s approval, but being seen to understand local concerns is also increasingly important.

Wang Guangya, director of the Hong Kong and Macau Affairs Office of China’s State Council, announced Beijing’s expectations. Besides the previous requirements of ‘loving the country and Hong Kong’, general competence and the support of Hong Kong’s people, ‘the trust of the central government’ is now an explicit (if opaque) requirement.

Ironically, it may be Beijing that most needs political healing in Hong Kong. China’s economic growth since 1978 has been driven by a vast reform effort that relied heavily on Hong Kong’s experience. Many people seem to believe that role is now finished, but China’s current needs are precisely Hong Kong’s greatest strengths.

China’s reform priorities include financial sector marketisation, capital account liberalisation and RMB internationalisation. Although these increasingly appear on hold, they remain essential. And Hong Kong is integral to each: it is the Hong Kong Monetary Authority, international banks and the individuals within Hong Kong’s institutions that are directly implementing the reforms. Until China becomes comfortable with the rule of law and the market economy, Hong Kong will remain China’s only candidate for an international finance centre.

Balancing Beijing’s demands for political control and Hong Kong’s need for political freedom is an unenviable challenge, but the future of the city (and a good share of China’s reform prospects) depends on it.

Not all Hong Kong’s challenges are political, however. Despite continued low unemployment, good wage growth and an economically unexciting 2016, 2017 could be difficult.

Finance, Hong Kong’s most productive sector, has few reasons for optimism. A great deal of Hong Kong’s financial sector depends on China’s trade, investment and transactions with the rest of the world. But China is moving to limit capital outflow (contrary to the Third Plenum) and President-elect Trump is apparently considering a trade war. Neither condition is conducive to capital flowing in or out of China.

Hong Kong is highly exposed to the economic consequences of US–China conflict. Finance, trade and other business services make up three of Hong Kong’s four most important sectors. If finance is dependent on China’s good external relations, trade is even more so.

The last of Hong Kong’s four key sectors is tourism. Because the vast majority of tourists come from mainland China, poor relations with Beijing directly reduced arrivals last year. But that may be a blessing in disguise. Hong Kong’s economy has become tilted toward mainland tourists’ needs at the expense of local residents’, contributing to the fallout between the city and the mainland.

Hong Kong’s economy fails local residents in another important way: real estate. Property regulation typically favours elite business moguls. This contributes to Hong Kong’s infamously miniscule yet exorbitantly-priced apartments.

Reorienting the economy to serve local residents rather than mainland tourists or elite business moguls should be among Hong Kong’s top priorities.

The environment (especially air and water quality), treatment of domestic workers, cost of living and inequality are among other important challenges. Meanwhile, the extension of the Mass Transit Railway system and the expansion of China’s financial infrastructure should be positives for 2017.

Hong Kong’s global importance is greater than many people, especially in Hong Kong, assume. What makes Hong Kong special is its unique role in China combined with its rule of law, world class education, impressive media and feisty public. These are the foundations of Hong Kong’s strength and its value to China. But they also make Beijing incredibly uncomfortable. If Hong Kong’s new leaders can resolve the tensions between Beijing and locals, Hong Kong could have an exciting future. If the political malaise continues for the next term of government, the city may struggle to revive itself.

The Chief Executive candidates have so far demonstrated a better ability to listen and heed diverse concerns. And Beijing has shown increased wisdom by refraining from backing a particular candidate: a real contest between all acceptable candidates would create a vastly better atmosphere in Hong Kong, and allow the winner to claim a clear mandate (something CY Leung never had). If these early signs continue, Hong Kong may just set itself up for a stronger future.

Dominic Meagher is an independent economist and China analyst.

This article is part of an EAF special feature series on 2016 in review and the year ahead.

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