Is Fortune magazine finally right about Hong Kong’s demise?

In June 1995, the fabled business publication raised this most provocative of questions with a “Death of Hong Kong” cover story. It explored how the city’s return to Communist Chinese rule two years later, in July 1997, might wreck the “world’s most aggressively pro-business economy.”

Since then, the Hong Kong elite and expat bankers have reveled in Fortune’s spectacular misfire. Yet the events of recent days highlight troubling dynamics that the magazine – and others, surely – feared two decades ago.

In particular, the controversial extradition law Beijing is ramming down the throats of Hongkongers. It’s the most chilling example yet of the Chinafication of a vibrant and open financial center.

On Sunday, roughly one million people marched through the city in protest, the biggest demonstration since 1997 – and good on them.

Anti-subversion laws

Hong Kong has had its share of Beijing overreach. The 2003 brawl over anti-subversion laws on which China insisted is a case in point. So-called “Article 23” was so vaguely and ambiguously written that journalists and financiers alike pushed back, fearing a loss of free-speech and Hong Kong’s transparency. China stepped back.

Other moves since then saw China demanding schools teach pro-mainland patriotic values, attempting to neuter local media organizations and allegedly disappearing booksellers carrying banned titles. The giant 2014 “Umbrella Revolution” protests were a response to Beijing making it even harder for Hong Kong to choose its own leaders.

But the extradition bill President Xi Jinping is foisting on Hong Kong is a game-changer. And a reality check for those who figured Xi would be wise enough not to wreck the greater China region’s “golden goose” economy.

The “goose that laid the golden egg” argument, says Simon Pritchard of Gavekal Research, has long comforted the laissezfaire crowd. First, Hong Kong provided capital and entrepreneurial know-how. Then it served as China’s conduit to the world, its financial plumbing. There’s reason to think Hong Kong will remain something a “green zone” for capital flows.

Yet there is a non-trivial chance that Beijing’s incursions on judicial independence, and US anxiety about Hong Kong’s role in enabling the rise of a strategic rival, will conspire to erode the city-state’s special position,” Pritchard says.

US the wild card

The US angle is quite the wild card. Hong Kong’s economy is already becoming collateral damage in Donald Trump’s trade war. The US long ago agreed to view Hong Kong as a separate entity from China. And for now, US President Trump’s White House is expressing “grave concern” about China’s extradition ploy. Who, though, doubts Trump might squeeze Hong Kong to hurt China?

Raising the stakes is the loyal subject Xi has in Carrie Lam, Hong Kong’s chief executive. In power since July 2017, Lam insists she won’t withdraw a bill that would give Beijing the scope to seize any Hongkonger it wants.

Granted, Hong Kong’s leaders have long looked out more for Beijing than the city’s seven million-plus residents. Lam, though, has been especially obsequious toward her Communist Party masters. And Xi, the most potent Chinese leader in generations, seems hellbent on increasing Beijing’s shadow over the city.

“The credibility of Hong Kong is now on the line,” says Tara Joseph, president of the American Chamber of Commerce.

And the likely winner here will be Singapore. Both cities have long been engaged in a knock-down, drag-out brawl to be Asia’s premier headquarters city for multinational companies. Both set themselves apart with ultra-low taxes, minimal red tape, liberal visa policies and raising ease-of-doing-business scores.

Singapore’s for the taking

Yet this moment is increasingly Singapore’s for the taking. One of the big narratives back in 1997 was that China would learn from Hong Kong. Global executives figured Beijing would, over time, emulate Hong Kong’s rule of law, unfettered capital flows and vibrant free press. Instead of internalizing Hong Kong’s lessons, Beijing is remaking the city in its image.

It’s but the latest China megatrend that the conventional wisdom had wrong. China’s 2001 entry into the World Trade Organization was widely expected to westernize its economy. Instead, China bent the WTO system to its will. The internet was supposed to thrust China into the ranks of democratic powers. Instead, the Communist Party remade cyberspace in its image. Now Hong Kong.

The world’s biggest companies may soon have reason to worry executives will be subjected to the capriciousness of Beijing justice. Businesspeople could indeed be spirited away in the night for political reasons. Corporate offenses, including inadvertent ones, could be applied arbitrarily. No? The vagueness of the extradition bill leaves us guessing.

Might a hedge fund taking a short position on a politically connected company be in harm’s way? What about a researcher publicizing corporate fraud? Or an economist questioning the veracity of Beijing’s economic data in ways officials see as unlawful? That’s the problem – no one really knows.

The 2003 Article 23 dust-up suggested China had little understanding of what makes Hong Kong special – and essential. This latest clampdown shows Xi’s government, 16 years on, doesn’t much care. Good fortune for Singapore.