September 19, 2019

Testing the Limits of ’One Country, Two Systems’

By Bernard Tsui

The Hong Kong protests that started in June are going to drag on for a while.

On June 9, more than 1 million people took to the streets to protest against a controversial bill that would have allowed criminal suspects to be extradited to China for trial.

However, even after the Hong Kong leader Carrie Lam's decision to suspend the extradition bill, the protests continue.

So what leads us to this situation?

Let's go back to history and look at two main drivers that took place in the 1980s.

First, Hong Kong is an experiment of the so-called “one country, two systems” policy. The principle was struck in 1984 between Deng Xiaoping, the former leader of the People's Republic of China, and Margaret Thatcher, the former prime minister of the United Kingdom, to allow Hong Kong to operate its own legal, financial and legislative system under the Hong Kong Basic Law for another 50 years after the 1997 handover to China.

As time goes by, the reality is that there has been growing influence from Beijing, rather than Hong Kong dictating its own destiny.

The second Hong Kong experiment has to do with the currency peg. Since 1983, the Hong Kong dollar has pegged against the U.S. dollar at 7.8000. While the pegged exchange rate regime provides currency stability that helps Hong Kong facilitate international trades, the drawback of the pegged system is that Hong Kong effectively gave up its monetary policy to follow that of the United States.

For example, when the U.S. adopted unconventional quantitative easing measures following the 2008-09 financial crisis, Hong Kong was forced to lower its interest rates as well. The artificially low rates have fueled highly speculative real estate activities primarily from Hong Kong and China, tripling housing prices there since 2009. It is not a coincidence that Hong Kong is the world's most expensive real estate market, averaging $1.2 million per home.

My View: There has been growing frustration that the young generation is being left behind and will no longer be able to afford to buy a home or have any say about their political future. Without any meaningful reforms from the pro-Beijing Hong Kong government, the ongoing social issues will not be resolved in the short run.

In other words, it's hard to imagine how to bring an end to these ongoing protests, which are already the longest in Hong Kong's history.

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