Why China’s Hong Kong model is falling apart E-mail Tweet Facebook Google Plus Linkedin Share icons by Minxin Pei @FortuneMagazine July 1, 2014, 9:24 AM EDT Under normal circumstances, a historic anniversary, such as Hong Kong’s return to China after more than 100 years of British colonial rule, should be an occasion for celebration. But these are hardly normal times. By all accounts, the much-touted “one country, two systems” model crafted by Beijing to govern Hong Kong after China regained its sovereignty over the former British colony on July 1, 1997, is unravelling. A week before the anniversary, Hong Kong’s pro-democracy forces launched an unofficial popular referendum to mobilize support for the direct election of the city’s powerful chief executive. Through online voting and street polling booths, the organizers of the referendum wanted to show to the Chinese government—and the international community—that the majority of the people in Hong Kong want to have a say in how their leader is appointed (so far, more than 800,000 have voted). Under the post-1997 arrangements agreed upon by the Chinese and the British, Hong Kong’s chief executive is selected by 1,200 pro-Beijing businessmen and politicians, rather than directly elected by the voters. In addition to the mock referendum, the pro-democracy forces, led by a group called “Occupy Central” (Central is Hong Kong’s main business district), have staged a large public rally on Tuesday to demand more democracy for Hong Kong. “Occupy Central” is also organizing a massive civil disobedience campaign that, if carried out, will effectively shut down Hong Kong’s business district. Beijing is incensed. Shortly before the unofficial popular referendum, the Chinese government issued a rare white paper on Hong Kong and denounced the pro-democracy forces as “unpatriotic” and declared that, despite Beijing’s pledge to grant Hong Kong a “high degree of autonomy,” the former British colony actually has no “residual rights” at all. In addition to resorting to intimidation and threats, the Chinese government is widely believed to be behind a massive denial-of-service attack against the website run by Hong Kong’s pro-democracy forces to collect votes for the referendum. Prominent Hong Kong businessmen have also been recruited to criticize the pro-democracy campaign. Apparently under Beijing’s pressure, two large British banks, HSBC and Standard Chartered, pulled advertising from the Apple Daily, a staunch anti-Beijing newspaper. Beijing’s “one country, two systems” model has begun to collapse for several reasons. Economically, Hong Kong’s middle class has been squeezed by sky-high housing prices (which have doubled since 2009), stagnant income, and record high income inequality (Hong Kong’s gini coefficient, at 0.537, is among the highest in the world). Culturally, the integration of Hong Kong into China has produced enormous tension between the mainland Chinese citizens and the city’s 7.2 million residents, who have to host 40 million tourists from the mainland each year. The flood of mainland tourists, many of whom are accused of behaving rudely in public and flaunting their wealth, is widely blamed for driving the rise in prices in Hong Kong. For all its efforts, Beijing’s attempt to manage Hong Kong’s affairs has been marked by repeated missteps. It has courted only the business community as a base of support while treating the pro-democracy forces as implacable foes—without realizing that, in a city with a free press and a vibrant civil society, wealthy businessmen are no match against political activists with wide support among the middle class. In its worst political mistake to date, Beijing tried to ram a new national security law through Hong Kong’s legislature in 2003. Worried that they would lose their civil liberties should the law pass, more than half a million Hong Kong residents demonstrated on July 1, 2003, shocking Beijing and forcing the early retirement of Hong Kong’s first chief executive. This time, Hong Kong’s unhappiness has focused on Beijing’s failure to fulfill its vague promise of allowing “universal suffrage” in the election of the chief executive in 2017. Losing patience and trust in the Chinese government, the pro-democracy opposition in Hong Kong is forcing a showdown with Beijing. A brewing crisis in Hong Kong is the last thing Chinese leaders want. If handled poorly, things could get ugly fast. Hong Kong’s authorities reportedly have built large temporary detention facilities to incarcerate members of “Occupy Central” if they block traffic in the city’s center. If Hong Kong authorities use excessive force and are seen as brutal lackeys of Beijing, a peaceful civil disobedience campaign could turn violent. When Beijing unveiled its clever “one country, two systems” model 17 years ago, the world was willing to give the Chinese Communist Party (CCP) the benefit of the doubt. Today, the verdict is in. It is clear that what the CCP has really wanted all along is “one country, one autocratic system.” Minxin Pei is the Tom and Margot Pritzker Professor of Government at Claremont McKenna College and a non-resident senior fellow of the German Marshall Fund of the United States.