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Oct. 1 is an important holiday in China, commemorating the founding in 1949 of the People's Republic. It's always marked by pomp, ceremony, concerts and fireworks. And this year, in Hong Kong, it is likely to add more fuel to already incendiary pro-democracy demonstrations that have brought the busy financial and commercial centre to a standstill over the past five days.

What happens next could have serious repercussions for Hong Kong, its economy and for China itself. A violent crackdown by Beijing could trigger an exodus from capital markets, drive down frothy property prices, scare off well-heeled investors and tourists, slash spending and plunge the region into recession.

If all that doesn't present enough of a worry to autocratic Chinese President Xi Jinping, who has shown no tolerance for such public displays of dissent in the rest of China, there is also the lasting damage that would be done to Hong Kong's standing as a major financial centre and the natural gateway for capital flowing to and from mainland China – the reason Beijing acquiesced to leaving Hong Kong largely alone in the first place.

Hong Kong is where Chinese companies have typically gone to raise money and where policy makers have tested many of their financial, market liberalization and other reforms crucial to their growth strategy.

If Beijing resorts to a heavy-handed response, international players eager to do business from a stable and relatively secure base where the rule of law prevails may well decide Hong Kong can no longer offer such an environment. Already, several companies have been eyeing moves to the safer-looking confines of Singapore.

The latest protests have been brewing for some time. They were led at first by students, who were later joined by thousands of other activists who have long demanded more say in political affairs, which is what they assumed Beijing had promised in the deal that restored Hong Kong to Chinese control in 1997 after 150 years of British rule.

The protesters object to what they see as Beijing's growing interference in Hong Kong's affairs, including its Aug. 31 decision to choose the only candidates who will be allowed to run in the 2017 election for the top political position of chief executive. And they are eager to use the National Day holiday, when many mainlanders come to the city for a little fun and shopping, to highlight their demands both for democratic choice and the resignation of the unpopular, Beijing-picked chief executive, C.Y. Leung.

Police initially tried to disperse the peaceful protests with tear gas, batons and pepper spray, before backing off. Now, the fear is that Beijing will intervene directly if the tens of thousands of demonstrators don't allow Hong Kong to get back to making money.

Mr. Xi insists that his government fully intends to "unswervingly implement the guidelines of 'one country, two systems' and the [Hong Kong] Basic Law and steadfastly safeguard the long-term prosperity and stability of Hong Kong and Macau," as he told a gathering Communist policy makers. So he is plainly aware of the stakes.

As it is, Hong Kong was facing tougher economic times before the protests erupted. The economy contracted 0.1 per cent in the second quarter, although forecasters are still predicting modest expansion for 2014. Capital Economics, for instance, is sticking with its forecast of 2.5 per cent annual growth, rising to 3.5 per cent next year.

"However, the risks are firmly to the downside," Gareth Leather, Capital Economics' Asia economist, adds in a note to clients. Indeed, they are.

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