The Chinese Communist Party made modern Hong Kong. They could break it, too.

In 1940, there was only one contender for the financial capital of Asia: Shanghai. With trading and investment volumes 10 times the size of Hong Kong’s, it was a “great cosmopolitan center” compared to the “small village” to the south, according to the British colony’s one-time governor.

The chaotic final years of the Chinese civil war changed that. By the time the People’s Republic was proclaimed in 1949, fighting and hyperinflation had driven an exodus of almost 1.5 million refugees over the Shenzhen River. With them went the fortunes and expertise that built Hong Kong’s postwar boom. Many of the city’s celebrated tycoons, including the late Cheng Yu-tung and fellow real estate barons Lee Shau Kee, Peter Woo and the Kwok family, came to the city as part of that upheaval.

Refugees in Shanghai. Photographer: Bettmann

Locals are now asking whether something similar could happen to Hong Kong itself. As protests against a bill that would have allowed extradition to mainland China degenerated this summer into running battles between riot police wielding tear gas and firebomb-throwing protesters, something has shifted. A city that once prided itself on being simultaneously the most laissez-faire and law-abiding on the planet — an ideal home for the world’s capital — looks more and more like a strife-torn corner of an increasingly repressive China.

Unsafe Harbor

Where would Asia’s financial center of gravity move, if it left Hong Kong?

Defining such a city as the place where major capital allocation decisions are taken, it may not be a hub of free markets at all. China’s overseas direct investment stock of $1.94 trillion overtook Hong Kong to become the largest in the world last year after the U.S. and the Netherlands.[1] Given the Chinese government’s outsize role in the economy, Beijing has eclipsed London and Hong Kong and may already rival even New York as the place where the future of global investment is decided.

That’s not necessarily what we mean when we think of a financial center, though. A good guide might be the 11 qualities underpinning Hong Kong’s status listed in a 1998 speech by Andrew Sheng, then deputy chief executive of the territory’s central banking agency. On that basis the city would have reason to worry.

Four of the named factors — use of English, a skilled population, freedom of information, and efficient infrastructure — are far more widespread across Asia than they were back then.

Five of the others — good government, economic freedom, social stability, the rule of law, and a record of being treated like a nation in economic and financial affairs — are under unprecedented attack as a result of the current crisis. The last two — low taxes and light-touch regulation — are a thin reed on which to build an empire of capital, especially when Singapore offers the same things.

There’s no sign of a full-blown exodus yet — but if a departure comes, it could be surprisingly rapid. For all their prominence in the boardrooms of Central and bars of Lan Kwai Fong, the population of expatriates from rich countries who dominate Hong Kong’s financial sector is minuscule — less than 100,000 in a city of 7.5 million[2] — and defined in many ways by its footloose cosmopolitanism.

Should the economy’s plunge into recession sharply cut the bonus pool next year, the attractions for foreigners of living in a costly, suddenly violent city will be sharply diminished.

“If people resign from a multinational’s office in Hong Kong, nowadays they may look at putting that headcount in Shanghai or Singapore rather than restaffing here,” said John Mullally, southern China and Hong Kong director for Robert Walters Plc, a white-collar recruitment firm. “Those questions are going to be asked more frequently and with more conviction now.”

The formula for stealing Hong Kong’s mantle is no great mystery. Would-be rivals need to have vibrant, innovative capital markets plus the sort of quality of life that could tempt financial professionals to migrate. That means a decent level of English proficiency, (though Hong Kong is by no means in the first rank on that criterion); good transport and public services, particularly international schooling; and, ideally, something of the low taxes and cheap domestic help that many residents privately see as essential to feeling affluent in one of the world’s most expensive cities.

A common-law legal system like the one that underpins legal contracts in most English-speaking countries would help, too — but that will only be replicated in places that already have it, like Singapore.

The most important trump card for Hong Kong is something no other city can quite match. China still needs it — both as its gateway to the world, and as a bolthole for wealthy mainlanders to stash their wealth. Almost two-thirds of China’s inward and outward foreign investment passes through the territory in some fashion or other. If anything, that role could grow as China seeks to attract more foreign funds to plug what’s becoming a persistent capital account deficit. Blocking that conduit could pose risks to the Chinese economy that would dwarf the problems of Hong Kong.

“There is this fundamental view that you can only do business with China if you tiptoe around human rights, fundamental freedoms and civil liberties,” said Anson Chan, the territory’s most senior civil servant for four years either side of the 1997 handover. “It’s just not true.”

Demonstrators clash with riot police in Hong Kong. Photographer: Justin Chin/Bloomberg

After the landslide victory of pro-democracy forces in local government elections last month, most Hong Kong residents would probably be happy with a return to normalcy if it could be coupled with moves towards universal suffrage and tougher scrutiny of the police. But the odds of China instead engineering a clumsy crackdown that would scare off foreign businesses look worryingly high. Killing the goose that lays China’s golden eggs might seem self-defeating, but it wouldn’t be the first time that politics trumped economics in Beijing. As Hong Kong’s last colonial governor Chris Patten once said, “history is littered with the carcasses of decapitated geese.”

We’ll be looking at three potential rivals to Hong Kong and asking whether its lightning can be bottled elsewhere. We’ve excluded several cities out of hand. Shanghai would love to regain the status it lost to Hong Kong in 1949, and across the border Shenzhen has grown from its founding in 1980 to be the bigger city in terms of both population and economic output. While they will benefit from any weakening of Hong Kong’s status, foreign capital and workers won’t flee en masse to any mainland Chinese city.

My home city of Sydney and its longstanding rival Melbourne could also make a case, but any banker stuck on a 10-hour flight to east Asia knows that Australia is too remote. To the west, Mumbai and Dubai have the same problem, and are better considered as gateways to India and the Middle East. Seoul, Bangkok and Kuala Lumpur are great places to visit, but their financial infrastructure is too small-scale to rival other regional centers.

It’s possible that no city in Asia can ever replicate what has made Hong Kong unique, but international workers who have made the city home are asking a similar question to peers in London contemplating Brexit: Where next?

Cities on the fringes of the Pacific have aimed at Hong Kong’s crown before and missed. In the current crisis, they may finally have found their opportunity.

View of Shenzhen China from Hong Kong. Photographer: Justin Chin/Bloomberg