June 15, 2019 / 8:25 AM / a month ago

Breakingviews - Beijing yields to Hong Kong’s financial clout

Hong Kong Chief Executive Carrie Lam speaks during her swearing in ceremony on the 20th anniversary of the city's handover from British to Chinese rule, in Hong Kong, China, July 1, 2017. REUTERS/Bobby Yip - RC121A50D6D0

HONG KONG (Reuters Breakingviews) - Beijing has yielded to Hong Kong’s unique economic status. Carrie Lam, chief executive of the special administrative region, on Saturday indefinitely suspended a bill that would have allowed extradition to the mainland, responding to mass rallies and violent street protests that rocked the city. It’s a defeat for her, and leaves the central government embarrassed. But for the Chinese Communist Party, preserving Hong Kong’s financial role still trumps the desire for more political control.

    Lam took office in 2017, and is considered a reliable Beijing loyalist. Pushing through the extradition bill, however, came from her, she said. Either way, the central government endorsed it enthusiastically as well.

    Yet the strength and breadth of the protests caught both Lam and Beijing off guard. The backlash was not confined to democracy advocates, much less to a radical minority that began calling for independence after the Occupy movement in 2014. It extended to anyone who distrusted the Chinese legal system. In the end, that seemed to be almost everyone.

Some tycoons began moving funds out of Hong Kong to Singapore in advance of the bill’s passage, Reuters reported, a hint of the outflows before the 1997 handover from Britain. And not only did the pro-Beijing camp fail to mobilise against the demonstrations in force – as it did in 2014 - the conservative business community began expressing public doubts about the agenda almost immediately. Financial markets wobbled. Worse still, U.S. politicians threatened to re-evaluate Hong Kong’s unique status, which could affect everything from visas to trade.  

    Hong Kong’s economy was a quarter the size of the mainland’s in the early 1990s. That share has now shrunk to single digits, yet it accounted for about 12% of China’s exports last year. It is also the largest single source of realised foreign direct investment to China, accounting for more than half the total as of the end of last year, plus portfolio flows into its equity markets via the Stock Connect programmes.

    Its stock exchange gives mainland companies an independent channel to international capital outside of New York or London. That allows China to maintain internal capital controls without starving its firms of hard currency or foreign investment. The CCP may close its ears to popular discontent, but Saturday’s surrender - assuming the bill remains shelved - shows it clearly listens to money.  

Breakingviews

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