Many of the world’s pundits gravitated to assuming that Beijing floated above crises that tripped up clumsy democratic governments. The Trump circus in Washington inevitably sparked more such commentary. The Chinese Century, supposedly, was here.
Instead, in the past couple few months, the trade war has hurt China more than the US. Some of China’s banks have recently needed bailouts as industrial stress and the growth slowdown exacerbated the challenges of managing an economy so addicted to excess leverage that it is responsible for half the world’s credit growth in recent years. Meanwhile, millions of Hong Kongers have marched the streets for 12 weekends to protest the erosion of the special status and the autonomy promised them in the international agreement signed between the Britain and China in 1984, governing its return to China in 1997. (Any similarity to wildly popular, non-fictional events in India in recent months is coincidental)
It is now China’s turn to misread the world’s tea leaves. This toxic mix of an idiot savant in the White House punishing Beijing for gaming the global trading system since it joined the World Trade Organisation in 2001 is made worse for China by the world’s television cameras training their sights on a peaceful rebellion in Hong Kong. Very unusually, Chinese state media are among those disseminating news of the unrest to citizens in China. This will make it very hard for Beijing to negotiate with protesters.
The timing could not be worse for the Chinese economy. The inversion of the bond yield curve in the US again this week is a sign that a recession is a looming possibility. On September 1, an additional $300 billion of Chinese goods will be hit by US tariffs of 10 percent, weakening the country’s export sector further. Ordinarily, the renminbi dropping to 7.10 to the US dollar as it has in the past couple of days would give exports a boost. But, with Chinese banks saddled with enormous US dollar liabilities to domestic companies and grandiose Belt and Road investments in Africa and elsewhere, this decline is the very definition of a double-edged sword.
China today is Communist only in name. Beijing relies on moments such as a dispute with the Japanese or the US bombing of its embassy in Belgrade 20 years ago to whip up nationalistic sentiment. In Hong Kong, however, Beijing is playing a dangerous game by encouraging thundering editorials in Communist media against the city’s protests. HSBC and Standard Chartered have felt compelled to run advertisements in Hong Kong this week criticizing the protests. Young Hong Kong people desecrating Chinese flags have been caricatured in Chinese TV and social media. Now, public opinion
in China may force it to deploy troops when it would be wiser to let the protests peter out as they did in 2014. Already, there is speculation that unless the protests end by September, Xi will be forced to act, largely to ensure the celebrations to mark the 70th anniversary of the founding of the People’s Republic goes off without a hitch.
One needs a warped sense of Communist apparatchik logic to understand this reasoning because, humanitarian considerations aside, such an intervention would spark a financial panic in Hong Kong that would send China into a deep recession and lead to the collapse of some of its banks. I have spent almost half my career in Hong Kong, but gave up trying to understand Beijing’s capacity for cruelty long ago. The protesters I was among in Victoria Park in Hong Kong last Sunday were not born when the tanks rolled into Tiananmen in 1989. They were good-natured and peaceable even as a cloud burst above the area where more than a million protesters had congregated. Mahatma Gandhi would have applauded their discipline as they stood still in a torrential downpour for almost an hour, raising slogans for the democracy that was promised to them when Hong Kong was returned to China.