China Herald: Special Administrative Region

The ongoing conflict between Hong Kong protesters and the central government in Beijing can still move into different directions, writes financial analyst Sara Hsu in The Diplomat. But a violent crackdown would be worst of three scenario´s, not only for the Hong Kong protesters, but also for the global economy, she argues.

Sara Hsu:

Third, Beijing may use violence, perhaps real bullets, to crack down, in a Tiananmen-like confrontation. This is the least desirable outcome for both Hong Kong and Beijing, as it would stifle relations between the two regions for some time to come. It would dampen trade and investment with Hong Kong, harm the stock market, which contains a large percentage of Mainland-based companies, and put the Shanghai-Hong Kong Stock Connect program on ice. Currently, trade from the Mainland into Hong Kong measured at $384.8 billion in 2013, direct investment from Hong Kong into the Mainland weighed in at $73.4 billion in 2013, and the market capitalization of Mainland firms listed in Hong Kong amounts to $1.8 trillion. Disruption of these financial flows would cause a serious economic shock to both regions.

Further, the wider economic implications of a crackdown should also be considered. A shock to the China/Hong Kong trade nexus, combined with an arrest in direct investment into the Mainland, would sharply impact the rest of the world, cutting off access to imported goods from China, and rerouting export channels to Shanghai, creating congestion and reducing exported goods to China. A crackdown would also call for an international response, possibly in the form of a trade embargo, as has been implemented against Russia. This would certainly disrupt trade, and would weaken economic ties between China and the West.

Therefore, the first two options are best. The protests are expected to come to a head on October 1, National Day, which celebrates the founding of the People’s Republic of China. The world is watching with bated breath to see whether the Hong Kong protests end without violence, for if they do not, there will be serious ramifications across the globe. The reality is that Beijing cannot approach the Hong Kong issue with a hammer-hard line; the line must be softened for this Special Administrative Region, or else the economic repercussions could be severe.

More in the Diplomat.

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