Hong Kong: The Game Behind the Game

Lost in all the hand wringing about Hong Kong is a larger more important issue: Chinese GDP is in all likelihood zero. China is not just on track to miss, though officially meet, its growth target but miss badly.

Steel and electricity consumption are falling.  Real estate prices have begun falling causing riots among consumers who feel defrauded or that apartments selling at almost $1,000 a square foot were a one-way bet.  Despite these falling indicators the People’s Bank of China continues to pump money into an already saturated market.  In the middle of September, the PBOC injected 500 billion rmb into major state owned Chinese banks.  All the while, Beijing continues to release additional stimulus measures while continuing to insist it will not release a major stimulus package as it did in 2008-2009.

Nothing here bears the hallmark of a healthy economy much less one growing at 7.5%. One source indicated that 7.5% was internally believed to be the number which would maintain enough cash flow to keep the Chinese economy from tipping into a crisis given the poor state of finances.

This matters for one very simple reason.  The implicit agreement between the Chinese populace and the government has always been an acceptance of political repression if the economy was growing rapidly.  If you want to see protests on the streets of every major city in China announce that housing prices have fallen by 50%.  Riots break out over smaller changes to prices and a significant slow down in Chinese growth would break the acceptance of political repression.

Beiing views taking a hard line with Hong Kong as a dress rehearsal for the serious economic problems festering just beneath the surface inside China.  Breaking their part of the agreement of rapid economic growth means needing to enforce the other side of the agreement, even if the Chinese population decides they want to opt out.

Standing up to the student protesters organizing recycling has always had nothing to do with Hong Kong and everything to do with the Mainland.  The self admitted fall in steel, electricity, and real estate prices, are prompting Beijing to see Hong Kong as nothing but the opening act.

Revisiting Hong Kong

I visited Hong Kong two days ago primarily because I had a previously scheduled business meeting but also to walk the streets to witness history first hand. Here are some more thoughts on both details and bigger picture items.

  1. If Beijing isn’t already scared, they should be. The protesters are motivated, organized, and have little to lose by continuing their protests. This is just the type of group that can take on and embarrass the Beijing goliath.

  2. Beijing and Hong Kong seem to be adopting the wait them out strategy and hope they melt back into society never to be heard from again. I am very doubtful this is going to happen. The protesters are motivated and organized. Walk around the streets and everywhere are people helping people. Trash brigades patrol the crowds to pick up trash and place it into the proper recycling bags. First aid is widely available at marked stands and food is distributed by volunteers walking around as well as at marked stations. This is done to keep protesters spirits high but also gain the support of the Hong Kong community. Non-luxury businesses I saw near the protest sights were doing a brisk business from all the foot traffic. The people I talked to away from the protests largely went about their daily business and ranged from tacit understanding to strong agreement with the protesters. The students and organizers seem to understand that this is not going to be a short term battle and that there would be no point in starting the mass protest unless they were in for the long term.

  3. Time is on the side of the protesters not Beijing. The longer this plays out the more pressure Beijing is going to face, both domestically and internationally, to resolve this situation. The more information that gets through, the more Chinese citizens learn about the protests, and the more foreign governments continue to speak out, the greater pressure facing Beijing. The biggest time pressure the protesters face is that their enthusiasm will wane and crowds will fail to materialize. I see mounting domestic and international pressure on Beijng as a bigger long term risk than a decline in crowds to Occupy Hong Kong.

  4. I would love to be inside Beijing and Hong Kong government offices right now to hear the strategy debates. I am beginning to have serious doubts about how unified Beijing and Hong Kong are about how to deal specifically with the Hong Kong protests and the bigger picture questions of potential democratic reforms. While the official Hong Kong government strategy appears to wait out the protesters, I think there is also reason to believe that internally there is some degree of support for the protesters. I believe even in internal discussion in Beijing, there is probably some support for the protesters. As one example, China routinely reduces internet speeds around major political events and national holidays to dial up speeds or attacks VPN services with such force that connections regularly drop. The Hong Kong protests however have seen virtually no change in speed or VPN reliability. I have actually been quite amazed at my ability to stream video of the protests and continue accessing Twitter and other sites. People in China, at all levels of society, know and believe that political change will happen someday in China. I think it is highly likely some of the ongoing strategy discussions are including people pushing for some degree of political liberalization.

  5. The Mainland response to the Hong Kong protests is mixed but most fail to understand what is causing this ambivalence. Read the comments in reported in the media and talk to Mainlanders in private about their aspirations and dreams and you will find they correlate quite closely with the Hong Kong protesters. The difference is this. The Mainland political thinking is pervaded with a sense of fatalism that nothing can ever change and I cannot make a difference so why even try. Working as a business school professor at one of the elite schools in China, I see all the time the extreme aversion to any type of risk students and business people have. No one ever wants to be first to do something and lower paying jobs in state owned enterprises or government with a promotion every two years are preferred for their stability over start ups or foreign enterprises. Talk in hushed tones to almost any Mainlander and they will all talk about China will change someday and become a democratic country that respects people and then qualify it by saying someday when the government tells us it is acceptable. In China people fear the government and do not believe they matter; in Hong Kong people do not fear the government and believe they matter.

  6. Strategically, Beijing is very limited in its options. Except for crossing their fingers and hoping this comes to an end, Beijing has few options. There would be significant back lash in Hong Kong, China, and internationally if significant force was used; however, if they back down in any significant way, they know very well they could be opening the door to greater problems. So far the Hong Kong and Beijing response seems to depend on repeating that the protests are illegal and everyone should go home. I doubt this will succeed in dispersing protests.

I believe this will be a much longer process and protest than is currently expected. As Beijing always wants to talk about democratic development according to the realistic situation, it will be interesting to see if they believe the words they publicly declare or if they are empty mantras.