Hong Kong has also been a favored destination for visitors from mainland China, whose appetite for retail goods and property has boosted Hong Kong’s GDP. Clearly, the two markets are heavily dependent on one another. While this has mostly worked to their mutual advantage, the global trade battles of the last year are bringing both of them down.

Ironically, present tensions are founded on concerns that Beijing was undermining the Hong Kong legal system, one of the pillars that have made Hong Kong valuable to the Chinese. Undermining the current structure could make it harder for Chinese firms and the Chinese government to attract capital. Beijing certainly realizes this, and their desire to preserve the value derived from Hong Kong’s markets has informed their reaction to the protests.

To this point, China’s response has been measured. Investment and tourism from the mainland have been discouraged, and China has placed pressure on Hong Kong companies to dissociate themselves from the protestors. Reduced cross-border commerce has combined with international trade constriction to push the Hong Kong economy close to recession.  Beijing is hoping economic pressure will be sufficient to quell the uprising.

If suasion fails, a more forceful intervention might follow. The military equipment massed on the Hong Kong border is a threat for now, but deployment cannot be ruled out. A heavy-handed intervention could prompt a substantial flight of people, firms and capital, which would harmful to both sides. And 2019 marks the 30th anniversary of the unfortunate events in Tiananmen Square; China will certainly want to avoid an echo of that occurrence.

Experts are divided on the extent to which China is still reliant on Hong Kong for access to international capital. The Brookings Institution wrote recently that the Chinese could march on independently, while the Peterson Institute disagrees. Beijing would likely prefer to make any transition gradually, but the current level of dissent may force its hand. Failure to quell the unrest in Hong Kong might serve as an invitation for groups in the mainland to consider expressing similar defiance.

The situation in Hong Kong has attracted the attention of the White House, which has encouraged China to show restraint. This will not play well in Beijing; China, after all, does not publicly offer advice on how the U.S. should handle its domestic affairs. The list of contentious issues between America and China continues to grow, making a broad resolution of differences more difficult to achieve. The best we might hope for in the months ahead is no further provocation; an accord seems a long way off.

In all likelihood, the protests will eventually dissipate, as the Occupy movement did five years ago. But the damage to Hong Kong’s attraction as an economic center could be lasting. The uncertainty surrounding the sovereignty and stability of Hong Kong could limit inbound investment and give pause to foreign firms and workers in the principality. One of the few remaining links between East and West may be in danger of breaking.

Staying Out Of The Hole

Five years ago at the annual monetary policy conference at Jackson Hole, pressure was mounting on the Federal Reserve to give clues about how it intended to roll back the easing policies that had lifted economy out of a hole. At this year’s gathering in Wyoming, the pressure is mounting on the Fed and other central banks to show how they will prevent the global economy from slipping into another one.