The jury is still out on China-HK 'One Country, Two Systems' model

It is certainly a grand design, and currently one that arguably has parallels with that of the European Union, which is now struggling to survive amid the threat of deflation and political turmoil in crisis-hit countries. So, is the China-Hong Kong marriage faring any better?
Hong Kong’s chief executive, CY Leung, recently said during a speech at the “Asian Financial Forum” in Hong Kong that the territory enjoyed the combined advantage of one country and two systems.
“When you are in Hong Kong, you are in China, but not just any other city in China. We have something special to offer that other Chinese cities don’t,” he told his audience.
He went further by saying that it is the “Two Systems” pillar that made Hong Kong stand out against the financial centres of China, or elsewhere in Asia.
And it is the “One Country” aspect that allows Hong Kong to serve as China’s offshore yuan hub, rather than other financial centres outside mainland China, he said. Few people may dispute his claims, as China has achieved remarkably high economic growth for many decades – and it recently became the world’s second-largest economy.
The special administrative region moreover ranks third among the world’s financial centres able to provide comprehensive financial services to global clients, according to the Global Financial Centres Index.
Then there is Hong Kong’s competiveness, which is ranked seventh-highest out of 144 economies by the World Economic Forum.
Nobel economics laureate Paul Krugman offered some words of caution, however. “There is a bit of distance between the stance of the Chinese government and the purity of capitalism. As long as it works, it’s fine,” he said at the forum.

Expansion has slowed
Krugman is also worried about the next stage of Chinese economic growth, as expansion has slowed from an average of 10 per cent annually over the last decade to 7.4 per cent last year, the lowest level in 24 years. He said he did not think Chinese growth driven by a high level of investment relative to gross domestic product would continue.
“China’s growth is [made up of] something like 50 per cent from investment and 30 per cent from consumption, which is sustainable if you have 9-per-cent growth, but you must be able to move more people from the low-productivity rural sector to the high-productivity urban sector,” he said. China is also facing a demographic crisis due to its one-child policy, which means it is running out of new people for its labour force, he warned. The economist said China may even face a severe recession as it tries to make a transition.
“China scares me; it scares me not because the policy has been wrong, but because of the magnitude of adjustment,” he said, pointing out that investment is going to fall and that it is going to take a while for consumption to catch up.
Krugman also said that little cash made its way into workers’ pockets, while large amounts of retained earnings were kept by state enterprises and township enterprises.
He suggested that the Chinese government should ask these state-owned enterprises to pay their workers higher wages. Another point, he argued, was that the government should put a social safety net in place.
He said he did not believe the high savings rate in China was a result of “deep-seated cultural thriftiness”, and added that “there are policies that can be changed [to encourage more spending]”.
Chaeng Cheng Hye, chairman and co-chief investment officer of Hong Kong-based Value Partners Group, raised the issue of the political street protests in Hong Kong, known as the Occupy Movement.
“Singapore is an independent state, but Hong Kong does not have such an option,” he said, adding he was worried that if the political conflict could not be resolved, it would pose risks to Hong Kong’s future. One of the causes of the protests was that the territory’s youth were frustrated about social change and that they were unable to share the fruits of economic development, he said.
Manufacturing – and jobs in manufacturing – has gone to mainland China, while high-paid jobs in financial services in Hong Kong go to foreigners, he pointed out.

Restricted job opportunities
“There are no big job opportunities available for the young generation,” he said, adding that they end up in low-paid occupations such as working in restaurants or hotels, or as salespersons.
However, there are some youths that think the causes of discontent among the young are different from those in Cheng Hye’s assessment.
A group of protesters, still camped outside the complex of the Hong Kong Government Office, expressed their intention to fight for a free election for the post of Hong Kong chief executive, and one in which the candidates are not vetted by the government in Beijing.
Tang Chung, 20, expressed this firmly, saying that he was fighting for true democracy. “Hong Kong belongs to everyone, not only to the Chinese authorities and the rich,” he insisted.
Meanwhile, Winsome Ng, a 22-year-old student at Hong Kong Baptist University, and Rainy Chan, a 21-year-old student at Hong Kong Polytechnic University, said they had no reason to protest other than their wholehearted commitment to fighting for universal suffrage.
Tai Hui, managing director and chief market strategist at Asia JP Morgan Funds in Hong Kong, expressed optimism about resolving political differences between the mainland and Hong Kong, although he foresees political challenges ahead in the next few years.
“We will probably go through some adjustment in terms of public expectations and the relationship between Beijing and Hong Kong,” he said. Hong Kong’s position is important, as the Chinese government uses it to promote yuan internationalisation and Shanghai-Hong Kong Stock Connect, he said. “You don’t have another location where you can try this kind of experiment and yet still manage the process quite smoothly. I think there is still a great deal of value for Hong Kong from China’s perspective,” he added.
Hong Kong was returned by the United Kingdom to Chinese rule in 1997. At the moment, it may well be too soon to say whether the experiment of “One Country, Two Systems” will succeed or fail.