Investors bet the Hong Kong protesters will blink

Arab Spring? Or Occupy Wall Street?

Global investors are searching for the best analogy to help understand protests in Hong Kong that have been simmering since summer but recently burst into a chaotic spectacle of blocked roads, riot police and tear gas.

A movement known as Occupy Central has been clogging Hong Kong’s most prominent streets to protest a recent decision by the Chinese government in Beijing regarding the province’s 2017 elections. The government’s ruling will allow universal voting, for the first time, in the 2017 election — a reform promised as part of Hong Kong’s handover from the U.K. to China in 1997. Candidates, however, must be nominated by a government committee, a provision democracy advocates regard as a sham that will produce a ballot larded with the Communist Party’s hand-picked operatives.

With protests intensifying, Hong Kong’s Hang Seng stock index fell 2% on Monday, and it’s down 4.5% over the past week. Markets in Europe and the United States have fallen by less, as investors gauge what will happen next — mindful that political disruptions in Ukraine, Iraq, Syria and Libya barely bothered the markets during recent years.

Peter out or intensify?

If the protests follow the Occupy Wall Street script from 2011, they’ll peter out as rabble-rousers lose their sense of purpose and drift away. If the movement intensifies, however, it could lead to violence and the sort of sustained upheaval that came out of the Arab Spring riots in Cairo and several Middle Eastern countries that began in 2010. “Hopefully this is not going to explode, which could become a huge issue for China and a huge issue for financial markets,” Yahoo Finance's Aaron Task tells Lauren Lyster in the video above.

The odds seem to favor a tense denouement, with protesters eventually dispersing. Hong Kong has been a bastion of commerce for centuries, with many of its 7 million citizens dependent on the banks, trading firms and retail establishment that make the island a financial powerhouse. Opposition to the protests could develop within Hong Kong itself, with no prompting from Beijing. “This has the potential to go disastrously for the protesters, who could lose all support from the public in a matter of days,” says Douglas Paal, a former White House official now with the Carnegie Endowment for International Peace.

For now, the protests lack organizational cohesion and a clear rallying cry. While upset about Beijing’s role in the 2017 elections, for instance, protesters haven’t articulated what they’d like instead. Occupy Central initially organized the demonstrations, but they've grown into something of a melee with no visible leaders and no unified message.

The danger, of course, is that Beijing will overplay its hand and clamp down in ways reminiscent of the Tiananmen Square massacres of 1989. So far, the Hong Kong protests are nothing like Tiananmen. Hong Kong has a well-trained police force that ought to obviate the need for military troops, which came to symbolize the Communist Party’s oppressive tactics during the Tiananmen protests. Nor is Hong Kong a symbol of national authority that Chinese leaders feel duty-bound to defend against interlopers, as Tiananmen was. Plus, Chinese leaders would have to be completely ignorant of history if they didn’t realize a military crackdown in Hong Kong might be highly likely to backfire and energize a movement that may otherwise run out of gas.

Still, the party isn’t known for a delicate touch with protesters who challenge its authority. Beijing probably isn’t likely to alter its terms regarding the 2017 elections, since it would make the government look weak. If the protests don’t peter out, the government might save face by declaring it a local problem and leaning on business interests in Hong Kong to get the natives under control. “My worst fear is that China will overreact, in the ugly tradition of Chinese rule,” says Paal. “But this is something they can deal with from a regional perspective." Investors everywhere are hoping so.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.