As Chinese paramilitary guards drilled on Hong Kong’s border last Thursday, China’s ambassador to the United Kingdom assured journalists Beijing had “enough solutions and enough power to swiftly quell unrest” in Hong Kong. And yet demonstrations have raged across the city for eleven weeks. So why hasn’t Beijing already sent in the troops?
Over the long run, using outside troops to subdue Hong Kong could trigger an exodus of talent and capital from Hong Kong. Such a move would inflame China’s already tempestuous relationship with the United States, possibly triggering economic sanctions. If the crackdown resulted in civilian casualties, it might backfire, bringing more people into the streets, and a prolonged occupation would do immediate damage to Hong Kong’s image as “Asia’s World City,” a unique half-way house between China and the West.
The half-way house
When Hong Kong was returned to Chinese sovereignty in 1997, it became one of two Special Administrative Regions in China—the other being Macau, a former Portuguese colony—to enjoy special privileges. That status is enshrined in the Basic Law, a mini-constitution that lays down the framework for Hong Kong’s relationship with mainland China.
Under the Basic Law, Beijing and Hong Kong adhere to a principle known as “One Country, Two Systems,” whereby Hong Kong is an “inseparable part” of China but operates an independent judiciary, executive, and legislature. As such, the Basic Law prohibits Beijing from deploying military forces in Hong Kong unless Hong Kong’s governing body, the Legislative Council, requests the interference.
But few analysts believe the protests will trigger troop deployment. As disruptive as demonstrations might be to Hong Kong’s economy—which Financial Secretary Paul Chan Mo-po says is heading towards a recession— allowing the Chinese military to patrol Hong Kong’s streets would have a much worse impact on the confidence of Hong Kong’s international business community.
Capital flight
According to Credit Suisse, Hong Kong is home to 179,000 U.S.-dollar millionaires, 835 of whom have personal wealth over $100 million. Since the protests began, rumors that industries and individuals are moving money out of Hong Kong have spread through the city, with private bankers and family office managers reporting an uptick in clients offshoring assets.
Tommy Wu, Senior Economist at Oxford Economics in Hong Kong, says it won’t be easy for industries to leave Hong Kong. “A lot of companies have invested quite a lot in the city in the sense [that] it’s a financial hub in Asia and also the door to get into mainland China. So it’s not an easy decision to just move out of the city,” Wu says.
Close to 9,000 foreign firms operate in the Special Administrative Region, according to data from Hong Kong’s Census and Statistics Department, and over 1,500 serve as regional headquarters. According to the United Nations Conference on Trade and Development (Unctad), Hong Kong is the world’s third largest recipient of Foreign Direct Investment, behind the U.S. and China, taking in $116 billion in 2018.
Unctad notes that mainland China is often the final destination for FDI in Hong Kong. Money moves to mainland China through Hong Kong’s stock exchange, too, which was the world leader in IPOs last year with 135 companies raising a collective $36.5 billion. There are over 1,100 mainland firms listed in Hong Kong with a total $2.6 trillion market cap—a 64% share of the total market at the end of 2018.
Hong Kong is also an exit path for outbound mainland Chinese investment. According to Bloomberg Economics, roughly 58% of Chinese outbound investment is channelled through Hong Kong, including funds for Xi Jinping’s signature Belt and Road Initiative. That’s because—thanks to the Basic Law—nations treat Hong Kong as an economic entity separate from China, helping the former British colony avoid broad economic sanctions imposed on China.
As the U.S.-China trade war rages, for example, the U.S. has yet to impose tariffs on imports from Hong Kong. However, some U.S. senators have warned that Beijing’s increased interference in Hong Kong threatens to undermine that political distinction.
Hong Kong’s local currency, the Hong Kong dollar, which is pegged to the U.S. dollar, is also a more stable investment tool than the Chinese yuan. Shanghai had hoped to supplant Hong Kong as China’s financial capital by 2020, but according to the American Chamber of Commerce, it is doomed to fail due to its capital controls, which prevents money moving easily in and out of the city.
Memories of Tiananmen
What’s more, the image of Chinese troops suppressing a political protest would remind too many Westerners of Beijing’s crackdown on student protests in 1989 and risk seriously damaging Beijing’s already precarious standing on the international stage. The U.S., locked in a trade war, could use the opportunity to put more sanctions on China.
Beijing knows this. While the subject of the Tiananmen protests is generally censored in China, last week the Global Times, a state-owned tabloid, said Beijing has the option to use force in Hong Kong, but that it “won’t be a repeat of the June 4th political incident in 1989.”
“China is much stronger and more mature, and its ability to manage complex situations has been greatly enhanced,” the Global Times wrote, leaving the threat of interference intact. But the possibility of armed intervention turning bloody is maybe too great for China to risk.
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