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Why China is not desperate to meet Hong Kong demands

While Hong Kong seeks change, the Chinese economy is looking peaky. EPA

Obviously, many Hong Kongers are not happy with the way their territory has been governed since it was returned to China in 1997. The recent protests have escalated to such a scale that the central Chinese authority has referred to it as an “illegal” mass demonstration, the likes of which is totally forbidden in the mainland.

In the 1980s Margaret Thatcher and Deng Xiaoling both agreed to hand over Hong Kong to China under the basic principle of “one country, two systems”. Since 1997, Hong Kong has duly enjoyed a status of “special administration region” (SAR), which is distinctively different from any of the 31 province-level administrative units in mainland China.

Hong Kong has its own financial, business and press autonomy, and its people are allowed to do many things that are strictly prohibited for mainlanders, including prolonged protests and occupations in city centres. What do the demonstrators want? The vast majority are college students, who have little understanding of, or no desire to understand mainland China, its people or the Communist party. They have have been educated to believe that democracy is the only way that Hong Kong will prosper and “one person one vote” is the only solution for realising the goal.

What Beijing wants

From the mainlanders’ perspective, whatever happens in Hong Kong has nothing to do with them, as long as Hong Kong is a part of their motherland. But this is not the view of the ruling party, which wishes to control Hong Kong – that is, whoever is governor must be loyal to the central state and the party. As a result, the past and current governors have largely been hand-picked by Beijing, although the principle of “Hong Kongers governing Hong Kong” has been upheld. This is still different from the British colonial period, however, when all 28 Hong Kong governors were British and directly appointed by the British monarchs.

Yet many Hong Kongers, especially the youngsters, want the current governor to step down and to use the “one person one vote system” to elect future governors. Whether and when the central government will bow to the demonstrators’ demands is unknown. What we can say is that Beijing has clearly been irritated by the demonstrators but appears to have no quick and effective solution to the problem.

Not quite the jewel of old

Parts of the mainland have caught up with Hong Kong. EPA

It would be easy to assume that the unstable situation in Hong Kong will have an adverse impact on China’s economic growth and development. But it is important not to overstate the importance of Hong Kong nowadays in comparison with its past influence on the mainland. Its relative importance has changed over time. On Hong Kong’s border, the city of Shenzhen has been doing spectacularly well. Northward, the Zhujiang river delta is now prospering by itself without Hong Kong’s help. In the 1980s and 1990s, China could not develop fast without Hong Kong’s capital and expertise, today, Hong Kong cannot prosper without China’s investment and tourism.

Source: GDP 2013 figures

What does this mean? It means that the mainland, especially the government, is not desperate to meet Hong Kongers’ demands. The overwhelming top priority of the central government is economic growth and social development. The year 2014 is probably the most challenging for China in a decade. As the country has turned its attention away from extensive growth to intensive internal development, the growth rate has slowed down to merely 7.5%, compared to an average growth rate of nearly 10% for more than 20 years before the world financial crisis. Furthermore, foreign direct investment and exports have declined for the first time in many years, having grown annually at 10% and sometimes even upwards of 20% in the past.

Slow growth is not a real problem itself as long as it can still generate sufficient employment. The real problem is whether slow growth can also improve China’s growth quality, which depends on the development of high-tech industries, high value-added services, and faster growth in the less developed regions.

House of cards?

There are signs that China has made some good progress in that direction, but the current situation is not at all rosy. The housing industry has been one of the most important industries in China for high growth, but market distortion, corruption and government land sales policies have blown the market into an uncontrollable bubble. On the one hand, house prices are too high for the low-income people. On the other hand, the rich and middle-class people have hoarded tens of millions of houses unoccupied.

Hot houses? Real estate fair shows off new developments in Qingdao, eastern China.

Unfortunately, instead of trying to contain the housing bubble, the central bank has allowed people to take their first mortgages with a 30% discount in interest payments, irrespective of the number of houses they have bought. The sudden and unexpected policy shift implies that China must have faced tough challenges to meet its economic growth target this year without stimulating the foamy housing market again. The country also knows it has a major problem with inefficient energy use, which again the authorities are looking to address.

It comes at a time when China’s debt situation is deteriorating sharply. As the latest “Geneva Report on the World Economy” said last week, “in China the ratio of total debt ex- financials to GDP has increased by a stellar 72 points to a level that is far higher than in any other emerging economy …

"A number of emerging economies reacted to the global crisis and the consequent slowdown in exports by switching from export-led growth to domestically led growth, engineered by a strong expansion in domestic credit, most noticeably in China.”

Though the report acknowledged that Chinese debt was still not as bad as certain Western countries, including the UK and US, it called the combination of slowing growth and rising debt “poisonous” and identified the country as being at the highest risk of a crisis among emerging markets.

In my view the debt is less of an issue than the housing market distortions and energy inefficiency. The central has been trying hard not to allow more fast debt expansion. Earlier this year it gave the local authorities more power to collect revenue and to issues local bonds. This aims to force them to take their own responsibility rather than just relying on the central finance to bail them out if they get into uncontrollable difficulties.

Consequently local authorities have been far more careful than before in making investments decision. At the same time, most local debts have been used for infrastructure investments, meaning that much of them have not been wasted and sooner or later will have been paid back.

The trouble in Hong Kong may just be unfortunately coinciding with the internal economic challenges in China as a whole. But the new Chinese government’s anti-corruption efforts have received popular support from the people, which has helped to keep sentiment buoyant on the mainland. It may not be an easy year for China, but the political and economic problems are likely to be short-lived. They are unlikely to change the course of the country’s determination to achieve its long term development objectives.

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