New Flash Point between Hong Kong and China

The Occupy Hong Kong Movement was sparked by Beijing's announcement of rules for the popular selection of Hong Kong's Chief Executive in 2017.   Essentially Beijing would appoint a 1200-person committee that would vet the candidates and present 2-3 that would be on a ballot for Hong Kong citizens to chose among. 

This bristles against the Hong Kong democrats, who want to freely choose their next leader.  They argue Beijing's plan violates the "one-man one-vote" principle.  Protest posters in Hong Kong mocked Beijing by showing pictures of a deer and claiming it was a horse. 

While the investors are focused on the upcoming MSCI decision on whether to include China's A-shares in their global indices, the mutual recognition of investment funds,  and whether the IMF will include the yuan in the SDR basket, heightened tensions with Hong Kong could reveal the other side of the contradiction between the modernizing economy and arcane political institutions.   First, June 4 commemorates the anniversary of the Tiananmen Square crackdown and there are expected to be large demonstrations in Hong Kong.   Second, toward the middle of the month, Hong Kong's legislature is set to vote on the political reforms and the early indication is that it will not pass with the needed 2/3 majority. 

The Hong Kong legislature has 70 members.   A 2/3 majority would require 43 affirmative votes.   There are 27 members of the pro-democracy block that could vote against the reforms.  If a 2/3 majority is not secured, it is not clear what happens next.  There will be calls for the current Chief Executive Leung Chun-ying to step down, but this would likely aggravate the political situation. 

Occupy Hong Kong did not receive much support from other parts of China.  It was not only that the protesters did not reach out to the mainland, but also because many saw Hong Kong's demands as unrealistic and an expression of Hong Kong exceptionalism, which they disdain.  By many measures, Hong Kong citizens enjoy greater liberties than others in China.   Free election of the chief executive is not a right enjoyed by Chinese citizens above the village or small town level.

It is interesting to note that US citizens do not directly elect the President either.  They vote for an electoral college.  The electoral college is directly elected now, but this was not always the case.  Previously, many state legislatures picked the electoral college representatives, leaving the presidential selection out of the hands of the citizens.  Moreover, in the early days of the republic, only white men with property had the right to vote. 

Whatever democracy or a representative form of government means, it seems to be a work in progress.  The lack of political reform in China is a potential source of vulnerability.  The current anti-corruption campaign has drawn popular support, even though it is widely recognized to target adversaries of President Xi. 

The Hong Kong dollar's peg is secure.  We see no signs that this will change any time soon.  The Hong Kong stock market is lagging behind the Shanghai and Shenzhen Composites, but who isn't.  Already this year the Shanghai Composite is up over 49% and the Shenzhen Composite is up almost 107%.  The Hang Seng is up nearly 17% and its China Enterprise Index (of mainland base companies) is up a little more than 19%. 

Meanwhile the booming mainland stock rally appears to be diverting funds away from Hong Kong's Dim Sum bond market, the offshore yuan bond market.  Issuance in the first five months of the year is running at about half the level of a year ago, with CNY7.6  bln issued so far.  Chinese corporate issuance is about 1/10 of last year's issuance and the lowest in five years.   Hong Kong-based investors have poured CNY23.8 bln into Chinese mainland shares since the HK-Shanghai Connect was launched late last year.   

The Hong Kong Monetary Authority estimates that yuan deposits in its banking system fell by CNY49 bln  in Q1 from CNY1 trillion at the end of last year.  In order to attract yuan deposits, local banks have had to raise the yuan interest rates it charges.  

New Flash Point between Hong Kong and China New Flash Point between Hong Kong and China Reviewed by Marc Chandler on June 01, 2015 Rating: 5
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