Hong Kong, China – The full-page advertisement in Australia’s national business news daily newspaper, the Financial Review, appeared to be aimed squarely at foreign investors in Hong Kong.
“You have read a lot, seen a lot, heard a lot about the events and protests in Hong Kong. But what you read, see, hear – or ‘share’ on social media – is just one piece of a complex social, economic and political jigsaw puzzle. It is a puzzle that we will solve on our own. And, it may take time,” the Hong Kong government’s advertisement on Thursday read.
“But we are determined to achieve a peaceful, rational and reasonable resolution.”
Hong Kong does not usually need to advertise the qualities that have made it the main gateway between mainland China and the rest of the world for multinational companies for decades: Political stability, the rule of law, low taxes, minimal regulation and freedom of speech.
But these are not normal times for the Hong Kong Special Administrative Region of China, a status that ensures its courts, civil service and media enjoy freedoms that do not exist on the mainland.
Months of protests, at times violent, against what many here see as the gradual erosion by Beijing of the freedoms that have allowed Hong Kong to become a magnet for foreign investment, have raised the prospects of intervention by China’s People’s Liberation Army (PLA).
And with those prospects come the fear that Hong Kong’s special status would be killed off, in turn ending the business model that has made it the world’s 15th richest territory (based on per capita income data from the International Monetary Fund).
The initial trigger for the protests was a bill, first proposed by the Hong Kong government in February, that would have allowed suspects to be extradited to the mainland for trial. But when Hong Kong’s leader, Chief Executive Carrie Lam, prevaricated in July by claiming the bill was “dead” rather than officially withdrawing it, the protests morphed into a platform for people to vent long-held frustrations against Beijing.
On Wednesday, Lam finally said she would pull the bill from the legislature. But the demonstrators still have a list of demands – including her resignation and universal suffrage – that have not been fulfilled, raising the probability of more protests and the possibility of a crackdown by Beijing.
“The end is coming for those attempting to disrupt Hong Kong and antagonize China,” the state-controlled Xinhua News agency said in a commentary on September 1.
Some analysts say the PLA is unlikely to take direct action.
“If anything, recent developments may signal the opposite, that they are directing the Hong Kong police to arrest people they view as ring leaders, even though their views in this regard are questionable,” Michael C Davis, a global fellow at the Woodrow Wilson International Center in Washington, DC and a former professor at the University of Hong Kong, told Al Jazeera.
In an audio clip obtained by the Reuters news agency and published on Wednesday, Lam was heard assuring a group of businesspeople that it was unlikely that the Central People’s Government would send in the PLA.
But others worry that Beijing may not want the protests to tarnish celebrations planned for the 70th anniversary of the establishment of the People’s Republic of China on October 1, possibly prompting the central government to take decisive action ahead of that date.
So while even the faintest likelihood of a forceful intervention exists, companies and investors remain on edge.
“The problem is not PLA intervention so much as the risk of bloodshed that might accompany it,” Duncan Innes-Ker, regional director of Asia and Australasia for The Economist Intelligence Unit (The EIU), told Al Jazeera.
“If the PLA arrives on the streets of Hong Kong, it would unsettle local residents and the business community,” Innes-Ker said.
Those fears are already having an effect on Hong Kong’s economy.
The Hong Kong Tourism Board recently said that arrivals for July were down 4.8 percent year-on-year. The number of tourists from mainland China had also dropped by 5.5 percent.
Also in July, real estate services firm CBRE Group reported that office rents fell 0.6 percent in the second quarter compared with the first three months of the year, the first drop in five years. Though it attributed the fall to the ongoing US-China trade war, the figure highlights the fragility of the real estate sector, one of the most important parts of the Hong Kong economy.
“Political protests in Hong Kong that started in June are continuing and we are concerned about the impact of these on tourist arrivals as well as broader economic stability in Hong Kong,” Clement Kwok, CEO of The Hongkong and Shanghai Hotels, said in an earnings report. The group owns a number of prominent office, retail and residential buildings in Hong Kong, including the prestigious Peninsula Hotel.
“We are concerned about the effect this political uncertainty may have on our results, especially given the proportion of our income which is earned in Hong Kong.”
And the government has said it now expects Hong Kong’s economy to not grow this year. Last month, it lowered its gross domestic product growth estimate to zero from one percent.
“The recent social incidents have hit the retail trade, restaurants and tourism, adding a further blow to an already-weak economy, and also affected the international image of Hong Kong,” Finance Secretary Paul Chan said in a statement on August 15.
So how would a forceful intervention by Beijing affect Hong Kong’s economy? Analysts say there are two main ways in which this might happen.
One is through changes in foreign policy.
Even if Beijing declares after a crackdown that the “one country, two systems” model that Hong Kong has operated under since being handed back by the United Kingdom in 1997 is still in force, foreign governments might disagree.
For instance, the Fitch Ratings agency has said that the possible termination of the US-Hong Kong Policy Act stands as a factor that could affect its assessment of Hong Kong’s risk of defaulting on its debts, also known as its credit rating.
The US Congress passed the act in 1992, five years before the handover, to treat Hong Kong as a “separate customs regime from China” based on it enjoying a high degree of autonomy. Newly proposed legislation would require annual certification of Hong Kong’s autonomy if Congress decides its status has been compromised.
On Friday, Fitch downgraded Hong Kong’s credit rating to AA from AA-plus and said its outlook for its rating is “negative”, meaning more downgrades could be on the way if the situation deteriorates.
“Months of persistent conflict and violence are testing the perimeters and pliability of the ‘one country, two systems’ framework that governs Hong Kong’s relationship with the mainland, underscored by mainland officials taking a more public stance on Hong Kong affairs than at any time since the 1997 handover,” Fitch said in a statement.
“Ongoing events have also inflicted long-lasting damage to international perceptions of the quality and effectiveness of Hong Kong’s governance system and rule of law, and have called into question the stability and dynamism of its business environment,” it added.
Woodrow Wilson’s Davis said: “If foreign governments suspended the special status afforded Hong Kong, it is doubtful investors would remain confident in continued maintenance of the rule of law in Hong Kong. Under such circumstances there would surely be economic consequences.”
Another consequence of military action would be to erode the independence of Hong Kong’s judiciary, a crucial prerequisite for any capitalist economy to thrive.
“The courts would be put under extreme pressure to uphold the intervention as permitted, even if the justification is not sufficiently established. Damage to the judicial reputation of the courts would be a grave concern,” said Davis.
He says Beijing may try to present a military intervention as a necessary step to quell what they have called “riots”. According to Davis, the international business community and foreign governments may take a different view.
Analysts say Hong Kong’s reputation for having an economy based on the rule of law could be permanently damaged.
“Presumably those who lack confidence in the autonomy of Hong Kong will begin to treat Hong Kong like any other mainland city,” said Davis.
Tommy Wu, an economist for Oxford Economics, says the political turmoil has driven many foreign companies in Hong Kong to start viewing the territory with a degree of concern.
“Multinational companies may now be more cautious when making foreign direct investment decisions and expansion plans,” Wu told Al Jazeera.
The EIU’s Innes-Kerr says Article 14 of Hong Kong’s constitution, its so-called Basic Law, authorises the territory’s government to request military intervention, allowing both Hong Kong and Beijing to claim that the “one country, two systems” model could withstand such an event.
“The situation would be more complicated if China invoked Article 18, which essentially allows for the suspension of ‘one country two systems’,” said Innes-Kerr.
David Webb, a prominent shareholder, activist and market analyst who has lived in Hong Kong for decades, says negative international reaction to a crackdown, especially if lives were lost, could accelerate “the retirement of the Basic Law“. Large-scale capital flight is a likely possibility, Webb wrote.
So where would all that capital go?
“Singapore would be the likely beneficiary as Taiwan presents too many obstacles,” said Woodrow Wilson’s Davis.
Singapore’s hotel occupancy rates surged in July to their highest level in more than 10 years as business travellers and conference organisers switch meetings and events away from Hong Kong.
Bangkok and Kuala Lumpur could also emerge as alternative destinations, analysts say.
But none of these cities offers the proximity to China that Hong Kong does or, in most cases, Hong Kong’s robust financial sector. This would end up hurting China and Chinese companies that rely on the Hong Kong Stock Exchange to do international business.
“We also need to keep in mind that Hong Kong is still a valuable gateway between mainland China and the rest of the world,” said Wu.