As Hong Kong’s rule of law descends into something more like a police state, the Chinese region’s financial markets may be more important than many demonstrators realize.
By Wednesday the Hang Seng Index, sort of a cross between Toronto’s TSX Composite and New York’s Dow Jones Industrial Average, was down about four per cent amid a week of increasing violence.
A four per cent decline over three days is nothing to be sneezed at in a world where that amount represents a healthy percentage gain for an entire year for Canadians saving for retirement. That the Hang Seng fell so much despite the influence of China’s government-controlled companies adds to the impact.
And while the tumble represents a loss of something in the order of $2 trillion US — from a market that earlier this year surpassed Tokyo as the world’s third biggest — it is unlikely student demonstrators or many Canadians will be shedding tears for wealthy shareholders.
In fact, one reader objected to a column earlier this week that ended on a reference to the potential impact of the violence on global financial markets.
“Good piece by @don_pittis until the very end,” the reader, a Canadian environmentalist and social activist, tweeted. “Greed is the root of our woes and media keeps reminding us that cash is king.”
I had sympathy for the reader’s comment. As Greta Thunberg has instructed us, the clamour for endless industrial growth may not be compatible with saving the world from terminal climate change. That said, there are many credible environmentalists who insist market forces can and will be used to improve the climate.
And greed may have contributed to the mess in Hong Kong. It has been widely remarked that income disparity, high housing costs and a shortage of good jobs have been among the early motivations for the youthful discontent that has blown up into something so much worse.
My current job at the CBC is to write about economics and financial markets, so it is hard to escape the fact that anything I write about Hong Kong will include those kind of references. But the reader’s tweet made me think about how important financial markets are, specifically in the case of this dispute that has grown through mismanagement from peaceful demonstrations to pitched battles reminiscent of a war zone.
The first thing to say is that, while far from perfect in their current rendition, markets remain valuable tools, that, until we invent a better system, are essential to our well-being as individuals and as a society. Arguably they are often commandeered by elite special interests. However, while too complex to describe all their benefits here, financial markets also allow us to build large, useful structures and evaluate their relative worth.
The best financial markets, like the best ports or highway systems, are not built overnight. The most reliable ones only occur in relatively healthy societies, ones that have a well-educated workforce, functioning transportation, good housing and laws that try to discourage corruption and fraud. As an example of such a society, Hong Kong — with median incomes at developed-country levels, reliable courts and good services — has been ideal.
While stock markets may be the visible portion, a successful financial centre like Hong Kong is an intricate network of highly skilled humans working together in banking, law, insurance, sales, communication and a variety of specialist jobs it is hard for most of us to imagine. Large financial centres are enormously valuable for the services they provide, the local wealth they generate in terms of employment and other spin-offs.
As a rule, successful financial markets and the complex system required to run them do not grow up in unstable war zones. And when stable societies crumble, markets crumble with them.
This is one of the reasons the current chaos in the streets of Hong Kong matters to markets and why those markets may act as a deterrence to greater police violence or the kind of invasion threatened by Chinese military police. Because the more Hong Kong degenerates into a war zone, with battles in the streets and buildings in flames, the harder it is for all those people to do their jobs and the less likely the people who make the region’s markets so valuable will want to stay.
Another reason markets make a difference to Hong Kong demonstrators is that sharply falling markets draw world attention. While the world may have grown used to months of demonstrations, falling markets act as an indicator that something new and more serious is happening.
A third effect is the danger of serious market declines for China. China’s explosive growth means Hong Kong’s share of the country’s GDP has shrunk to about three per cent, but that is with only half a per cent of China’s population. Recent calculations by Reuters show the region’s markets continued to punch above its weight in importance to the Chinese economy, with Chinese assets in Hong Kong worth almost 10 per cent of the whole country’s GDP.
“Losing such a massive financing channel risks destabilizing the already slowing Chinese economy, hurting confidence that the Communist Party can continue to deliver prosperity after a strong, decades-long track record,” said the Reuters analysis.
De-escalating the current destructive violence with peaceful negotiations will likely be the best outcome for pro-democracy demonstrators. It would also help preserve Hong Kong’s economy and its value to China.
But for the powerful government in Beijing, the danger of shattering Hong Kong’s value as a vigorous financial market due to an extended military crackdown, with the resulting danger that it would weaken the Communist Party’s grip on power, may be the strongest impetus for Chinese government moderation.
Follow Don on Twitter @don_pittis