July 1, 2017

At midnight on July 1, 1997, a red banner slowly rose over the banks of Victoria Harbor. Hong Kong was now back under China’s authority after more than 150 years under British rule. Nearly 20 years later, the moment lives on in the minds of many. The transfer ceremony came to symbolize the official end of China’s so-called “century of humiliation,” which began with the Sino-British opium wars and put the country under the thumb of successive Western and Japanese imperial forces. Overnight, the freewheeling capitalist playground of Hong Kong came under the control of an emerging socialist superpower.

But hammering out the details of the transfer was a longer and more complicated process. Throughout 13 years of negotiations, Hong Kong’s residents and leaders vacillated among feelings of resentment toward colonial rule, affinity with the mainland that shared so much of its culture and history, and suspicion about its prospective new governing authority. The resulting “One Country, Two Systems” agreement promised to preserve Hong Kong’s economic and cultural conventions for 50 years, until 2047. Now, on the eve of the turnover’s 20th anniversary, Hong Kong has reached a decisive moment in its relations with Beijing.

For decades, a vibrant civil society, along with a liberalized economy and rule of law, characterized Hong Kong. These features didn’t always align with traditional Asian culture. Though it served the mainland for centuries as a free port, and despite its 95 percent Chinese population, Hong Kong based its identity on its differences from China.

The distinctions in part helped make it competitive. While China cloistered itself from the rest of the world in the 1950s, Hong Kong relied on a free market, a plentiful supply of cheap labor and a business-friendly culture to become a key manufacturing base. Beijing took advantage of the city’s liberal economy and Western-style regulatory environment for its own economic and political experiment in the 1970s as it re-opened its doors to international trade. Hong Kong became a conduit between China and the rest of the world and, in turn, a leading trade and financial center.

The skyline of Hong Kong stretches up over Victoria Harbor. The 20th anniversary of the United Kingdom’s handover of the city to China will be marked on July 1.

Deepening economic integration with the mainland in the wake of the turnover jeopardized its privileged position, however. At first, Hong Kong muddled through hardship — from the Asian financial crisis of 1997 to the outbreak of Severe Acute Respiratory Syndrome in 2003 — with help from booming trade, capital infusions and a surge of investment from the mainland. But the consequences of its closer ties with and growing dependence on China soon began to stack up. Inflows of capital and investment overheated the city’s limited real estate market. Concerns mounted that China’s political and economic influence would gradually erode Hong Kong’s identity, particularly as citizens started pouring into the city from the mainland. Socio-economic inequality intensified, meanwhile, and prospects for upward mobility slimmed, especially for the younger generations.

And at the same time, China’s economy was on the rise. Hong Kong’s contribution to the country’s gross domestic product, amounting to 25 percent in 1997, has plunged to just 3 percent today. Burgeoning finance centers on the mainland, in Shanghai, Shenzhen and Guangzhou, for example, still have a long way to go before they rival Hong Kong’s. But Beijing is giving these developing hubs more attention as it looks for ways to diversify its outlets to the West.

Fears over losing its competitive edge, coupled with the anxiety over China’s economic and political dominance, have compounded the pressures on Hong Kong and sparked popular resistance to Beijing’s integration efforts. Tension has risen over the past five years. In a bid to reassert its authority over the city, the Chinese government moved to introduce curriculums with a stronger communist message and to enact legislative reforms.

Hong Kong, in turn, started protesting against travel by Chinese mainlanders to the city. As their mutual distrust deepened, Beijing dragged its feet on making the political reforms it had promised to Hong Kong, including universal suffrage and the direct election of the city’s chief executive. The repeated delays reinforced the growing perception among the city’s residents that the Chinese government was trying to undermine Hong Kong’s autonomy, laying the groundwork for nativist and independence movements that began sweeping the city in 2013.

Baggio Leung (l) and Yau Wai-ching, both pro-indpendence lawmakers, were among six representatives barred from taking their seats in Hong Kong’s legislature. The ban sparked accusations of political inferference in the city’s politics from Beijing.

Support for the independence camp is small relative to Hong Kong’s total population. Still, the movement is gaining traction, and its appeal to the city’s younger residents will be a cause of growing concern for Beijing in the years to come. The Chinese government’s moves to disqualify six pro-independence lawmakers who won seats in the city’s legislature in September 2016 met with backlash that has yet to subside. The prevailing suspicions of the central government could conspire with the social and economic costs of China’s rise to widen the divide between Hong Kong and Beijing.

And so, as China and Hong Kong ring in the 20th anniversary of the city’s return, the future of the One Country, Two Systems principle looks doubtful. Hong Kong’s independence or self-determination is anathema to the Chinese government, given the importance of national sovereignty to its continued rule — to say nothing of the implications for Taiwan. On the other hand, should Beijing tighten its grip over Hong Kong, it could further invigorate the city’s push for autonomy and democracy. One Country, Two Systems served China and Hong Kong for the first 20 years of their transition. But the framework may not survive the next three decades intact.


— One Country, Two Systems and 20 Years originally appeared at Stratfor.