Making Cents Of Hong Kong

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While the ongoing protests are primarily about political freedoms, Matt O’Brien observes that the island has “already seen what being subsumed by the mainland means economically. And it’s had enough of that”:

It’s true that China’s growth has been good for Hong Kong’s—especially their retailers—but it hasn’t been as good for their relative standard of living. Not only have the richest mainlanders caught, or even surpassed, them, but now those Chinese are pushing up their cost-of-living and snatching up everything from their stores. That’s why Hong Kongers say the mainlanders are “locusts” who come in, take everything, and then leave—and with bad manners, too. Indeed, it set off a social media firestorm this year when a mainland parent was caught letting their two year-old urinate in one of Hong Kong’s streets. In other words, it’s the same old story of old money versus the nouveau riche.

But Yglesias attributes Hong Kong’s recent economic slump, which may also play a part in driving the protest movement, to the absence of these rich mainlanders:

Economic weakness in Hong Kong in part reflects a broader slowdown in the Chinese economy, which seems to be no longer capable of sustaining ultra-fast growth rates. But Hong Kong has a particular problem because of an ongoing decline in luxury goods sales that appears to be linked to a Chinese government crackdown on corruption and conspicuous consumption. … Hong Kong is pretty much the closest you can be to mainland China without being subject to mainland China’s luxury taxes. Consequently, the island is crawling with upscale malls with large mainland client bases. Lately, those customers have been staying away, and it’s dragging Hong Kong’s economy down.

William Pesek considers what the demonstrations mean for the economic futures of the island and China itself:

As I’ve pointed out before, China should be learning from Hong Kong’s first-world institutions. It should emulate the laissez-faire ethos, rule of law, open capital accounts and free-wheeling media environment that underpin Hong Kong’s success — not stamp them out. Instead, Xi’s government appears to be intent on remaking Hong Kong in China’s deteriorating image. If Beijing continues to erode the liberties and institutions that have made Hong Kong such a great place to do business, multinationals aren’t suddenly going to shift base to Shanghai. Indeed, by the time the mainland’s favored hub reaches Hong Kong’s current level of transparency and financial sophistication — if it ever does — all the banks and household corporate names would’ve already moved to Singapore, or elsewhere in the region.

Mohamed El-Erian agrees that China’s decision to double down on repression will likely backfire economically:

Indeed, the Chinese government is likely to prevail over the Occupy Central movement in Hong Kong. But in doing so, it will probably be inclined to slow certain economic reforms for now, seeking instead to squeeze more growth from the old and increasingly exhausted model — similar to how Brazil’s government responded to protests there ahead of the World Cup a few months ago. And while this would be part of a broader political strategy to defuse tensions and avoid an immediate growth shock to both China and the global economy, it would undermine the longer-term economic vibrancy of both.