The Communists are not going to tolerate the current situation, especially in a period of economic distress.
I wrote the following over 20 years ago
CHINA: The Long March II
(reprinted from our July letter in light of President Jiang's visit)
The last vestige of the politics of the Nineteenth Century vanished when the Union Jack was hauled down for the last time over Hong Kong yesterday. The destiny of over 6 million people was handed over without a shot to a despotic government. Despite Margaret Thatcher's recent reiteration of "we did the right thing", I think her attitude in 1994 towards a handover of Hong Kong might have been a little different than the conciliatory attitude of 1984. After 150 years a plebiscite would have been a far more appropriate response to China's call for unilateral reunification.
For those readers who think Communism died when the Berlin Wall crumbled and the Soviet Empire dissolved into its constituent fractious parts, think again. Consider what the NATO response would have been ten years ago to a Soviet offer to withdraw to its Russian border if West Berlin was ceded to the control of East Germany. Fat Chance - how long do you think West Berlin would have lasted as an independent Administrative Region? Oh, but the Chinese are different. They're not really communists anymore.
The problem isn't even communism; the problem is dictatorships of all stripes whether they are grounded in religious fanaticism like Iran, personality cults like Iraq, Cuba or North Korea or the numerous military thugs from Bosnia to Africa and South America. Investing in these countries is insanity. People still do it and act surprised when their pockets are picked.
Let me make three critical points about China. China is a lawless society because such law as may exist is subject to the whims of its political leadership. In an economic sense China is an emerging third world country with virtually no modern infrastructure. Chinese foreign policy is childish and is rooted in the gunboat diplomacy that it learned from the European powers in the 19th Century and from the Japanese in the early 20th Century. Its most recent foreign policy experience under the Communists was as a Soviet card against the United States for twenty years and then as an American card against the Soviet Union for the next twenty. Only recently has China emerged from the shadows of other political entities to cast its own long shadow.
Now longtime readers may be confused by this unsual political diatribe and new readers who (given the title of this newsletter) hoped for some discourse on the economy may be even more confused. But bear with me; there is significant long term economic import to the events of yesterday. Just as good politicians can't survive a bad economy, a good economy can't survive bad politicians. Hong Kong's economy and its financial strength will not survive the ministrations of its new political master. But for the next few years China will use the financial expertise and capital of Hong Kong to attract much needed foreign investment. Some commentators see the handover of Hong Kong as a virus that will infiltrate the Chinese mainland and hasten the introduction of democratic reform. It is far safer to view Hong Kong as a luscious fruit that will be sucked dry by the Chinese dragon, providing short term benefit to the mainland and leaving Hong Kong as a dried out husk. …
....The handover of Hong Kong has increased significantly the financial strength of a major adversary. Fortunately the PRC government will likely kill this golden goose at the first sign of discontent. At that point I hope rational national interest replaces the lure of China's markets in formulating our foreign policy.
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