Mohamed El-Erian: Chinese government may succeed in quashing Hong Kong's protest movement- but that's only going to hurt the economy

China is likely to prevail over the Occupy Central movement. But in doing so, it will undermine the longer-term economic vibrancy of both

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The Independent Online

Will the tensions in Hong Kong be the straw that breaks the global economy's back?

That question is on many investors' minds as they watch the Chinese government's response to one of the biggest sociopolitical challenges it has faced in recent years. The answer is far from straightforward.

Some are quick to use history to dismiss any lasting economic impact, both domestic and global, of the Hong Kong protests. They rightly point to the repeated ability of the Chinese government to quash internal protests, and without altering the country's growth trajectory. For them, it is only a matter of time until the current civil disobedience in central Hong Kong dissipates.

Yet this view ignores two more recent historical insights.

First, the combination of the Internet, social media and better mobility makes it easier to coordinate and sustain protests, while also reinforcing individuals' confidence in meeting their aspirations. The outcomes of the ensuing collective actions become much more difficult to predict.

Second, China has been engaged in the delicate task of revamping its growth model. This includes reducing its reliance on external sources of demand and on excessive state and credit-led investments, and toward unleashing greater domestic grass-roots engines of growth, investment, consumption and prosperity.

 

 

This is not to say that the stability of the government is in any danger today from the protest movement and that an economic contraction in China is about to send tremors through the world economy. Indeed, the Chinese government is likely to prevail over the Occupy Central movement in Hong Kong.

But in doing so, it will probably be inclined to slow certain economic reforms for now, seeking instead to squeeze more growth from the old and increasingly exhausted model -- similar to how Brazil's government responded to protests there ahead of the World Cup a few months ago.

And while this would be part of a broader political strategy to defuse tensions and avoid an immediate growth shock to both China and the global economy, it would undermine the longer-term economic vibrancy of both.

— Mohamed El-Erian is chief economic adviser at Allianz, chairman of President Obama's Global Development Council and the former chief executive officer and co-chief investment officer of Pimco.

©Washington Post-Bloomberg

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