When the mainland Chinese government amended its promise to allow free elections in Hong Kong in 2017, protesters flooded the streets. Western observers may be wondering if this protest is similar to the uprising in Tiananmen Square in 1989, or if there are other reasons for this unrest. Is this a political protest, or are there other factors? (For more, see: Investing in China.)

Though the protests were ignited by a political controversy, there may be economic reasons behind them as well. Here are six reasons a thirst for democracy may not be the whole story in Hong Kong.

  1. Hong Kong's economy contracted in Q2, 2014. Though a single quarter of contraction doesn't make a recession, it may be a leading indicator of deeper economic weakness.
  2. The contraction in Hong Kong's economy was due to a slump in consumer spending, perhaps an after-effect of mainland China's crackdown on corruption. (Newly rich mainlanders travel to Hong Kong to make high-end, big-ticket purchases. China's crackdown may make big spenders nervous about explaining how they got their money.) It may also be due to the larger slowdown in the Chinese economy, which saw growth in double digits for decades, but now only manages less than ten percent a year. (For more, see: Consumer Spending as a Market Indicator.)
  3. Hong Kong's historic role as gateway between mainland China and the West meant it has been a hub for much of China's overseas economic activity. From shipping to finance, Hong Kong continues to benefit from England's cultural influence (which leased Hong Kong from the Chinese for 99 years in 1898) and its liberal, free trade policies. Protesters may worry that more government control from Beijing will mean more economic controls as well.
  4. Hong Kong's financial markets bridge the gap between China and other economic powerhouses in East Asia, like Singapore. Mainland Chinese intervention in Hong Kong's political scene, and by extension its economic scene, may worry some Hong Kongers that they will be less competitive as a regional hub. 
  5. Hong Kong is not only a tourist destination for mainland Chinese. Its excellent transportation and the residual effect of British rule on language and culture make it also a large tourist draw from across the region and across the world. Hong Kongers may worry that political suppression from the mainland will have a negative effect on foreign tourism.
  6. Hong Kong is one of largest recipients of Foreign Direct Investment (FDI) in the Asia after Japan. But as China has become more open to western investment, Hong Kongers may fear China will redirect funds from Hong Kong to the mainland, further reducing its importance as an economic hub.

Bottom Line

Though the people of Hong Kong may be justified in their distrust of Beijing's political motives, the same economic factors underlying the current protests may give the People's Party pause. At a time when China's spectacular growth of the 90s and 00s has been reduced to a fraction, and that against a backdrop of sluggish global economic activity, will Beijing want to strangle the goose that lays the golden eggs by reneging on its promises for free elections and driving out free market entrepreneurs? Only time will tell.

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