Midst of a Crisis

An Economic Success Story…with a Caveat

Wider Issues

There is no doubt Hong Kong is in the midst of a crisis with an uncertain path ahead.

August 13th 2019 5:21 am. HONG KONG (Reuters) - Apprehension over capital outflows triggered by escalating political unrest has driven Hong Kong’s stock market to its lowest this year and pressured its currency, with analysts warning of more weakness. The Hang Seng Index (HSI) fell 2.1% to 25,281.30 points on Tuesday, down 16% from the year’s peak, and is at lows last seen in early January.

It has fallen over 8% since June 12, when street clashes escalated between anti-government demonstrators and the police.

Now into their third month, those protests ground Hong Kong’s airport to a halt this week and forced flight cancellations even as both protester and police tactics turned increasingly violent. Concerns over China’s slowdown, as the Sino-U.S. trade war remains unresolved, have also dragged on Hong Kong’s economy. The Hang Seng is Asia’s second-worst performer after South Korea’s this quarter. Other risk indicators in markets are flashing red.

It is unlikely Carrie Lam, Hong Kong’s chief executive (or anyone else), back in June ever expected a proposed bill that would allow extraditions to mainland China would ignite the protests now engulfing the Hong Kong Special Administrative Region (SAR) of China. The bill was originally designed to close an extradition loophole with Taiwan (i.e. as part of China). But opponents of the bill feared the legislation’s main purpose was to further extend Beijing’s reach into the largely autonomous Hong Kong. Under the proposed legislation, anyone could be extradited to China for prosecution. This concept is an anathema to many factions of the greater Hong Kong community.

As part of the 1997 handover between the United Kingdom and China, Hong Kong SAR was granted a 50-year period under “Basic Law” [one country-two systems] before being fully re-absorbed back into the Peoples Republic of China (PRC). In response to the unrest, the extradition bill was suspended but not withdrawn exacerbating the demonstrators’ ire with the Lam administration and suspicion of the legislation’s true intent.

But as the staying power of the unrest shows, there are far more grievances than just the extradition bill. And the Lam Administration balancing the aspirations of an unhappy populace against the PRC’s precepts is like being stuck between a rock and a hard place with little room to maneuver.