2019_08_12 — “Hong Kong: 🇭🇰 past, present, future — a super region”
By: Michael Ashley Schulman
Tags: Asia, Investing, China, Hong Kong, Wealth

August 12, 2019

Hong Kong 🇭🇰 past, present, future — a super region

Credit: Hong Kong city and harbor by Michael Ashley

Hong Kong: 🇭🇰 past, present, future — a super region

SUMMARY

Months of demonstrations in Hong Kong sparked by a contentious extradition bill show no signs of moderating as both sides harden and anti-protest crackdowns strengthen

Hong Kong, although officially a part of China, remains independently minded and governed, and has one of the highest GDPs in the world

China wants to integrate Hong Kong, yet preserve its value after its current governing system expires in the middle of the century

One path to integration could in the medium term create a super region of over 36 million people that commingles Hong Kong and Macau with much more populous neighboring Chinese cities of Shenzhen and Guangzhou

The market does not expect such a move, and stock and company valuations might drop precipitously on such an announcement, but long run it could be a positive

DETAIL

The area of Hong Kong has been inhabited for over 30,000 years, was incorporated into China’s Qin Dynasty around 200 BC, eventually governed as part of the Guangdong and Dongguan regions (which would include today’s large modern cities of Shenzhen, Dongguan, and Guangzhou), and saw its population expand in the late 1200s as the Mongol invasion drove Chinese refugees to the territory. In the early 1840s, Britain took Hong Kong to protect its tea and opium trade with China, and in 1898 colonized the surrounding areas under a 99 year lease with China. In 1997, when the lease ended, Britain returned the leased territories as well as Hong Kong to China under a “one country, two systems” (OCTS) regime for the following 50 years; i.e., Hong Kong would remain part of China, but have its own political government and financial system.

Hong Kong has become an international finance and trade/shipping center with the 10th highest GDP per capita in the world — and the most expensive housing market (for seven years straight) — a far journey from its roots as a simple farming, fishing, salt producing, and pearl hunting region. It is too valuable and important to China to mar, and simultaneously, from the Chinese perspective, it has been a part of China for thousands of years. With this dual role that Hong Kong plays as different but same, in the next few years, China may step up its preparations for the homogenization of the independently minded territory into China (now less than 30 years away) while preserving the luster that has made Hong Kong so valuable.

Starting peacefully in March and April 2019, demonstrations began in opposition to a Hong Kong government extradition bill which allows suspected criminals to be sent to mainland China or Taiwan (or anywhere else) for trial. Protestors claim that it undermines the legal freedoms of Hong Kong citizens. Over the last ten weeks, protests and anti-protest crackdowns have escalated as Honkongers react to Beijing’s influence in local politics. However the near term conflicts settle, the uprisings may strengthen Beijing’s medium term resolve towards eventual unification (if that is the end goal).

One possible path to integration would create a super territory of four quadrants, combining Hong Kong (7.6 million people) in the southeast with neighboring Shenzhen (an economically diverse 40 year old city of 12.9 million people in the urban area and 20+ million in the greater metropolitan) in the northeast, Guangzhou (15 million urban population) in the northwest, and Macau (a densely populated territory of 640,000 people similarly handed back to China by Portugal in 1999) — in the southwest. Such a super region, including smaller town and cities in the area, could easily have a population of 36 million to 40 million people.

A new Chinese super territory with no borders and the legal use of both local Hong Kong dollars and Chinese renminbi currencies, could preserve the symbolic nature of OCTS, yet dilute the independent minded and Cantonese speaking populace of Hong Kong and Macau with tens of millions of Mandarin speaking Chinese. Mandarin has already become the second language of choice taught in Hong Kong and Macau schools, displacing English and Portuguese respectively. A combination of this nature could occur within several years, allow freer transition of labor (without having to go through immigration at every border), and still provide approximately 25 years of transition before the “One Country Two Systems” agreement expires.

Even if done adroitly, such a move could spark large scale protests from the citizens of Hong Kong and Macau — afraid of losing some of their self rule — as well as a precipitous drop in local stock and company valuations. However, amidst current protests, such a move by the Chinese government could be molded as a compromise. Either way, in the long run, the creation of a super region could prove an advantageous path to meet China’s dual goals of integration and value preservation. In an optimal scenario, the value of Hong Kong, Macau, and regional companies could increase with such a super region.

Invest in, avoid, or exit the region? These are all relevant questions. One has to weigh the potential of several years of upside versus of the possibility of a short to medium term drop. Whatever happens, if there is a market dip on integration fears, it could be a good opportunity to add to positions.

Disclosure: The views and opinions expressed are those of Michael Ashley Schulman, CFA and are subject to change without notice. This material is provided for informational purposes only, does not constitute an offer or solicitation to purchase or sell any security or commodity or invest in any specific strategy, and is not a recommendation. It is not intended as investment advice and does not take into account each investor’s unique circumstances. Information has been speculatively made up or obtained from sources believed to be reliable; its accuracy, completeness and interpretation cannot be guaranteed. Past performance is no guarantee of future results. Stocks, securities, companies or investments mentioned may be held long or short by the author.