A ‘golden goose’ loses its luster: Why Beijing is willing to risk Hong Kong

June 6, 2020, 10:00 AM UTC

In 1984, when British Prime Minister Margaret Thatcher agreed to return Hong Kong to Chinese sovereignty in 1997, ending 156 years of British rule, architects of the accord assured residents that communist leaders in Beijing would find it in their best interest to preserve the colony’s freedoms.

Were Hong Kong’s new overseers to encroach on the city’s legal system, freewheeling financial markets or unfettered press, it was often argued, they would risk “killing the golden goose”—whose shiny eggs enriched Chinese and foreigners alike.

And for decades, that assumption held true. Hong Kong prospered under a curious arrangement known as “one country, two systems.” Troops from the People’s Liberation Army marched across the border and took up residence in garrisons around the territory, including one overlooking Victoria Harbour. But they remained mostly out of sight. Hong Kong boomed as a kind of half-way house, whose residents understood China’s language and culture but also spoke English and operated according to British laws and financial traditions.

Hong Kong banks and family businesses financed factories that sprang up along the Pearl River Delta in neighboring Guangdong province. Hong Kong’s port handled mainland export cargo. Foreign businesses flocked to the city to open regional headquarters. And as mainland businesses matured, the Hong Kong stock exchange helped them raise billions in new capital from global investors.

The city set its own tax rates and even used its own separate currency. Hong Kong residents were permitted civil liberties unimaginable across the border.

But Hong Kong’s golden goose has lost its former luster—at least in the eyes of Chinese President Xi Jinping. A vote in May by China’s National People’s Congress to approve a sweeping new security law for Hong Kong, bypassing the city’s legislature, makes clear that China’s current leadership is determined to rein in Hong Kong’s independence even if it jeopardizes the city’s role as a global financial capital.

Shrugging it off

The stated aim of Beijing’s national security law is to prevent and punish acts of secession, subversion, terrorism or foreign interference in Hong Kong affairs. But critics have decried it as a way for China’s central government to crack down on protests that have engulfed Hong Kong for months, assert influence over the city’s independent judicial system, and roll back liberties like the right to protest, free speech, and an open press.

China Holds Annual Two Sessions Meetings Amidst Global Coronavirus Pandemic
Communist Party delegates on May 28 attend the closing session of the National People’s Congress, at which a new draft security bill for Hong Kong won near-unanimous approval.
Kevin Frayer—Getty Images

The day after Beijing announced the new security law, Hong Kong’s Hang Seng Index plunged 5%, its biggest drop in five years. The U.S., Britain, Canada, and Australia issued a joint statement condemning the proposal. U.S. Secretary of State Mike Pompeo declared that he can not certify to Congress that Hong Kong continues to enjoy a “significant degree of autonomy” from mainland China. Days later President Trump vowed to revoke special trade privileges the U.S. has conferred on Hong Kong since 1992.

Hong Kong’s special trade status currently excludes the city from U.S.-China trade policies, meaning, for instance, that Hong Kong is not subject to U.S. tariffs that were levied on Chinese imports in the trade war.

The U.S., Trump said, would also “take necessary steps to sanction [People’s Republic of China] and Hong Kong officials directly or indirectly involved in eroding Hong Kong’s autonomy.”

Yet apart from blustery denunciations of Trump’s press conference in China’s state media, Beijing has shrugged off U.S. threats. A spokesperson for the Ministry of Foreign Affairs of China in Hong Kong said in a press conference Wednesday that the law will have “no impact whatsoever on Hong Kong’s high degree of autonomy, the rights and freedoms of Hong Kong residents or the legitimate rights and interests of foreign investors in Hong Kong.”

A new flock

One reason for this relative indifference is that Hong Kong plays a far smaller role in China’s economy today than it did in 1997. The city’s GDP accounts for less than 3% of China’s total economic output today, down from more than 18% before the handover.


In a sense, China has hatched and grown a flock of new geese. Hong Kong is now China’s fourth-largest city by GDP after decades as China’s most prosperous, trailing Shanghai, Beijing and neighboring Shenzhen. Hong Kong’s shipping port, once the world’s busiest, slipped to eighth place last year, eclipsed by ports in other Chinese cities including Shanghai, Ningbo, Shenzhen, Guangzhou, and Qingdao. Traffic in Shanghai alone exceeded 43 million twenty-foot equivalent units, more than double the 18 million TEUs handled in Hong Kong.

From the 1980s through the early 2000s, Hong Kong’s port was the gateway to and from mainland China, and flourished as the mainland shipped more goods to the rest of the world. The development of large container ports on the mainland, however, allowed other Chinese cities to ship their goods abroad directly and reduced the importance of Hong Kong as a middleman.


What’s more, Beijing alone now boasts two airports that are larger than Hong Kong’s. Shanghai has a bigger Disneyland. Beijing, Shenzhen, and Huangzhou are home to multi-billion dollar tech giants—such as Baidu, Tencent, and Alibaba, respectively—for which there is no equivalent in the former colony.

Hong Kong also has lost its monopoly on technical expertise as Beijing has made concerted efforts to retain its most promising talent.

In 2008, the Chinese government launched a policy called the Thousand Talents Plan to lure Chinese nationals studying and working overseas back home. This plan sought to reverse mainland China’s trend of losing its top research scholars to opportunities abroad, and has returned some 6,000 people each year to China. At the same time, over the last decade, more Chinese students attending foreign universities are choosing to repatriate each year, drawn home by a strong Chinese economy. In 2011, China sent 339,700 students abroad and welcomed 186,000 students back home after they had completed their studies. In 2018, China sent 662,000 students abroad and 519,400 came back, according to China’s Ministry of Education

Yu Yongding, a prominent Chinese economist, argues that the 2008 global financial crisis marked a crucial turning point in China’s reliance on Western capital markets and Hong Kong’s role as a gateway to global investors. The financial crisis was a wake-up call for China to ratchet up efforts to build its own financial centers outside of Hong Kong that could support the country’s transition to a more consumption-oriented economy.

The plan started with Shanghai.

All eyes on Shanghai

In the wake of the crisis, China’s leaders announced an initiative to transform Shanghai into a global financial hub by 2020, promising major infrastructure investments into the city’s port and transportation system, as well as tax incentives and a host of market liberalization measures to attract foreign capital and boost the city’s stock exchange.

At the time, China’s premier, Wen Jiabao, seemed to realize that these measures would threaten Hong Kong’s status as the country’s financial center. He admonished Hong Kong to “more vigorously enhance its competitiveness in international finance and shipping, otherwise it will fall behind.”

An aerial view of the Yangshan Container Port in Shanghai, China on May 14, 2020. Shipping volume at Shanghai’s port has surged in recent years, lessening the country’s dependence on Hong Kong’s hub.
Feature China/Barcroft Media/Getty Images

In the last decade, Shanghai’s stock exchange has grown into one of the largest in the world, and its market capitalization now even outpaces Hong Kong’s.

Yet foreign business executives still see Shanghai’s exchange as hamstrung by excessive government control and its reliance on the RMB. Hong Kong’s relative independence from such oversight is a main reason its exchange remains a more attractive destination than Shanghai for foreign capital, as is its U.S. dollar peg. Hong Kong’s exchange has been the world’s top IPO destination in seven of the past 11 years.

Xi may have concluded that, even if the dream of transforming Shanghai into Hong Kong eludes him, it is enough for him to remake Hong Kong in the image of Shanghai.

‘Just another Chinese city’

Indeed, Xi and his allies seem far more willing than any Chinese leader since Mao Zedong to trade away growth for the sake of greater stability and control.

Xi’s predecessors might have taken a more “pragmatic view” on resolving the Hong Kong protests and allowed the city a greater degree of autonomy, said Steve Tsang, the director of the SOAS China Institute in London. “After Xi became leader in 2012 I think he took a much harder-line interpretation” of Beijing’s dealings with the former colony, Tsang said.

In retrospect, the passage of the security bill appears part of a carefully considered strategy to take a more forceful approach in dealing with unrest in Hong Kong, even if it puts Beijing on a collision course with Washington. Critics of that approach warn that Xi risks rendering Hong Kong’s unique hybrid model into “just another Chinese city.” But that appears to be an outcome Xi can live with and may, in fact, prefer.

Anti-Government Protests in Hong Kong
Pro-democracy protesters march on a street on December 8, 2019 in Hong Kong. Beijing’s new national security law is seen by critics as an effort to quell dissent in the city.
Anthony Kwan—Getty Images

Last November, pro-democracy parties in Hong Kong won landslide victories in district council elections, an outcome that caught Beijing by surprise. Ma Ngok, a professor of government at the Chinese University of Hong Kong, argues that, as the odds that Hong Kong’s legislature would approve pro-Beijing policies deteriorated, Xi and his allies reversed tack, and began preparations for using the national parliament to enact the security law.

To lay the groundwork for that new strategy, Ma says, Xi appointed trusted officials to top government posts that handle Hong Kong’s affairs. In January, Xi named Luo Huining, who helped carry out Xi’s anti-corruption campaign, as the new director of the Hong Kong Liaison Office, the most senior Chinese Communist Party official in the city. In February, he appointed Xia Baolong, a close ally with experience strengthening party supervision of Christian churches in the eastern Chinese province of Zhejiang, as head of the cabinet-level Hong Kong and Macau Affairs Office.

Autonomy as a necessity?

Many global experts have warned that the new security measures could trigger an exodus of foreign businesses from the city, with some companies shifting operations to Singapore or Tokyo. Already thousands of Hong Kong residents are preparing to emigrate from Hong Kong as the laws take effect. Wealthy residents have reportedly begun moving their funds to other markets in recent days on concerns the new legislation will allow Chinese authorities to seize their wealth. Some 30% of American businesses and at least one prominent Japanese investment bank have signaled their intent to scale down operations in Hong Kong in response to the law.

But many foreign businesses, especially those in the finance sector, may see the new security rules as irrelevant to their operations in Hong Kong. Michael Spencer, Deutsche Bank’s Asia Pacific chief economist, recently told the Financial Times that he doesn’t expect the new law to significantly affect his bank’s operations in Hong Kong. “There may be added scrutiny on payments to Hong Kong, but fundamentally we do not see a reason today to expect any restrictions on capital flows between the U.S. and Hong Kong,” he said.

In some ways, the heightened tensions between the U.S. and Beijing, including the rift over Hong Kong’s economy, may provide a boost to Hong Kong’s capital markets. With U.S. lawmakers pressing for tighter disclosure rules for the nearly 200 mainland companies listed on U.S. exchanges, some of these companies, particularly China’s state-owned enterprises, may opt to exit American exchanges as the friction between Washington and Beijing rises.

Already venture capitalists are warning the Chinese tech companies in which they invested to avoid U.S. listings. Major Chinese tech companies like e-commerce giant JD.comand NetEase, a Chinese online gaming behemoth, are now pursuing secondary listings on Hong Kong’s exchange.

For now, Xi and his allies seem less intent on preserving the golden goose than on keeping their ducks in line.