China needs to side with the middle class in Hong Kong and craft a better future for them

Hong Kong’s “Umbrella revolution”, named after the protection the demonstrators carry against police pepper-spray (as well as the sun and the rain), was triggered by a decision by China in late August that candidates for the post of the territory’s chief executive should be selected by a committee stacked with Communist Party supporters. Protesters are calling for the party to honor the promise of democracy that was made when the British transferred the territory to China in 1997. Like so much in the territory, the protests are startlingly orderly. After a night of battles with police, students collected the plastic bottles that littered the streets for recycling.

For some of the protesters, democracy is a matter of principle. Others, like middle-class people across mainland China, are worried about housing, education and their own job prospects. They want representation because they are unhappy with how they are governed. Whatever their motivation, the protests present a troubling challenge for the Communist Party. They are reminiscent not just of uprisings that have toppled dictators in recent years from Cairo to Kiev, but also of the student protests in Tiananmen Square 25 years ago. The decision to shoot those protesters succeeded in restoring order, but generated mistrust that still pervades the world’s dealings with China, and China’s with its own citizens.

Nextbigfuture thinks that Beijing does not need to be so clumsy with the stacked committee. The governor of Hong Kong does not have much power.

Also, Hong Kong has the worst crony capitalism in the world.

The Economist crony index has three big shortcomings. One is that not all cronies make their wealth public. This may be a particular problem in China, where recent exposés suggest that many powerful politicians have disguised their fortunes by persuading friends and family to hold wealth on their behalf. Unreliable property records also help to disguise who owns what.

Second, the Economist categorisation of sectors is crude. Rent-seeking may take place in those we have labelled open, and some countries have competitive markets we label crony.

The third limitation is that the Economist only counts the wealth of billionaires. Plenty of rent-seeking may enrich the very wealthy who fall short of that cut-off. America’s subprime boom saw hordes of bankers earn cumulative bonuses in the millions of dollars, not billions. Crooked Chinese officials may have Range Rovers and secret boltholes in Singapore—but not enough wealth to join a list of billionaires. So the index is only a rough guide to the concentration of wealth in opaque industries compared with more competitive ones.

China’s can continue strong economic growth and still leave the top level of China’s government mostly the same.

Hong Kong produces about 4 per cent of global financial flows with 0.1 per cent of the world’s population. Mainland China has a share of about 10 per cent of financial flows, but it has 18 per cent of the world’s population to generate them with. In terms of total value of flows by each economy, Hong Kong generates around $US180,000 per person, against $US4000 on the mainland. Had it not been for Hong Kong’s reach into the global economy, China’s spectacular performance after entering the World Trade Organisation in 2001 would have been much more difficult to achieve.

Last year around $US60 billion ($68 billion) of direct foreign investment with China as its ultimate target flowed through Hong Kong.

It is estimated that 40 per cent of Hong Kong’s $US1.15 trillion in foreign claims is now extended to borrowers in mainland China, up from just 5 per cent a decade ago. The Hong Kong stock exchange is the largest in Asia and second only to New York in launching IPOs in recent years.

The government is expected to announce details shortly on a major initiative that will permit direct trading by retail investors in Shanghai and Hong Kong in the other markets. There are miles of potential expansion still untapped in China’s financial systems.

Finance and property developers dominate the Hong Kong sharemarket though tourism and retail, and actually account for 10 per cent of Hong Kong’s GDP. It’s not known how much of China’s property boom has spilled over into the Hong Kong market but it has certainly been responsible for record prices in the more expensive end of that market.

China in the middle of an anti-corruption campaign that is to last at least another 5 years.

China needs to side with the middle and professional class in Hong Kong and craft a better future for them.

Hong Kong’s economy will need to be transitioned. Leadership at the top could enable better integration with Guangzhou.

Investment to help create an innovation economy in Hong Kong would be part of an overall drive for a technological future with a broader prosperity base.

China is squandering the potential of the educated professionals in Hong Kong. The billionaires in Hong Kong are not investing to develop the Hong Kong in a meaningful way. Li Kai Shing and other billionaires can leverage a rigged property market and stay rich but professionals have to buy tiny US$2 million apartments. Li Kai Shing makes billions more by getting pieces of Alibaba and Facebook. Li Ka-shing bought a 0.8% stake in Facebook for $120 million. He ended up making upwards of $600 million.

Re-investment in education and development of innovation industries would help secure Hong Kong’s future social and economic stability.

Although has a lot of dense skyscrapers about 70-90% of the land is undeveloped. China could build the infrastructure and adjust the system to enable that land to be developed. China could invest in Hong Kong to relieve social imbalances and pressures while also targeted more technical industries.

A lot of the undeveloped land is mountainous in nature, but China flattens mountains for development.

These would be populist moves that are consistent with the anti-corruption drive, large scale Chinese investment efforts and help with the effort to move up market into service and technology markets.

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