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Westlake Legal Group > China  > Hong Kong’s Status as Neutral Ground at Risk as China Asserts Power

Hong Kong’s Status as Neutral Ground at Risk as China Asserts Power

In a part of the world familiar with conflict, dislocation and ruthless ideological extremism, Hong Kong has long beckoned as an oasis of stability.

It has prospered on the strength of its proximity to mainland China — close enough to be a base for investors capitalizing on China’s development, and still beyond reach of the authoritarian hand of the Chinese Communist Party.

It has served as a bridge between two rival powers nursing mutual suspicions, the United States and China. It is Chinese territory yet governed by a legal system inherited from the West, and intertwined with the global financial system.

But now Hong Kong’s status as neutral ground between mainland China and the outside world is being threatened by a pair of momentous confrontations. As President Trump increases tariffs on Chinese goods in his trade war, the value of Hong Kong as a hub for commerce is being diminished. And as protesters filling Hong Kong’s streets accuse China of breaching a deal that was supposed to protect the territory’s democratic norms, the endurance of its semiautonomous status appears in doubt.

With geopolitical and ideological friction between China and the United States intensifying, some say the space for a place like Hong Kong is disappearing.

“We will see a different Hong Kong,” said Lynette H. Ong, a China expert at the University of Toronto. “The very reason for Hong Kong’s existence — the rule of law, respect for the police, for public institutions, respect for the judiciary, the bureaucracy — everything has been eroded.”

On Sunday, three of Hong Kong’s main commercial districts were engulfed in thick clouds of tear gas as tens of thousands of pro-democracy demonstrators battled the police in some of the territory’s worst unrest since the protests began. A few protesters threw firebombs at the police. Some chanted, “Expel the Communist Party, free Hong Kong!”

The protest was an open challenge to the party just two days before China celebrates 70 years of Communist rule on the mainland. Even larger demonstrations in Hong Kong aimed at upstaging the festivities in Beijing are expected on Tuesday, with fresh clashes with the police likely.

ImageWestlake Legal Group merlin_157239561_173662e2-cf50-4827-a25e-a98a02d00505-articleLarge Hong Kong’s Status as Neutral Ground at Risk as China Asserts Power Xi Jinping United States Shenzhen (China) Lam, Carrie (1957- ) International Trade and World Market Human Rights and Human Rights Violations Hong Kong Protests (2019) Hong Kong Great Britain fitch ratings Economic Conditions and Trends Dealogic PLC Communist Party of China China

The People’s Liberation Army marching in a Hong Kong ceremony this year marking the 22nd anniversary of the end of British control.CreditKin Cheung/Associated Press

Twenty-two years ago, as Britain handed its erstwhile colony back to China, cautious optimism prevailed that Hong Kong’s special status would endure. Beijing pledged adherence to a doctrine known as “one country, two systems” and asserted that its “ultimate aim” was universal suffrage to elect the territory’s leader. It promised that Hong Kong’s traditional freedoms would be protected for the next half-century.

Surveys showed that a majority of Hong Kong residents were happy about the handover, which transpired on July 1, 1997. Business leaders exuded confidence that the territory’s rules-based regulation, independent courts and freewheeling press would persist. Hong Kong would return to China, yet retain its status as an open, global metropolis.

“There’s no lack of confidence,” Nellie Fong, a partner in the American accounting firm Arthur Andersen and a member of the incoming government’s cabinet, told The New York Times as the handover approached. “What Hong Kong people regain on July 1 is our own identity.”

Hong Kong’s port, once the world’s busiest, now handles less container shipping than four other Chinese cities.CreditLam Yik Fei for The New York Times

The British Empire had seized Hong Kong in 1841 as it pursued retribution for a lopsided balance of trade: Britain was purchasing vast quantities of tea and silk from China, but China was buying little in return. Britain deployed naval power to force China to accept opium shipped from colonial India, capturing the island of Hong Kong as a military and commercial outpost.

Over the next 150 years, Hong Kong was a refuge for Chinese dissidents and those fleeing upheaval in China, especially after the Communists took power in 1949. It became the linchpin of trade between China and the rest of the planet, swelling into the busiest port on earth.

As the handover approached, China was seeking entry to the World Trade Organization, a step it would achieve in 2001, gaining greater access to world markets. China was also preparing its largest state-owned companies to go global. Hong Kong’s impressive port offered a convenient pathway for trade. The banks and trading houses clustered in its gleaming skyscrapers provided a way to secure foreign money.

The optimism about Hong Kong’s future was premised on the notion that China had to respect its ways or risk undermining the value of the territory it was reclaiming.

Beijing also hoped that Hong Kong’s prosperity would validate China’s mode of governance, in which politics are a distraction to economic progress. The party would govern Hong Kong through a loyal elite, while tapping the territory’s capital markets and professional ranks to advance China’s ambitious development plans.

Success in Hong Kong would be leveraged to court reunification with Taiwan, the self-governing island that China claims as part of its territory.

Some local leaders fretted that their interests were subordinate to Britain’s determination to close the book on its colonial adventures.

“The British did not give Hong Kong people a choice,” said Anson Chan, who was Hong Kong’s chief secretary — the second-highest position in the territory’s government — during and after the handover. “There was a great deal of trepidation. Even among the business sector there was skepticism, because, essentially, you were turning over Hong Kong to a sovereign power whose philosophy, ideology and everything else was so totally different.”

Many Westerners expressed hope, however, that Hong Kong would help change China rather than the other way around, serving as a conduit for free enterprise and democratic ideas. Some maintained that global commerce would prove decisive. “Constructive engagement” would tether Chinese fortunes to world markets, and that would require liberty.

“There is no firewall between economic freedom and freedom in its many other dimensions,” Lawrence H. Summers, who was deputy Treasury secretary, declared in Hong Kong before the handover. “The free flow of information, the ability of people to remain free, to enter into transactions, to speak out: These are all the essential elements of free markets and a strong financial system.”

As Britain’s last governor of Hong Kong, Chris Patten, officially transferred power back to China, he asserted that the city’s principles were immutable.

“They are universal values,” Mr. Patten said. “They are the values of the future in Asia as elsewhere, a future in which the happiest and the richest communities, and the most confident and the most stable, too, will be those that best combine political liberty and economic freedom as we do today.”

For a time, these competing hopes — those of the party and the West — coexisted in a delicate tug-of-war, allowing Hong Kong to thrive.

The skyline of Shanghai, which the head of a Hong Kong hedge fund said “will become the pre-eminent financial center.”CreditLam Yik Fei for The New York Times

Xi Jinping had other ideas.

After he ascended in 2013, the new Chinese president delivered a profound change in his country’s engagement with the world. He used China’s growing economic clout as impetus for an increasingly muscular foreign policy.

Under his leadership, China has sought to dominate new markets, projected power around the globe and redoubled the Communist Party’s control of the political sphere. He has crushed dissent while presiding over the mass imprisonment of minority Uighurs in the western region of Xinjiang. He enshrined Xi Jinping Thought as party ideology, scorning democracy and liberalized economics as decadent Western exports.

Mr. Xi’s vigilance against threats to party authority also appears to have altered Beijing’s assessment of Hong Kong. Its commercial value was now discounted by its potential as a hotbed for dangerous free expression and a base of subversion against the party’s rule on the mainland.

“Xi Jinping has tightened his control over Hong Kong,” Sally Chan, 30, an investment bank clerk, said as she marched toward government offices during the demonstrations on Sunday. “The government overlooks the rule of law now. Police brutality is everywhere. We have to be careful not to reveal our identity to the police.”

Hong Kong’s worth also came in for re-examination after the global financial crisis of 2008. Western bankers — some based in Hong Kong — and officials from Washington had long lectured Beijing about the need for China to lift restrictions on the movement of money. But the crisis exposed the deficiencies of the Western system.

“The current leadership under Xi Jinping is far less interested in learning the lessons of capitalism from Hong Kong,” said Rana Mitter, director of Oxford University’s China Center. “Hong Kong is seen as a more anomalous and troublesome place that needs to be sorted out. It’s no longer seen as a golden goose.”

Part of the change reflected the reality that Hong Kong was no longer the primary gateway to China. China was building road and rail networks while modernizing its ports, eliminating the need to ship through Hong Kong. Today, Shanghai, Shenzhen, Ningbo and Guangzhou each handle more container traffic than Hong Kong, according to the World Shipping Council.

Shanghai’s stock market is now the leader for initial public offerings by state-owned Chinese companies, overtaking Hong Kong a decade ago.CreditLam Yik Fei for The New York Times

By 2009, the dollar value of initial public offerings for state-owned Chinese companies on Shanghai’s stock market was greater than those in Hong Kong, according to Dealogic, a financial data company. “Hong Kong is no longer critical,” said V-nee Yeh, chairman of Cheetah Investment Management. “Shanghai will become the pre-eminent financial center over Hong Kong.”

The trade war threatens to further diminish Hong Kong’s status as a center of commerce. Mr. Trump has exhorted American companies to abandon China and make their products elsewhere. Economists say such talk is overheated. The global economy revolves around two foundational forces — China’s unsurpassed capacity to make things, and Americans’ insatiable appetite for buying things. Yet even a marginal movement of factory production out of China challenges Hong Kong’s place as a financial and logistics center.

A Shanghai suitcase factory. President Trump’s calls for companies to move production outside China threaten to reduce Hong Kong’s clout as a commercial hub.CreditLam Yik Fei for The New York Times

Hong Kong’s economy is already contracting amid fears of a full-blown recession. Fitch Ratings downgraded Hong Kong’s credit this month out of concern over China’s increasing role in the city’s affairs. Moody’s followed, asserting that “the ongoing protests reveal an erosion in the strength of Hong Kong’s institutions” and “undermine Hong Kong’s credit fundamentals by damaging its attractiveness as a trade and financial hub.”

In Washington, Mr. Xi’s authoritarian proclivities and global ambitions have silenced talk of constructive engagement with China, replacing it with hawkish warnings of a new Cold War. That has narrowed the space for a neutral Hong Kong. The huge protests of the past three months have worsened the tension. American politicians from both major parties have voiced support for the protesters while Chinese officials have hit back, angrily accusing them of encouraging street violence to block China’s rise.

The demonstrations were initially spurred by anger over a proposed bill that would have enabled criminal suspects to be extradited to the mainland, where justice is opaque. But even after Hong Kong’s chief executive scrapped the bill, the protests endured with a broader goal of democratic representation.

Video footage of police officers attacking demonstrators has enraged the public, provoking accusations that local security forces are acting with no public accountability, like those on the mainland. The police actions have especially alienated younger people, many of whom view Hong Kong as a distinct place and sympathize with calls for independence.

“Everyone is very clear about what China’s system is like,” said Yoyo Chan, a 17-year-old student. “Cruel things can happen there, such as concentration camps, and it’s all frightening. Even before the extradition bill was drafted, a few booksellers in Hong Kong had disappeared into China. In a place like Hong Kong, where we have freedom of speech, we don’t want to lose things integral to us.”

Within the business world, the perception that Beijing has brazenly asserted itself is sowing fears that Hong Kong’s identity as a neutral ground is in danger.

“Hong Kong is a good place for business,” said Trevor Ma, 31, founder of Gethemall, an online clothing store. “But the most important thing is freedom. The atmosphere should not just be one where we’re getting enough money. We should be able to say anything without threat. That’s not the case in Hong Kong right now.”

Mostly, he is galled by the creeping sense that China is trying subsume Hong Kong.

“Most Hong Kong people don’t want to be integrated with China at all,” he said. “If Hong Kong is not different from China, why would I stay?”

A shopping mall in Beijing. “Most Hong Kong people don’t want to be integrated with China at all,” said Trevor Ma, the founder of an online clothing store.CreditLam Yik Fei for The New York Times

In recent weeks, Beijing has dialed up its propaganda channels, portraying the demonstrators as terrorists who are manipulated by foreigners while broadcasting footage of paramilitary exercises in Shenzhen, with the implication that those forces could be dispatched to Hong Kong.

Most experts assume that Beijing will avoid substantial bloodshed, lest it spook financial markets and worsen China’s economic slowdown. But China can stop well short of unleashing troops and still end Hong Kong’s status as a bridge to the West.

The leadership in Beijing and the demonstrators in Hong Kong are dug in, limiting room for compromise.

During Sunday’s protests in Hong Kong, many participants described a violation of trust, with the crackdown on the demonstrations prompting a basic reassessment of the legitimacy of local authority.

Geography seems to have been reconfigured, with mainland China now closer than ever.

“When we were children, our parents always told us to seek out the police when we are in trouble,” said Stephanie Chung, 21, a student at Open University of Hong Kong. “But having seen the police behave so brutishly has been traumatizing. You wonder if one day they will send us back to the mainland to be prosecuted.”

She was standing near the Bank of China tower in downtown Hong Kong. A Chinese flag fluttered in the sky, as wisps of tear gas drifted in the wind.

“Hong Kong has become more alien to me,” said Vincent Tong, 27, a trader at a local financial firm who was also marching on Sunday. “If we fail this time, Hong Kong will be doomed. I don’t want our way of living to become the same as those living in China.”

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