The Economist July 1st 2017
12 Leaders 2 streets are being cleared of protest slogans; demonstrators will
be kept at a distance. At the time of the handover, this newspaper expressed the hope that Hong Kong would help “change China” politically. The opposite is happening. Wishful thinking? In 1997 there were grounds for optimism, despite the crushing of the Tiananmen protests. In fits and starts, China was evolving in a way that could make it more amenable to democratic reform in Hong Kong. It was keen to join the World Trade Organisation, and thus, it seemed, to embrace free-market principles. It was reasonable to expect that a private sector and a middle class would arise in China and begin to demand more freedom. In villages the party was experimenting with more democracy. Would these efforts encourage similar ones in urban areas, too, Chinese liberals wondered? In 1998 a newly appointed (and refreshingly reformist) prime minister, Zhu Rongji, suggested they might indeed. “Of course I am in favour of democratic elections,” he said. Twenty years on, Chinese officials no longer bother even to talk about political reform. Under Mr Xi, the party has been tightening its grip. A huge new middle class has emerged, armed with the internet. But, fearing the potential power of well-informed and interconnected citizens, the party is striving to keep them in check—beefing up the police and deploying armies of censors to scrub the internet clean. At the time of Hong Kong’s handover, China was at least
prepared, occasionally, to release a dissident or two in order to heal the rift with America caused by the massacre in Beijing in 1989. No longer. Its economy is far bigger and its army far stronger than it was. It shrugs off the West’s concerns about its human-rights abuses. Witness its brutal treatment of Liu Xiaobo, an intellectual whose demand in 2008 for democratic reform secured him an 11-year jail sentence (and later, a Nobel peace prize). This week it emerged that Mr Liu was being treated for advanced liver cancer (see page 27). Only the prospect of his death, it appears, persuaded the authorities to send him to hospital from his prison cell. It may seem far-fetched that such a China might grant Hong Kong more freedom. Sure enough, everything the country has done of late suggests the opposite—from sending agents to abduct people from Hong Kong, to issuing a ruling to ensure that legislators sympathetic to the idea of Hong Kong’s independence cannot take up their posts. But Mr Xi should take a good look at Hong Kong and consider mainland China’s future. The city’s young people feel alienated from the elite by an ossified political system and deprived of a voice by a lack of full democracy. That makes it unstable, as was evident during weeks of student-led protests in 2014 and in rioting early last year. The mainland has lots of Hong Kongs in the making. China needs a chance to experiment with a way of defusing unrest that does not make people more sullen: democratic reform. One country, two systems makes Hong Kong the perfect opportunity. Mr Xi should seize it. 7
European banks
Senior moment Europe’s framework for dealing with troubled banks is working, but has one big drawback
I
F ONE goal has animated the reform of finance since the criCredit-default-swap spreads Basis points sis of 2007-08, it has been a de400 sire to spare taxpayers from hav300 ing to pick up the bill for bank 200 failures. Regulators have intro100 duced stress tests to see how 0 2010 12 14 17 banks stand up to shocks; America’s latest round of tests concluded this week (see page 61). They have forced banks to fund themselves with more equity and to issue layers of debt that are earmarked for losses in the event of severe trouble. They have even asked banks to draw up plans for their own dismemberment in the event of failure. The first real tests of this post-crisis machinery were always going to happen in Europe, which has been damagingly slow to face up to the sorry state of its banks. One such trial occurred early in June, when the European Central Bank (ECB) declared that Banco Popular, a big Spanish lender, was failing or likely to fail. In that instance, the machinery purred. A new European agency, the Single Resolution Board (SRB), took charge. Popular’s shareholders and junior bondholders lost their money; another Spanish bank, Santander, raised its own cash to fund the purchase of Popular; taxpayers watched from the sidelines; and regulators hailed a textbook bank resolution. The latest test was more reminiscent ofHeath Robinson. On June 23rd the ECB handed out the same “failing or likely to fail” verdict to two midsized lenders in Italy, Veneto Banca and European banks
Banca Popolare di Vicenza. But this time the outcome was very different. The SRB determined that the pair did not pose a threat to financial stability, and handed them to the Italian authorities to deal with under national insolvency procedures. Instead of senior bondholders taking losses, as would otherwise have happened, taxpayers have again found themselves on the hook. Public money will subsidise the purchase of the two banks’ good assets by Intesa Sanpaolo, a big Italian rival. As much as €17bn ($19bn) of state funds could be at risk, although the actual bill is likely to be lower (see page 59). It’s the political economy, stupid What conclusions should be drawn from these divergent outcomes? Optimists see the fruits of reform in both episodes; pessimists fulminate that promises to protect taxpayers are broken after the Italian deal, and that hopes of moving towards a true banking union are dead. The reality lies somewhere in the middle. Europe’s post-crisis reforms have yielded genuine progress. First, the ECB’s supervisory powers over euro-zone banks are welcome. National regulators were prone to look the other way when banks wobbled; the ECB, which took on the powers in 2014, has waited too long to flex its muscles but is a more credible judge of financial trouble. Second, junior bondholders can now be certain that they will be wiped out when banks get into deep trouble (something that was not always guaranteed during the crisis). New instruments such as “contingent 1