How Will Hong Kong’s Chief Executive Election In March 2017 Affect The World Economy?

Hong Kong is an island nation with a complex history and political system. As a modernised global financial center, Hong Kong is often viewed as the conduit by which wealth flows from China and the Far East to the Western world. Once an outpost for farmers and fishermen, modern day Hong Kong is a bustling metropolis where Eastern culture is infused with the customs of the West.

The election for chief executive, Hong Kong's highest political office, has a considerable impact upon currency, commodity and equities markets worldwide. The victorious candidate will be responsible for fostering a positive relationship with China while ensuring that foreign investment capital, international trade and the legitimacy of the Chinese yuan renminbi (CNY) is preserved.

Political History

The history of Hong Kong is rooted in ongoing conflict between colonial Great Britain and mainland China. In 1841, towards the conclusion of the First Opium War, China surrendered control of Hong Kong to Great Britain. Britain capitalised upon the opportunity, quickly establishing the island as a prosperous East-West trading center. Eventually, the need for Great Britain to promote a peaceful arrangement to retain control of Hong Kong became obvious. In 1898, Britain successfully negotiated a 99-year lease of Hong Kong from China, an agreement that remained in place until 1997.^[1]

On July 1, 1997, Hong Kong was peacefully relinquished by the U.K. to the People's Republic of China. An accepted stipulation of the transition was that Hong Kong's capitalist economic system was to remain intact. However, this idea ran contradictory to China's system of government and principles. In order to remedy the conflict, Hong Kong's first chief executive under Chinese control, Tung Chee Hwa, promoted an official policy of governance called "one country, two systems."^[1]

"One country, two systems" is the official policy of the Chinese government towards the islands of Hong Kong and Taiwan. Under this policy, mainland China maintains the traditional principles of socialism while the island territories of Hong Kong and Taiwan uphold their independent capitalist systems.^[2] This notion is the basis for Hong Kong's sovereignty, and the preservation of which currently serves as a hot-button issue for March 2017's election for a new chief executive.

Election Process And Candidates

The task of electing the next chief executive will fall to the 1,200 individuals selected to serve on Hong Kong's Election Committee.^[3] Appointment of the Election Committee is a relatively complex procedure. Electors are chosen by varying degrees of public participation, according to their distinction within one of four different sectors. Each sector is represented by many sub sectors made up of individuals from Hong Kong's different industries, professions, religious affiliations or legislative posts.

There have been efforts to redefine the electorate to include all citizens through the promotion of "universal suffrage." As stated in Hong Kong's constitution, known as "Basic Law," the people of Hong Kong have the right to directly elect their head of government. This tenant of Basic Law was to go into effect seven years after China acquired Hong Kong in 1997, but has not been implemented as of yet. Without it, citizen participation in the election for chief executive is limited. Only 230,000 citizens, which is a small portion of the total voting population, voted for candidates seeking positions on the Election Committee.^[4]

The limited levels of public participation in the electoral process have brought to the surface concerns regarding the amount of Beijing's influence upon Hong Kong's government and subsequent sovereignty. Candidates for the office of chief executive have differing stances regarding Hong Kong independence, universal suffrage, finance and the continued affiliation with China.

The final roster of candidates for successor to incumbent chief executive Leung Chun-ying will be determined in February 2017. The following are a few frontrunners for the office:

• John Tsang: Former head of the government's financial branch, and a supporter of a traditional relationship with mainland China.
• Carrie Lam Cheng: Social issue-oriented with focus on helping the elderly and underprivileged.
• Regina Ip: Former director of industry from 1995-97, later serving as security secretary; proponent of constitutional reforms regarding the elimination of direct elections.
• Woo Kwok-hing: Advocate for suffrage expansion and investment in local infrastructure.^[5]

Fierce debate over the degree of Hong Kong's independence rages between local pro-independence lawmakers and the Chinese establishment in Beijing. Since its acquisition, the notion of Hong Kong remaining an autonomous nation existing for the sole purpose of high finance and profit has repeatedly come under fire from Chinese traditionalists. A full-scale economic integration between China and Hong Kong remains a future possibility, and given Hong Kong's economic standing within the context of the global financial community, this development could have a widespread impact upon the world's economy.

Hong Kong's Economy And World Standing

Hong Kong is a vibrant metropolitan area, serving as one of East Asia's primary commercial centers. Although geographically small, measuring 1104 square kilometers (426 square miles), Hong Kong has a population of 7 million residents and one of the world's highest population densities.^[6]

The economy of Hong Kong is service-based, with tourism and banking being the key drivers of prosperity. China, the United States, Japan and Singapore are Hong Kong's primary trading partners.

Hong Kong ranks among global leaders in several economic categories:

• Stock of foreign investment: 4th (US$1.744 trillion)
• Imports: 8th (US$528.5 billion)
• Exports: 8th (US$505.7 billion)
• Currency and gold reserves: 9th (US$358.8 billion)
• Budget surplus: 12th (3.1% of GDP)
• GDP (per capita): 18th (US$56,700)
• Unemployment rate: 27th (3.3%)
• GDP (purchasing power parity): 45th (US$414 billion)

The Hong Kong dollar (HKD) is the official currency of Hong Kong. Dating back to 1983, the HKD has been pegged to the United States dollar (USD) under the Hong Kong Monetary Authority''s (HKMA) "Linked Exchange Rate System."^[8] Since May 2005, the HKD has been allowed by the HKMA to trade in a range of 7.75-7.85 HKD to one USD.^[9]

Historically, Hong Kong has played a vital role in the facilitation of international trade with China as well as in the dispersion of wealth from the region to the world. Upon its acquisition from the U.K. in 1997, Hong Kong accounted for 16% of China's total GDP.^[10] Although post-2000 levels of GDP contribution are much lower (around 3%), Hong Kong functions as a leading provider of foreign capital to Chinese industry. For the period of 2012 to year-end 2014, the Hong Kong debt market proved to be valuable in the raising of capital for companies in China, accounting for 66% of all direct foreign investiture.^[10]

The size and scope of Hong Kong's equities markets further accentuate its financial worth. For the year-end 2015, the aggregate market value of publicly traded shares measured US$3.082 trillion, earning a global rank of fifth. This metric is spearheaded by robust growth in the Hong Kong Stock Exchange (HKSE). With a market cap of US$2.7 trillion, the HKSE is the seventh-largest equities market in the world.^[12]

Free trade, limited regulations regarding foreign investment and a complementary political relationship with mainland China are contributing factors to Hong Kong's prosperity. The next chief executive will play a key role in preserving these aspects of the economy, in addition to nurturing partnerships with the rest of the world.

Election Fallout: Impact On Global Economics

Hong Kong's chief executive election in March 2017 represents a turning point in domestic politics. Hailed as the most important election in 20 years,^[5] the vote will either be an approval of the growing independence movement or a decree of allegiance to the establishment power of mainland China. No matter the outcome, the effect the election may have upon the world economy could be substantial.

Perhaps the largest impact the election's result could have on the global economy is through compromising the financial relationship between Hong Kong and China. They interact with one another according to tenets outlined in the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA). The agreement ensures free trade beneficial to the economic development of both nations along with the promotion of accelerated financial integration.^[14]

In the event that advocates for Hong Kong autonomy and universal suffrage are victorious in the election for chief executive, establishment powers in Beijing are likely to retaliate through financial and legislative means. This could mean amendments to CEPA and new restrictions on the flow of investment capital between nations.^[15] If CEPA is compromised, the slowing of regional economic growth and reduced levels of foreign investiture are likely results.

The result of the election for Hong Kong's new chief executive may yield several consequences upon the world economy:

• Contraction in global equities: Hong Kong's stock exchange remains one of the world's premier equities markets, providing international investors a method of investing in Chinese companies. Of the 1780 companies listed on the HKSE, 896 are enterprises located on China's mainland.^[16] Cooperation between the HKSE, Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) has facilitated an avenue by which capital may flow directly between international investors and China. Financial undertakings such as the "Shenzhen Connect" have linked Hong Kong's markets directly to the massive equities markets of China. The integration of these exchanges has enabled traders worldwide to readily access investment opportunities in China, made possible by the political cooperation between the two countries. Independence movements, such as "Occupy Hong Kong," have strained relations between Hong Kong and Beijing, and could undermine financial progress.
• Free trade: Hong Kong is one of the world's largest shipping ports, averaging nearly three times the annual cargo volume of Los Angeles.^[17] Acts of civil disobedience may serve to impact the functionality of the ports, creating a logistics nightmare for the delivery of physical goods to the rest of the world. This can have widespread implications affecting everything from retail sales to global commodity pricing.
• Create upheaval throughout international debt markets: Hong Kong's banking industry is one of the largest in the world.^[18] These banks specialise in launching IPOs for Chinese companies, facilitating foreign currency trade and providing a safe haven for international investment capital. Hong Kong's banking sector thrives due to its transparency and limited regulation. Any formidable opposition to China may lead to a restructuring of the banking system itself, creating a ripple effect throughout debt markets around the globe.
• Slowing of China's GDP: China's GDP is a key indicator observed by the global investment community. Limited availability of foreign investment capital, shrinking regional equities markets and disruptions in the importation of raw materials may all serve to slow China's lofty GDP growth. In the event that China's GDP slows substantially, action will be taken by its government to create economic stimulus. To accomplish this, a likely course of action is to sell debt instruments on the open market. This will impact the economies of debtor nations, specifically the U.S. China is the largest holder of U.S. debt, estimated at US$1.2 trillion.^[19] A massive selloff of U.S. debt instruments by China could lead to rising global interest rates and a global credit crisis. In turn, volatilities facing foreign currency exchange markets and global commodity pricing are likely to grow.

Summary

Hong Kong is an invaluable financial "gateway" to the East. Although it's considered a sovereign nation, the influence of China on political and economic affairs is formidable. Progress has been made toward addressing the social issues of universal suffrage and human rights, but establishment powers originating in Beijing continue to exert their influence upon Hong Kong.

It's a challenge to determine what the likely outcome of the election will be. Polling data is largely inconclusive,^[20] and the candidates themselves have taken few public stances on political issues or announced any affiliations. Whether the next chief executive is establishment supported or an advocate for the independence movement, the degree of impact upon the world economy remains to be seen.

While civil unrest is a possible result of the election and may lead to economic uncertainty, all candidates will more than likely work to preserve alliances with both China and the international financial community.

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