Hong Kong's 'One Country, Two Systems' is unraveling
Flickr / Loïc Lagarde
January has seen a series of student protests throughout Hong Kong, driven by concerns over Beijing’s growing influence in Hong Kong’s domestic affairs. These political developments create several risks for investors.
Protests in Hong Kong throughout January have called attention to what many see as a campaign by Beijing to establish greater influence over Hong Kong’s internal affairs. Although Hong Kong has belonged to the People’s Republic of China (PRC) since 1997, its status as a Special Administrative Region (SAR) in a framework popularly known as “One Country, Two Systems” has previously afforded it a significant degree of autonomy.
This framework puts Beijing in charge of Hong Kong’s foreign policy and defense but allows Hong Kong to maintain a separate economic system and significant independent legislative, executive, and judicial authority over its domestic affairs. Under this system, Hong Kong citizens have enjoyed significant political and economic liberties unavailable to mainland PRC citizens.
Recent events, however, indicate that Beijing is looking to exert greater influence over Hong Kong’s domestic affairs, undermining the “One Country, Two Systems” arrangement.
The academy
One of the main areas where Beijing appears to be exercising more influence in Hong Kong is through the governance of Hong Kong University (HKU).
In March 2015, Hong Kong’s Chief Executive CY Leung appointed Arthur Li Kwok-Cheung to the University’s Governing Council, despite widespread opposition among university staff worried that Li would undercut academic freedom. Li almost immediately became embroiled in political controversy in the fall of 2015 when he played a major role in blocking Johannes Chan from becoming pro-vice chancellor at HKU. Li allegedly vetoed Chan’s appointment due to Chan’s ties to pro-democracy political groups. This decision led to several students protests at HKU.
Flickr / Loïc Lagarde
More recently, Li was appointed to be chairman of the governing council, leading to student protests which culminated in the storming of a governing council meeting on January 26. Li is seen as authoritarian and pro-Beijing. Many HKU students and faculty fear he will actively quash criticism of Beijing, undermining academic freedom at one of Hong Kong’s most prestigious academic institutions.
The media
Many Hong Kong citizens also fear the growing influence of Beijing over Hong Kong’s media.
January has seen major protests in Hong Kong over the abrupt disappearance of five publishers whose publications were notoriously critical of PRC leadership. Although freedom of expression is protected in Hong Kong, and PRC law enforcement does not have jurisdiction, it is widely believed that PRC public security have detained the publishers and taken them to the mainland.
Hong Kong’s own police have done little to attempt to discover what happened to the publishers. Many in Hong Kong are concerned that this only confirms that Beijing has solidified its control over Hong Kong’s domestic affairs.
The political process
Beijing also has continued to impede political reform in Hong Kong over the last few years, fueling resentment.
Most famously, in August 2014, Beijing emphasized that candidates for Hong Kong’s upcoming 2017 elections must be screened by a Beijing-appointed committee. The committee provides a means for Beijing to veto any candidates who will not toe the party line.
Beijing’s decision triggered massive pro-democracy protests throughout the year. The demonstrations – known as the Umbrella Movement – have since subsided, but the sentiment that Beijing is tightening its grip remains pervasive, particularly among students, academics, and media outlets.
Flickr / Loïc Lagarde
Overall, the general consensus in Hong Kong is that Beijing is violating the spirit of “One Country, Two Systems” by retaining control over who is selected to lead Hong Kong while also tightening its political grip by silencing dissenters. These political developments create several problematic risks for businesses and investors.
Unrest and political violence
If Beijing fails to allow Hong Kong to reform politically, while also clamping down on freedom of the press, businesses and investors in Hong Kong will face mounting risks from civil unrest and political violence. Amid a climate of growing discontent – particularly among Hong Kong’s college students – political controversies of various forms could catalyze large-scale demonstrations like those seen in 2014.
Major demonstrations would hurt investor confidence and could disrupt businesses in protest locations. They might also end in violent clashes or a police crackdown, which could adversely affect the safety of personnel and property.
Detention risks
Beijing’s growing influence in Hong Kong’s domestic affairs is also increasing the risks posed by politically-motivated harassment and extrajudicial detention. Media enterprises in particular must be increasingly wary of what they publish and businesspersons in general will need to tread carefully around politically sensitive issues. Association, witting or unwitting, with individuals, groups, and/or ideas that are critical of Beijing could prove increasingly problematic for businesses operating in Hong Kong.
Cross-strait risks
The “One Party, Two Systems” framework in Hong Kong has previously been touted as an effective model for future reconciliation between the mainland PRC and Taiwan. As such, many Taiwanese have watched Beijing’s growing interference in Hong Kong’s internal affairs with great concern. The degradation of the “One Party, Two Systems” framework will therefore likely hinder the development of closer cross-strait ties in the near future, prolonging and possibly exacerbating existing cross-strait political risks.
In the near future, investors should follow developments in relations between Beijing and Hong Kong closely and seek to hedge against the political risks borne of Hong Kong’s diminishing autonomy.
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