Coatings World - October 2014

China Report

investment community since how it eventually gets resolved could be a sign of how the central government will act in regards to other situations that might impact on foreign investors. It’s possible that this whole issue may be resolved prior to the publication of this article.

As a bit of history, some of the great, most celebrated protest actions in China’s past began with student activism. If the state uses repressive actions against students, even if the official press chooses only to denigrate the students, then it normally leads to large numbers of sympathizers joining with the students on the streets. This is something that happened in Beijing, and many other cities, in 1989. But it also happened as far back as 1919, when there was an initially student-led movement that led to a general strike in Shanghai.

The irony of this protest is that the residents of Hong Kong didn’t like life under the British rule and they now equate life under Beijing to be no better than what they experienced under the British, hence Beijing has become the New British.

The question that everyone is wondering about is “What is the potential long-term economic and business impact of the massive protests sweeping Hong Kong”? Not surprisingly, no so called “China expert” appears ready to make any definite predictions about this matter, at least not yet. That’s mostly due to the continuing uncertainty about how exactly how long the demonstrations will continue and the larger question about what actions Beijing may take to contain the unrest. If we assume that the protests will continue for some time, such action would definitely hit the tourism and retail industries of Hong Kong, which added together yield about 10 percent of the territory’s total gross domestic product. These two sectors would be “harshly impacted” due to the fact that most tourists would avoid going to Hong Kong. In addition, overall business confidence in Hong Kong would likely take a nose dive. After Hong Kong’s economy contracted last quarter, a prolonged bout of protest or a heavy handed Beijing response to the protest could easily push Hong Kong into a recession. To this writer, the worst-case scenario would materialize if Beijing were to decide to end the protest using force by sending in the army or armed police. That sort of action would most likely have severe repercussions far beyond Hong Kong’s borders and send shivers around the globe thus jeopardizing Hong Kong’s status as an international financial center. Such fall out would impact negatively on China’s own economy thus creating a “lose/ lose” situation for all involved.

It appears that the main casualty of the protests (so far at least) is the often referred to policy of “one country, two systems.” When China took back Hong Kong from Britain in 1997, Hong Kong became what is known as a “Special Administrative Region” (SAR) of China under a unique set of conditions, called “one country, two systems.” This rather cumbersome sounding policy was put together to win over support from the residents of Hong Kong for the takeover by China. This policy granted Hong Kong a defined range of freedoms that was far greater than what was (and still is) allowed on the Chinese mainland.

Hence, the recent decision taken by the central government in August to renege on parts of that agreement signals that Beijing cannot be trusted in this matter.

It’s important to point out that both Britain and the U.S. offered themselves as guarantors of the 1997 transition agreement that established Hong Kong as a Special Administrative Region (SAR). I strongly suspect that this is a responsibility that neither country wishes to take today. Should there be a violent crackdown of the protesters initiated by Beijing it’s highly unlikely that any country would do much to be of assistance to Hong Kong. Military action by any outside groups is out of the question, and economic sanctions would come into the picture only if the level of violence is deemed extreme. Obviously, there would not be any Russian proposed sanctions levied on China.

So the Hong Kong movement of today is actually linked to long-term traditions and history within China, it’s also connected to things happening in other parts of the world, and it’s connected to quite different but simultaneously occurring challenges around the territory that the Chinese government wants to claim authority over. Needless to say the Hong Kong protest is probably connected to some political actions being played out within the Beijing power structure. Somewhat coincidentally, the Communist Party’s Central Committee will convene in Beijing in October for their annual plenum to plot and steer the country’s economic, political and social path. Anything that would make President Xi look weak or indecisive will benefit his detractors.

So, with this bit of history and introduction, let’s revisit the question posed by this article. Is China the right place for offshore companies to make a significant investment today?

To answer this question I propose that we assume that the Hong Kong issue will be peacefully resolved. How that will actually happen is open to speculation. China has far more to lose by incorporating force to resolve this protest that it has to gain. A number of China experts feel that in the end, the protesters will gain some of their demands but probably, not all of them.

To address the primary question at hand, it’s important to look at key parameters. Investments are generally made in areas that offer a good return and pose good growth opportunities. How does China stack up in this regard? Looking at the past few years (2000 – 2013) one thing is for certain, China’s GDP growth has been unmatched by any other country (See GRAPH 1, next page).