The swelling protests in Hong Kong that have gripped the world’s attention are Xi Jinping’s and the Chinese Communist Party’s worst nightmare. The fear is that if not properly contained, the street protests could flare into China’s own version of a color revolution (like the Orange Revolution in Ukraine) and prove an existential threat to the leadership.

“Street movements can evolve into revolution when more demonstrators become embroiled in them,” wrote the English edition of the People’s Daily-owned Global Times today. “However, Hong Kong is not a country; it neither has the conditions for a ‘color revolution,’ nor are the forces on the street influential enough to mobilize its entire populace.”

But even without such a dramatic and still probably very unlikely outcome, equally damaging is what the protests are doing right now to the standing of Xi and the rest of the top Chinese leadership.

Just as Xi wants to demonstrate to all that he’s the most forceful and effective leader in decades, that the party is fully in charge despite China’s myriad problems, including corruption, income inequality, and social unrest, and that he has an inclusive vision for all Chinese people, including those in Hong Kong and Taiwan, the protests are sending just the opposite message.

And:

Ultimately, if it were deemed absolutely necessary, Xi and the rest of the top leadership probably would not shrink from aggressively squashing the protest movement—the likely economic and business fallout would be unfortunate but a cost worth accepting to ensure China’s continued authority over Hong Kong. Xi is remembered for some ominous lines he delivered in an internal speech in late 2012, on the collapse of the former Soviet Union.

“Why did the Soviet Union disintegrate? Why did the Soviet Communist Party collapse? An important reason was that their ideals and convictions wavered,” Xi said. “Finally, all it took was one quiet word from Gorbachev to declare the dissolution of the Soviet Communist Party, and a great party was gone. In the end nobody was a real man, nobody came out to resist.”

David Fuller's view

I have little doubt that Xi Jinping will crack down on Hong Kong’s protests if they continue.  Mainland China faces a difficult economic transition and last thing the Communist government wants is a grassroots push for democracy. 

The last paragraph above, quoting Xi’s comments on the collapse of the Soviet Union is chilling, showing either no understanding of the resentment felt within countries absorbed by the USSR, or no concern other than “a great [Communist] party was gone.”

What about the Chinese markets?

China’s Shanghai A-Shares Index (weekly & daily) appears unaffected by the Hong Kong demonstrations, which will certainly not have received much coverage on the mainland.  However, Hong Kong has clearly been affected as you can see from the sharp reaction in the Hang Seng Index (weekly & daily) which has now entered its fourth consecutive week.  Consequently, its valuations are currently more attractive at a p/e of 10.12 and yield of 3.87% for HSI, versus a p/e of 11.34 and yield of 2.86% for SHASHR, according to Bloomberg.  Both are very competitive on a global basis.

I am no fan of China’s politics but hope that they will increase personal freedom over the longer term.  This should also be in China’s economic interests.  Meanwhile, these markets remain attractively valued at a time of considerable international uncertainty.   

See also: Hong Kong Demonstrators Return as Democracy Protests Swell.  And Hong Kong’s Autonomy.