SinoInsight 1
On June 16, hundreds of thousands of people in Hong Kong took to the streets to protest. According to Hong Kong media reports and protest organizer estimates, between 1.44 million to over 2 million people participated in the day’s demonstration. Protesters called on the Hong Kong government to scrap proposed amendments to Hong Kong’s extradition bill and retract its definition of an earlier protest as a “riot,” as well as the resignation of Chief Executive Carrie Lam. The Hong Kong government has yet to respond to the protest demands.
On the same day, Carrie Lam “apologized to the people of Hong Kong for this and pledged to adopt a most sincere and humble attitude to accept criticisms and make improvements in serving the public,” according to a statement. On June 15, Lam announced that the Hong Kong government would indefinitely suspend the passing of the proposed extradition bill.
OUR TAKE
1. Several factors could have inspired the Hong Kong government to suspend the extradition bill:
1.1. Popular sentiment is heavily against Carrie Lam’s government. The brutal police action against young protesters in an earlier demonstration and the government’s designation of the demonstration as a “riot” incensed many Hong Kong people. The recent death of a 35-year-old protester (the protester indicated that he was committing suicide on social media, and the police are treating his death as a suicide case) has provoked even more anger from the populace, with people calling the protester a “martyr” and others saying that Lam has “blood on her hands.” Finally, some pro-establishment politicians have also publicly expressed disappointment in the Hong Kong government’s actions.
1.2. The Hong Kong government might be concerned that its continued insistence on passing the proposed extradition law could provoke a bank run and trigger financial collapse. According to Hong Kong Chinese language media, a large number of Hong Kong people have recently been canceling their Chinese bank accounts and exchanging Hong Kong dollars for U.S. dollars. This phenomenon led to soaring interbank borrowing rates in the city and forced Chinese banks to restrict the making of large withdrawals. Hong Kong media also reported that local housewives have started are lining up in banks to exchange local currency for the greenback. Should this trend continue, Hong Kong’s financial sector is in danger of being targeted by international financial predators and financial collapse. The situation in Hong Kong would in turn adversely affect the financial and economic situation on the mainland.
1.3. Western media recently reported that investors and tycoons have begun moving their money out of Hong Kong to places like Singapore as a result of the proposed extradition bill. The capital flight would likely inspire more capital to withdraw from Hong Kong.
The Hong Kong protests have also very likely caused increased capital outflows from the mainland. The sudden appreciation of the Hong Kong dollar in recent days appears to be due to mainland funds being transferred to the city. Should the situation in the city worsen, the mainland funds would likely be shifted out of Hong Kong to elsewhere. In this scenario, Hong Kong’s stock market, property market, and foreign exchange market will be affected.
1.4. The Chinese regime has practical reasons to support the Hong Kong government’s decision to suspend the passage of the proposed extradition bill.
First, Xi Jinping and U.S. President Trump look likely to meet at the G20 in Osaka. It is in Beijing’s interest to calm down the situation in Hong Kong to avoid embarrassment during a Trump-Xi summit.
Second, the mass demonstrations and police violence in Hong Kong have attracted intense international scrutiny of the Chinese regime. In particular, a bipartisan group of U.S. lawmakers recently reintroduced the Hong Kong Human Rights and Democracy Act, which requires the U.S. Secretary of State to certify annually that Hong Kong is autonomous and deserving of special economic and trade benefits. The Act also calls on the U.S. President to identify persons responsible for suppressing freedoms in Hong Kong and “freeze their U.S.-based assets and deny them entry into the United States,” a clause which threatens Chinese officials and forces them to reconsider their actions with regard to Hong Kong out of self-preservation.
Finally, the capital flight from Hong Kong and the potential financial chaos it would trigger directly threatens the interests of certain Party elites and interest groups. In 2018, China’s actual utilization of foreign direct investment totaled $134.97 billion, of which $96.01 billion (71.1 percent) went from Hong Kong to China. We believe that a good portion of China FDI in Hong Kong is actually comprised of ill-gotten funds belonging to corrupt Chinese officials; the “FDI” is likely remitted back to the mainland after being laundered in Hong Kong. Thus, the corrupt Party elite have a vested interest in preventing the collapse of Hong Kong’s financial system via the fallout of the Carrie Lam government pushing through the proposed extradition law.
2. Delaying tactics are a CCP classic, and the suspension of the proposed extradition bill is almost certainly a delaying measure. If the people of Hong Kong stop strongly protesting the bill, then the Hong Kong government could suddenly move ahead with the extradition law amendments. But if the Hong Kong people do not let up in their demonstrations, then the Chinese regime could consider “abandoning” Carrie Lam (pressure her to resign early, etc.) to calm Hong Kong and avert a financial crisis.
3. On the factional struggle front, we believe that Xi Jinping could next move to purge the State Council Hong Kong and Macau Affairs Office and the Hong Kong Liaison Office in a bid to strengthen his control over Hong Kong affairs. Hong Kong Liaison Office head and Jiang faction member Zhang Xiaoming is at risk of being transferred or investigated. Han Zheng, the Central Coordination Group for Hong Kong and Macau Affairs head, could also be subjected to internal Party criticism.
4. In an earlier analysis, we noted that the CCP has historically worried about “foreign influence” from Hong Kong affecting its control over the mainland. The CCP’s worst nightmares would be realized should mainland Chinese learn from the Hong Kong people and “attack” the regime via financial means (see point 1.2.) or somehow pull off mass demonstrations.
In our China 2019 outlook, we wrote that “a Black Swan event could imperil the CCP regime.” The massive Hong Kong protests of 2019 could prove to be that Black Swan event.
SinoInsight 2
After Hong Kong Chief Executive Carrie Lam issued an apology on June 16, the heads of the various Chinese government apparatuses overseeing Hong Kong and the Chinese foreign ministry all expressed their support for Lam and noted that the Chinese regime respects the decisions of the Hong Kong government.
On the same day, the state-run Xinhua published an article on how the people of Hong Kong from all walks of life support the Hong Kong government’s decision to suspend the passage of amendments to the city’s extradition law. Just three days ago, a Xinhua article noted the exact opposite, that is, the Hong Kong people supported the Hong Kong government’s decision to pass the proposed extradition bill.
Also on June 16, Party mouthpiece People’s Daily published an article about “resolutely supporting” the Hong Kong chief executive and government’s efforts to “govern by the law.” While the article briefly mentioned the official statements about Party central supporting the suspension of the proposed extradition bill, its focus was on how “foreign forces” were interfering in Hong Kong affairs and China’s “internal matters.” For example, the article criticized “some people in Hong Kong” of “using Westerners” and “young people” as the “chess pieces” and “pawns” of “foreign forces.” The People’s Daily article was republished on the Xinhua website.
OUR TAKE
1. Like in the Sino-U.S. trade war, the recent developments in Hong Kong have caused the CCP propaganda apparatus to “backtrack” on past proclamations and somewhat lose control over the narrative. Because the CCP will never admit to its mistakes and is fearful of triggering a financial crisis in Hong Kong (see SinoInsight 1), the propaganda apparatus has been forced to “sell funeral arrangements as a festive occasion” in light of the suspension of the proposed extradition bill.
2. The People’s Daily article’s focus on “foreign forces” and incitement of hatred clearly indicate that while the Party has accepted the need for a tactical retreat, it has not abandoned its goal of turning Hong Kong “red.”
3. Propaganda wise, the CCP is caught between the proverbial rock and a hard place. If the propaganda apparatus continues making ultra-leftist proclamations, it risks provoking more Hong Kong people to join demonstrations and resist the CCP all the way. Yet if the CCP shows weakness in its propaganda, it risks giving the people of Hong Kong hope and encourage them to fight for greater freedoms. Already, the Hong Kong people are calling for the proposed extradition bill to be entirely scrapped and for Carrie Lam to step down. Next, the Hong Kong people may request for genuine universal suffrage to pick their chief executive, the central demand of the 2014 pro-democracy protests.
4. The Hong Kong situation is likely also giving the CCP headaches with propaganda on the mainland. If the propaganda apparatus avoids talking about Hong Kong, it risks losing its ability to shape the public discourse on that matter. Yet the CCP does not want to draw attention to the Hong Kong situation on the mainland, especially given how the Party is perceived to have been “defeated” by the massive Hong Kong protests.
The CCP does not want the Hong Kong protests to become a model for similar uprisings on the mainland. However, the CCP cannot entirely suppress information about Hong Kong in China. This dynamic could lead to interesting developments in the Chinese regime in the coming weeks and months.
