Shanghai stock link: Beijing offers HK protesters carrots, shows stick

The Chinese government’s response to Hong Kong’s political freedom protests has mostly only surfaced in stern op-eds in Chinese state-owned media and reserved criticism from officials. But this week may mark the start of long-lasting financial ramifications for the Special Administrative Region’s diminishing movement for open elections.

The Shanghai-Hong Kong stock exchange link – billed as giving international investors unprecedented access to the Mainland Chinese market – has already started directing capital from Hong Kong to what analysts have called its competing finance hub in Shanghai.

Under the program, which launched Monday, Chinese authorities will allow $3.8 billion in daily cross-border share purchases between the two cities’ stock exchanges, and nearly half of that amount can originate in either Hong Kong or Shanghai.

With equal opportunities for investment flows from the world into Shanghai and from a cash-rich mainland to Hong Kong, it appears international investors are more interested in Shanghai. On Tuesday, investors drove $438 million into the mainland economy, according to Hong Kong newspaper South China Morning Post, even as some analysts warn that Chinese President Xi Jinping’s anti-graft campaign – which has targeted officials and big business alike – creates an unsteady environment for investment. That’s nearly eight times the amount that the exchange drew to the Hong Kong stock exchange through the Shanghai market. Monday figures also tipped drastically in the Mainland Chinese market’s favor.

The first few days of the linked exchange reveals that – whether intentionally or otherwise – Hong Kong’s role as a financial hub for the greater China region is easily overshadowed by the mainland.

At the onset of the recent Hong Kong protests, launched by activists to keep the central government from pre-selecting candidates for the city’s top office, Hong Kong Polytechnic University business professor Kevin Tsui told Al Jazeera that Beijing could help quell unrest by threatening to undo Hong Kong’s status as a regional financial center.

Since 2013, when the Hong Kong protest movement’s leaders started organizing, China’s central government has been cultivating alternative financial hubs on the mainland, gradually loosening regulations for international business interests.

“Both Shanghai and [Shenzhen, a large mainland industrial city near Hong Kong] are likely to play a more significant role if the situation in Hong Kong gets worse,” Tsui said.

If Hong Kong quieted down, Beijing would boost the city’s finances.

“If the leaders in Hong Kong can settle the unrest,” Tsui said, “the Chinese government may give Hong Kong a more important role” in Beijing’s endeavors to internationalize China’s renminbi currency — a move that Tsui said would reaffirm Hong Kong’s role as a financial center and “sort of buy support from local people.”

The linkage is what Columbia University Chinese business professor Arthur Dong called a “carrot” to motivate Hong Kong officials and its business community to stand firm against the protesters and continue promoting an end to the demonstrations. But as protests continue and the linked stock exchange starts to work largely in the mainland’s favor, it appears to be more of a stick.