15 August 2019; DW: There are reasons why the paramilitary troops of the Peoples Armed Police have not yet rolled across the border crossing at Shenzhen to crush the protests in Hong Kong. Chiefly because China needs Hong Kong.
China doesn't need the former Crown colony quite as much as it did back in 1997 when Hong Kong switched from British rule. But the Special Administrative Region remains a valuable conduit for Beijing. One the ruling Communist Party cannot risk undermining.
In the past four decades, China has emerged as the world's second-biggest economy and an integral part of the global financial system. That rise was facilitated by Hong Kong.
With economic reform still lagging on the mainland, having ready access to Hong Kong's freewheeling brand of capitalism is vital for China.
Even before the current round of protests, there was little love lost between Hong Kong and China, despite regular government claims of affection for its compatriots in the south.
Hong Kong is perceived as a spoilt, unruly child by many mainlanders, including senior officials.
But a hardline Beijing-led crackdown in Hong Kong would undermine stability in China to a much greater degree than the masked protesters could ever do. The repercussions would soon spill over from Hong Kong into the mainland itself. The resulting negative sentiment would spook investors and compromise China's ability to trade internationally.
Pressure from US-China trade spat
The US-China trade spat and the blacklisting of telecoms giant Huawei have put Beijing in a bind. Chinese companies have been ordered to become less dependent on foreign money and technology, which means more of a focus on Hong Kong.
Chinese direct investment in Hong Kong totals $620 billion (€556 billion) — 70% more than Hong Kong's overall gross domestic product (GDP). Of the 10 biggest public listings (IPOs) since 1986, nine were Chinese.
Mainland companies raised $47 billion in equity and $66 billion in bonds on the Hong Kong market in 2017.
Despite years of promises to move in that direction, the yuan is still not a convertible one. Capital controls restrict the movement of financial capital across borders. The pool of yuan deposits in Hong Kong is worth around $100 billion.
Nearly 60% of the mainland's outbound investment, including projects in President Xi Jinping's flagship Belt and Road Initiative, are channeled via Hong Kong.
Key part of Greater Bay Area Project
It's not just the financial markets. Hong Kong is an integral part of the "Greater Bay Area," which includes Hong Kong, Macau and the nine major cities of Guangdong province. The hub has a population of 70 million and has a GDP of $1.5 trillion.
China needs Hong Kong to counter an increasingly grim economic outlook.
The days of double-digit growth figures are over. Data shows growth of industrial output and retail sales — key measures of Chinas economic well-being — slipped in July.
China has made inroads into areas traditionally dominated by Hong Kong, such as container port trade.
And the Communist Party has been building up alternatives, especially in the financial capital Shanghai and the innovation hub Shenzhen but they are not ready to act as a replacement for Hong Kong.
In July, 25 companies debuted on the Shanghai Stock Exchange's new Science and Technology Innovation Board, also called the STAR market, which is aimed at luring back funds from overseas but also boosting Shanghai's competitive strengths vis-à-vis Hong Kong.
Hong Kong offers the kind of flexibility that mainland competitors can only dream of and it is a vital source of IPO fund raising for mainland firms. This is underscored by a watertight regulatory environment that is for many investors the best and most open in the region.
Every year for 25 years, the Heritage Foundation has named Hong Kong as the world's freest economy. By comparison, China ranks 100th in the conservative think tank's list.
Rest of the world needs Hong Kong too
Not just China — the rest of the world needs Hong Kong too.
Investors like the "One country, two systems" agreement struck with Britain in 1997, which guarantees its legislative and legal systems as well as its own currency and capitalist economy until 2047.
The central bank, the Hong Kong Monetary Authority, and its corporate regulator, the Securities and Futures Commission, are seen as reliable and sophisticated institutions.
This is why Hong Kong is the base for over 1,500 multinational companies who use it as an easy way into the China market — 60% of foreign investment comes through Hong Kong.
Above all, Hong Kong provides security for investors, including some very senior Communist Party cadres who would not like to see the crisis unsteady the economy. The Chinese leadership has enough investments in Hong Kong apartment blocks and blue-chip stocks to keep the Peoples Armed Police at bay for now.
