Bloomberg News: Hong Kong's 'Velvet Revolution'

2003-07-08

(Clearwisdom.net) July 9 -- Hong Kong's economy is getting some rare good news. No, deflation hasn't been licked and growth isn't rebounding. Something even better seems to be afoot: democracy, or something bearing an uncanny resemblance to it.

ááá It's never wise to read a single gesture as a sign a government is listening to its people, and Hong Kong is not a democracy. But Chief Executive Tung Chee-Hwa's move to delay today's vote on national security legislation after the biggest public demonstration in 14 years proves people power is working.

ááá Just days ago, Tung was adamant about pushing through ''Article 23'' laws that would muzzle dissent. That was until 500,000 people, one in 14 Hong Kong residents, last week took to the streets in protest. This week, Tung shocked the city's 7 million people by bowing to public pressure and deferring the legislation.

ááá Investors could be well served by democratic forces, or even something approaching them, in post-1997 Hong Kong. Clearly, investors care more about economic fundamentals and Hong Kong's are hardly good. The largest demonstration on Chinese soil since Tiananmen Square in 1989 may encourage Beijing to dump Tung, its handpicked leader. Some new blood could help things.

'Velvet Revolution'

ááá Call it Hong Kong's ''Velvet Revolution.'' Just as Czechoslovakians rose up peacefully against Communism in 1989, Hong Kongers are saying they have little use for Beijing's central planning and repression. If the efforts win any concessions, Hong Kong's beleaguered markets could get a boost.

ááá Tung has fumbled every major challenge thrown his way since 1997, when China resumed control of Hong Kong. He has failed miserably on the economy, and done even worse when it comes to representing the people of Hong Kong. He also was slow to tackle severe acute respiratory syndrome, or SARS.

ááá At the very least, Beijing has received a humiliating setback as it pursues political integration with Hong Kong. The city's residents are all too happy to support economic integration with the mainland, something that got a boost from the signing of a free trade agreement between the two economies last month. On the issue of closer political links, Hong Kongers are balking.

ááá This is a problem for China on many levels. It devastates Beijing's efforts to create a kinder, gentler image in global markets. It creates tension between Beijing and Hong Kong that complicates efforts to woo Taiwan back to the motherland.

Caution for Taiwan

ááá China wants to demonstrate to Taiwan that its ''one-country, two-systems'' relationship with Hong Kong is working. Yet events in Hong Kong can only be seen as a cautionary tale for Taiwan.

ááá Beijing's other problem is more immediate: investors. Companies are rushing to China to harness its cheap land and labor costs and its willingness to look the other way on labor rights and the environment. But institutional investors have been far less willing to go there.

ááá The reason: Scant trust that Chinese officials will allow the free speech and flow of information on which markets thrive. The current dustup in Hong Kong suggests Beijing isn't ready. Hong Kong rejoined China six years ago, but the laws under Article 23
represent the real handover.

ááá It's one of the forces weighing on Hong Kong stocks. The Hang Seng Index is up just 7.20 percent this year, lagging double-digit stock gains throughout Asia. Even deflation-plagued Japan is experiencing a stock rally; the Nikkei 225 Stock Average is up over 15 percent this year.

ááá The ambiguous language of Hong Kong's internal security laws could be used to punish seemingly minor offenses. If a Hong Kong- based economist published a report suggesting China's gross domestic product is overstated, would that be an act against the state? Could an analyst be punished for publishing negative economic forecasts? What about a journalist who gets leaked information about a politician or a company doing dodgy things?

Confidence Test

ááá Investors should watch Beijing for clues about what they can expect to face in the world's most dynamic economy. In Hong Kong, Chinese leaders are faced with a unique opportunity to show global markets they understand that the needs of high-developed, knowledge-based society differ from those on the mainland.

ááá Hong Kong's crisis also is a reminder that China is missing a key economic ingredient: self-confidence. When you think about the world's most vibrant, efficient and entrepreneurial economies, what they have in common is a sense of certainty. Not so much in the success of their policies, as in the belief that right or wrong, their nation and economy will survive intact.

ááá Beijing's insecurity complex sends exactly the opposite message -- that things are too shaky to allow free speech and transparency. Far from being signs of strength, limiting debate and spending so much time and energy on controlling what's said about China in China are signs of weakness.

ááá In Hong Kong, Beijing has the opportunity to show investors it's maturing and becoming more confident. Otherwise, it may have even bigger protests on its hands.