How my views on Hong Kong’s future have advanced | USAEMALL.com

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer is a faculty member at Yale, formerly chair of Morgan Stanley Asia, and is the author of ‘Accidental Conflict: America, China, and the Clash of False Narratives’

Controversy swirls over the future of Hong Kong. I played a small role in sparking the recent debate, writing 16 months ago: “It pains me to say Hong Kong is over.” Since then, part of the story has become different even if much of the longer-term trend remains intact.

Significantly Hong Kong bears little resemblance to its former self. The 50-year interregnum following the handover of 1997 from Great Britain to the People’s Republic of China has been cut in half. A Special Administrative Region on paper, Hong Kong is now just another big Chinese city.

Yes, it brings a unique pedigree to its new identity that other Chinese cities do not share. Steeped in the heritage of a former British colony for more than 150 years, Hong Kong’s well-developed institutions and market structures had long set it apart from those that can be found almost anywhere in the world, especially in mainland China. But that is what is now on a fast-track to becoming “over” — a word I do not take lightly.

At the forefront is a pivotal transition in governance. Intolerant of a growing democracy movement, Beijing has quashed the possibility of universal suffrage that was promised in Hong Kong’s constitution, or Basic Law. Under new national security strictures, Hong Kong’s once cherished rule of law, the crown jewel of its special autonomy, is now in tatters. Today, Hong Kong’s rule of law is made in Beijing. And it has been reported this week that Beijing national security authorities have carried out an joint operation with police in Hong Kong.

The dramatic shift in Hong Kong’s political underpinnings was but one of three considerations in my argument. A second point was the state of its economy, especially its tight linkages to the ups and downs of the Chinese economy. As China goes, so goes Hong Kong.

The numbers speak for themselves: in the 13 years ending in 2024, a 3.7 percentage point slowdown in average Hong Kong GDP growth to 1.5 per cent (from its 5.1 per cent pace over 1980 to 2011) is virtually identical to a 3.8 percentage point deceleration in the growth of the Chinese economy over the same period. The two economies are joined at the hip.

In the face of China’s ongoing growth struggles, the chances of a spontaneous revival in Hong Kong’s economy are exceedingly remote. Without recapturing its once impressive growth mojo, many of the economic struggles of the city are likely to endure.

Third, I argued that Hong Kong’s trade-dependent economy would suffer from being trapped in the crossfire of the US-China conflict. This is one aspect of my argument that now deserves rethinking. Driven by US President Donald Trump’s tariff war, the global trade cycle is turning down as expected — especially in Asia where economic linkages are so vital for Hong Kong. But this outcome has not trapped Hong Kong as I had originally suspected.

Instead, Hong Kong has benefited from the more powerful strain of financial decoupling between the US and China. This development is playing to the territory’s advantage as China’s international financial centre, spurring a new wave of capital raising by mainland companies and boosting investor sentiment in the face of the growing risks of a “sell-America” rejection of US dollar denominated assets. While the US-China conflict is a negative for Hong Kong’s real economic underpinnings, so far, the opposite has proven to be the case for its financial sector.

Reflecting this latter development, the Hang Seng index has surged 60 per cent off its January 2024 lows, outpacing the 21 per cent increase in China’s CSI 300 Composite index over the same period. Never mind that the HSI remains 22 per cent below its early 2021 highs, this resurgence has been taken by many — especially Hong Kong’s political punditry — as a powerful repudiation of my wildly unpopular thesis that “Hong Kong is Over.” 

Yes, it’s quite possible that the Hang Seng might continue to outperform, especially if the forces of Sino-American financial decoupling intensify. Indeed, I have little doubt that if a vote were held today, the US Congress would endorse a delisting of Chinese companies from US stock exchanges. But to repeat, there were three legs to the stool of my negative case for Hong Kong. With two of the legs still wobbly, at best, leaning more on the financial leg hardly makes for a stable stool.

That doesn’t mean Hong Kong isn’t special. Like its larger neighbours in the Greater Bay Area — Shenzhen with its technology, Guangzhou with its advanced manufacturing — Hong Kong’s role as China’s major international financial centre is certainly quite special. Just like any other big Chinese city.