As hedge fund managers declare victory with the launch of the Shanghai-Hong Kong stock link, don't forget the obvious loser: the city's pro-democracy movement.
For almost seven weeks, the students who have commandeered key streets around Hong Kong have sought modest concessions from Beijing. They probably would've folded their tents long ago if President Xi Jinping had signaled he might, perhaps, maybe let Hong Kongers choose their own leader at some vague point in the years ahead. The angry masses might've even settled for the slightest hint that unpopular Chief Executive Leung Chun-ying might step down early.
But Xi hasn't just held his ground -- he's managed to shift it right underneath the protesters. All it took was saying yes to the long-anticipated Shanghai-Hong Kong exchange link that allows for $3.8 billion of daily cross-border purchases, a limit regulators will increase if the link is a success.
Xi's Communist Party may be clumsy at diplomacy, but it sure knows how to change the subject. Over in Beijing, where Xi is hosting Barack Obama, Vladimir Putin and other Asia-Pacific leaders, the buzz is about China's meteoric rise and how it's reshaping the world -- not its encroachment on Hong Kong's civil liberties. U.S. officials are celebrating a "breakthrough" in a new technology trade pact, rather than praising the city's protesters.
As the global media pulsates with dollar signs and speculation about what might become of the Hong Kong stock link, they're not condemning China for its territorial expansion in Asia, checkbook diplomacy that supports many a rogue regime, or the military arms race it's inspiring. Rather, the talk is of poetry. In a closed-door meeting with Leung on Monday, Xi cited a line from a poem that Chinese emperors used to praise loyal ministers facing rough times. The verse Xi chose -- “strong winds reveal the strength of sturdy grass” -- was his way of patting Leung on the back for standing firm against those pesky protesters. It's also the clearest sign yet that Xi plans to use carrots rather sticks to eclipse the biggest challenge to Beijing's authority since the 1997 handover.
Yet the quid pro quos for opening the international monetary spigot pose risks both to China and Hong Kong.
Some might conclude that this link is all China's gain. After all, speculation has already turned to how much Beijing will increase the daily flow of investment into China's underperforming bourses. Ditto for the next cities that will benefit from this so-called through train, including Shenzhen and Tianjin. But this is Hong Kong's payday, too. Xi just strengthened the city's position as the clearing house for China with its rule of law and a first-world banking system.
For China, there are long-term positives to being included in global stock indices. But welcoming walls of money is no replacement for the economic reform needed to internationalize the economy. That requires bold and steady progress to open the economy, increase transparency and reduce the roles played by state-owned enterprises and the shadow-banking system. As China increases the number of financial products available to retail investors, it should allow some of Hong Kong's higher governance standards to bleed over to the mainland.
But the train goes both ways. Now that Leung has his precious Shanghai tie-up, Beijing is signaling, it's time his government -- and police force -- fulfilled its end of the bargain and sent protesters home. Also, by reminding the business community China is still the proverbial goose laying golden eggs, Hong Kong Inc. has less incentive to push for greater democratic development.
As I've argued before, Hong Kong's tycoons have much invested in preserving the freedom of expression, transparency and legal certainty that make Hong Kong the thriving business center it is. Those who see the anti-Beijing students blocking the streets as misguided nuisances haven't thought things through. In order to maintain its pivotal role, narrow the widening gap between rich and poor and make winners of everyone, Hong Kong needs greater accountability to the people, not less.
(Updates with details of new Sino-U.S. trade pact.)
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