Hong Kong – Beijing Chipping Away at Autonomy

The Beijing government’s further encroachment on the autonomy that Hong Kong enjoys as a special administrative region of China will continue to have a mildly negative effect on political risk in what is otherwise one of the most attractive business climates in the world. Chinese President Xi Jinping’s use of corruption prosecutions to side-line political rivals within the mainland political structure and the bellicose rhetoric directed at Taiwan is reminiscent of an older style of politics that has understandably raised questions about the Communist regime’s commitment to the “one country, two systems” model that underpins Hong Kong’s special status.

The local government headed by Chief Executive Carrie Lam has endorsed a change to the Basic Law, which serves as Hong Kong’s de facto constitution, that would not only outlaw displays of disrespect for the Chinese national anthem—such as the loud booing that typically accompanies the playing of the song at soccer matches—but would also prohibit the use of the anthem for commercial purposes and the alteration of either the music or lyrics for any reason. In addition, lawmakers who fail to sing the anthem at official events could face fines, imprisonment, or both, if they fail to provide a reasonable explanation.

The local government’s capitulation to Beijing’s directive to alter the Basic Law is a clear violation of the spirit of the “one country, two systems” model. The opposition response has so far been relatively muted, but the potential for a backlash will increase once the anthem law is approved by the pro-Beijing majority in the Legislative Council. In that regard, local authorities face a difficult decision in April, when sentences will be imposed on the leaders of the “Occupy Central’ protests that erupted in 2014. The defendants face up to nine years in prison for various public-order offenses. A heavy sentence could have a chilling effect on domestic dissent, but it might galvanize mass demonstrations of solidarity that create a high-stakes political standoff for the Lam administration.

There is little danger that a groundswell of popular opposition might pose an immediate threat to Lam’s position, but she would likely suffer the same fate as her predecessor, C. Y. Leung, who failed to secure Beijing’s endorsement for a second term in 2017, if she cannot manage discontent to the mainland government’s satisfaction. Leung’s political downfall was also attributable to a significant erosion of his popular support, a weakness that Lam is hoping to avoid by pursuing an ambitious land reclamation program that holds the potential to boost economic growth in the near term and provide a long-term solution to a housing shortage that is a source of considerable discontent.

The effects of the China-US trade war are already showing through in reduced domestic spending and slower trade growth, creating a disincentive for Hong Kong businesses to invest. If China and the US fail to resolve their trade dispute, annual real GDP growth is likely to decelerate once again in 2019, falling below 3% for the first time in three years.

Since 1979, The PRS Group Inc., has been a global leader in quant-based political and country risk ratings and forecasts. This commentary represents a sneak peek from our upcoming political risk reports. For more information please contact us at (315) 431-0511 and sales@prsgroup.com, or explore a subscription to PRS Online and/or ICRG Online today to receive political risk updates.

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