Economics and finance, Trade and industry, International relations | Asia, East Asia

19 August 2019

With much to lose and little to gain from military intervention, Beijing needs to chart a course to return Hong Kong to normality, Stephen Nagy writes.

For 10 weeks, the protests in Hong Kong have been closely watched by stakeholders in and outside the region. Depending on how Hong Kong protesters and Beijing resolve this crisis, there could be significant ramifications for the global production network and the geopolitical balance of the region and globally.

As 2019 marks the 70th anniversary of the People’s Republic China (PRC) and the 30th anniversary of the Tiananmen Square Massacre, President Xi Jinping is unlikely to resort to force to find a resolution to the standoff.

His key priorities are to highlight his and the Communist Party of China’s (CCP) achievements in returning China to respectability and overcoming the so-called ‘Century of Humiliation’.

Violently or nefariously intervening in Hong Kong would cast a long shadow over his leadership and deepen already sceptical international community views about China. It would also negatively impact China’s twin goals of realising ‘socialist modernisation’ by 2035 and to build “a modern socialist country that is strong, prosperous, democratic, culturally advanced, and harmonious” by 2049.

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Recent troop movement along the Hong Kong border should not be minimised but it does need to be contextualised. It is a strong signal to Hong Kong that leaders in Zhongnanhai are not going to compromise with protestors – but it is also a sign of restraint.

Beijing has deployed a tremendous amount of political and fiscal capital to ensure that the ‘one country, two systems’ model that exists with Hong Kong could be a template for a peaceful reunification with Taiwan. A military crackdown in Hong Kong or a muscular suppression of protestors would virtually eliminate the chance for peaceful reunification, as it would consolidate Taiwanese concerns of what a CCP takeover might entail.

Beijing is conscious that what happens in Hong Kong also has a potential impact on global supply chains. Increased instability could lead financial services to migrate their regional headquarters to Singapore and Tokyo – both of which are noted for their stability, rule-of-law, and good governance.

Supply chains between Taiwan and China would also likely migrate away from the China-centred global production network as investor confidence would be shattered by military or heavy-handed intervention, or both.

Saliently, both would be seen in Hong Kong and globally as a breakdown in Hong Kong’s comparative advantage: a transparent, rules-based legal system that clearly and firmly separates politics from its legal system.

The US-China trade war has already accelerated Taiwan to more proactively promote its New Southbound Policy, and violent intervention in Hong Kong would certainly hasten the rate of exodus from the China-centred global production network by Taiwanese businesses.

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Japanese, South Korean, and other manufacturing powerhouses whose businesses are intimately intertwined with Taiwanese electronic chip makers would certainly follow Taiwan’s lead by re-centring their supply chains for global export to Southeast and South Asia.

Japan began this process in the wake of the 2010 rare earth embargo and accelerated the transition after the anti-Japanese riots in 2012 that followed after the nationalisation of the Senkaku Islands.

South Korea has also shifted some of its supply chains after the punitive economic measures taken by Beijing on Seoul following the 2017 THAAD instalment.

The US-China trade war has quickened the migration of both Japanese and South Korean manufacturers to Southeast Asia. Further breakdown of Hong Kong’s Basic Law through Mainland intervention would further accelerate this migration.

Zhongnanhai is reluctant to let this situation cascade. Party leaders there clearly understand Hong Kong’s role as a global financial centre and its position as the major financial centre for capital to move freely outside of China. Intervening in Hong Kong would complicate China’s strategic efforts to internationalise the Renimbi, a key determinant in the global expansion of Xi’s signature Belt and Road Initiative.

While distant from the protests, Ottawa, Canberra, and Washington are laser-focused on Beijing’s response to the protests. With an estimated 300,000 Canadian, 100,000 Australian, and 80,000 US passport holders in Hong Kong, violence could result in an exodus of unmanageable numbers of citizens attempting to return to their countries of citizenship.

This would not just be a logistical challenge, but would also saddle each state with the challenge of reintroducing them into each country’s respective economies, housing markets, medical systems, and school systems.

For Vancouver, Toronto, Seattle, Sydney, Melbourne, and other cities that have benefited and had their property market restructured over the past decades due to the influx of monies from Hong Kong immigrants and migrants, the prospect of receiving a wave of returning citizens is daunting.

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It is unclear if this exodus would be limited to Hong Kong. Shenzhen, Shanghai, Beijing, Nanjing, and other first-tier cities could also witness an outward flow of skilled professionals. This would put a dent in China’s Made in China 2025 initiative to transform China’s manufacturing base by focusing on ten high-tech industries including electrical cars, new energy vehicles, the Internet of Things and telecommunications, advanced robotics, and AI.

In this scenario, it would not just be the outflow of people that would be destabilising to Hong Kong and China, but also the associated brain drain and capital that would go hand-in-hand with large numbers of people returning to their home countries for fear of an expansion of any crackdown on Hong Kong.

With so much to lose and so little to gain from military intervention, Beijing needs to chart out a course to return Hong Kong to normality. Not doing so leaves Hong Kong and the region in a state of geopolitical Jenga, teetering on the edge of a transformative geopolitical mess that will have severe repercussions for all stakeholders.

The consequences of Hong Kong faltering could destabilise the Mainland economy and the CCP’s political centrality, both of which would have unforgiving global economic impact.

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