Hong Kong financial Center

Hong Kong protestersExtraordinary scenes over the weekend showed the scale of protests in Hong Kong as students and the organisers of the Occupy movement called for democracy.

Stocks are down in Hong Kong, but the last time I checked, other markets are largely unaffected.

The incongruity between the tense scenes on the ground, where police have fired tear gas to disperse crowds, and the benign reaction in markets, is at least partly due to the peaceful nature of the protesters.

Non-violent demonstrations are symptomatic of a developed legal system and, indeed, of a democracy. Safeguarding its system after the British handover to China in 1997 was part of what the British and Chinese governments negotiated under the "One Country, Two Systems" agreement that would govern Hong Kong for 50 years.

There are a lot of crucial political and social implications for Hong Kong as the protests continue.

In terms of the economic impact, a developed rule of law, a stable system of governance, and its desirability as a place to live, are what underpins Hong Kong as an international financial centre.

Hong Kong has the sixth largest stock market in the world, which is second in Asia after Tokyo, and is the sixth largest hub for foreign exchange trading. It maintains open borders to investors and does not impose any capital controls.

There may have been problems with inequality and sky-high real estate prices, but Hong Kong's high degree of economic freedom is also a large contributor to its prosperity.

So the reaction to the protesters will matter a great deal for Hong Kong if it is to retain its status as one of the top global financial centres where money flows freely across its borders and investors are comfortable investing billions into its stock market.

Since its return to China, this has been a question lurking in the background.

The protestors are demanding more say in the direct elections that are scheduled for 2017.

But the Chinese government wants to dictate the candidates. This is what it has done in village-level elections on the mainland as part of China's experiment with limited democracy.

For Hong Kong protesters, this isn't adequate.

Will China buckle? Will the protesters disperse? What will the Hong Kong government do next?

As some shops are shut and multinational companies are recommending their employees stay home, the longer the standoff continues, the greater the uncertainty.

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