HONG KONG — June Fourth could be the best chance to see whether “one country, two systems” is actually working in Hong Kong.
On this day in 1989, the Chinese military violently suppressed unarmed students and civilians in Tiananmen Square, in central Beijing. The tragic event has been a taboo subject in mainland China, but Hong Kong citizens have been able to commemorate the victims every year, even after the territory’s sovereignty was handed over to China from the U.K. in 1997.
That tradition, which lasted for over three decades, is set to be broken this year. Police have banned the commemoration, blaming the pandemic, even though there has been only one new local infection over the past 28 days. A similar ban with a similar reason was in effect last year, too, though many defied it and gathered in Victoria Park.
The imposition of the National Security Law by Beijing at the end of last June changed everything. The organizer’s core members and prominent pro-democracy activists — including Albert Ho, Lee Cheuk-yan, Jimmy Lai and Joshua Wong — are serving prison sentences.
The lack of a June Fourth candlelight vigil in the city would be another clear indication of the “one country” overwhelming the “two systems,” but in the business world, the line has already been blurred.
The metamorphosis of Hong Kong’s stock market, a cornerstone of the territory’s international financial hub status, is a case in point. The Hang Seng Index, the city’s leading benchmark, will add three constituents on Monday, bringing the total to 58. All three are mainland Chinese companies, including BYD and Xinyi Solar Holdings.
It was back in August 1992 when Citic Pacific — now China Citic, a unit of state-owned conglomerate Citic, which was established in 1979 under the leadership of Deng Xiaoping — was selected to be the first mainland enterprise to be part of the city’s blue-chip index. The latest update brings the proportion of mainland shares close to two-thirds.
Mainland companies already make up 80% of the market capitalization of the entire Hong Kong equity market. Except for AIA and HSBC, the top 10 most valuable shares today are from the mainland. Tencent Holdings and Alibaba Group Holding taking the top two slots, despite a mounting crackdown by Beijing.
Mainland Chinese investors, casually referred to as “northern water” in Hong Kong, have become market movers as well.
The Hong Kong Exchange’s “stock connect” arrangements with bourses in Shanghai and Shenzhen, which open a rare legal window for mainlanders to make portfolio investments beyond their borders, reached 16.65 trillion Hong Kong dollars ($2.15 trillion) in turnover during the first four months of the year, taking up almost a quarter of the total turnover.
The Hong Kong market traditionally has been heavy on financials and developers, but the recent rise of tech shares is supported, at least partly, by mainland money. The top three active shares through southbound trading in recent months and quarters have been tech, namely Tencent, Meituan, and Xiaomi. This is stimulating changes in the market’s structure.
Hong Kong may be losing luster as a free city for many locals as “one country, two systems” rapidly fades, but it seems to be looked at differently by mainlanders whose freedoms are restricted at home.
Apparently, Hong Kong is a cozy place to list for mainland companies, as the U.S. becomes more unwelcoming. Big tech names like Alibaba, JD.com and NetEase made Hong Kong their secondary listing location as they hedge against their primary listing status in the U.S.
But why Hong Kong? Nana Li, China research director at Asian Corporate Governance Association, believes these brands “prefer the more predictable regulatory regime in Hong Kong, the city’s open capital account, and its stronger base of global institutional investors.” Even though their main operations are on the mainland, they are missing these aspects.
This in turn invites more global institutional investors to Hong Kong, as there are various restrictions to accessing Chinese companies listed on the mainland. Hong Kong remains the major channel for those who wish to invest in Chinese equities, despite the lack of democracy and civil liberties in China as well as the deterioration of various freedoms in Hong Kong.
“I think Western investors take the view that liberal democracy, which works in the West, is not the system which is undertaken in China, and for that reason find it difficult ideologically to accept that equity investment in China is actually valuable,” Jim McCafferty, joint head of APAC equity research at Nomura, said during an online forum on Tuesday. His position, perhaps shared by many of his industry peers, is that “we tend to refute that view.”
He added that the pressure to discourage investment in China by various U.S. agencies — which he calls a “kind of a propaganda machine” — is here to stay. But, he said, “we think being rational is best to ignore that particular metric.”
The biggest change over the past 32 years in terms of China and Hong Kong is probably coming from local politicians and business owners. Immediately following the crackdown in Beijing on June 4, 1989, a flurry of newspaper advertisements in Hong Kong newspapers protested and condemned the authorities’ actions in Beijing. But today, many Hong Kong politicians and business people avoid talking about June Fourth, as they have firmly positioned themselves to support Beijing and the territory’s pro-Beijing regime.
In contrast to 32 years ago, many of today’s ads in Hong Kong papers are being taken out by pro-Beijing organizations and companies indicating their full support of policies that shave off the territory’s freedoms and partially owned democracy. The pose these ads strike is one of loyalty to Beijing.
No wonder the Hang Seng Index has gained almost 20% since the imposition of the National Security Law, even when the basic framework of governance is decaying in Hong Kong.
Kenji Kawase is chief business news correspondent for the Nikkei Asia and an editor of #techAsia, a newsletter on technology in Asia that combines the best reporting from Nikkei and the Financial Times. He has been reporting and editing for Nikkei since 1992, mainly covering corporate and financial news in Tokyo, Osaka, Shanghai, Hong Kong and Bangkok. He returned to Hong Kong for the third time last year.