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This is why China will want to keep Hong Kong politically stable

  • China will want to keep the city politically stable as it expands its reach via the city that is also a preferred location for many Western firms.
  • China has not lived up to its "One Country, Two Systems" promise, say Hong Kong activists.
  • Despite differences, Chinese investments into Hong Kong have flourished.

China's growing influence on Hong Kong has triggered concerns and protests, but Beijing will want to keep the city politically stable given its economic importance to the mainland and appeal to Western firms looking to set up a base in the region, analysts said.

"From Beijing's perspective, Hong Kong is still very important as a bridge to the rest of the world," said Commerzbank's senior emerging market economist, Hao Zhou.

"China wants to have a relatively politically stable Hong Kong, as well as strong financial services in Hong Kong, to enhance China's transition to a service-oriented economy," said Zhou, adding that he expected "supportive policies" from Beijing soon.

Hong Kong was returned to China from Britain 20 years ago on July 1, 1997 under a "one country, two systems" formula which confers wide-ranging freedoms and judicial independence not seen in mainland China.

Concerns in the city about the creeping influence of the Communist Party, however, loom large.

Widespread protests in 2014 saw thousands flood the streets and camp on major roadways, blocking traffic for months, to protest proposed changes to Hong Kong's electoral system.

The disappearance of some Hong Kong booksellers specializing in politically sensitive books in 2015 added to skepticism about Beijing's intentions for the Special Administrative Region.

Despite the political tensions, Chinese investments and businesses have continued to grow in Hong Kong.

The city, said Zhou, has opened a door for Chinese companies, while Western firms prefer to set up a base in its familiar environment. The city is also a bridge for the Chinese financial system, linking it to the rest of the world.

The growing heft of Chinese companies in Hong Kong's markets reflects this.

Companies with the largest market capitalization on the Hong Kong Exchange include Chinese tech giant Tencent and China Construction Bank, according to William Ma, chief investment officer of Noah Holdings, an investment management firm. The Chinese companies were not listed 20 years ago.

Last year, an overwhelming 90 percent of initial public offers in Hong Kong were from mainland Chinese companies, added Ma.

"The impact to Hong Kong is that it has become a hub and bridge (facilitating) the exchange of capital and talent between mainland China and the rest of the world," said Ma.

Despite the economic benefits from a cozier relationship with China, the mainland's political influence over Hong Kong is also seen to be expanding, culminating in the 2014 pro-democracy protests and resentment against the city's current Chief Executive Leung Chun-ying.

"These past five years have not been easy at all," said Chinese President Xi Jinping who arrived in Hong Kong on Thursday to mark 20th anniversary of the handover and to oversee the swearing-in of incoming leader Carrie Lam on Saturday.

Elected in March, Beijing-backed Lam was chosen by a 1,200-person "election committee".

The election of Hong Kong's Chief Executive by a committee rather than through universal suffrage is a contentious issue in Hong Kong. Activists are pushing China to fulfill a constitutional promise under Hong Kong's mini-constitution, the Basic Law, to allow universal suffrage as an "ultimate aim".

Before Xi's arrival on Wednesday, local police arrested 26 demonstrators who clambered up the Golden Bauhinia, a commemorative handover statue, to demand universal suffrage.

"Everyone of (of the Chief Executives) was handpicked by Beijing, they were not elected. That's why whenever there's trouble, you don't find our chief executives speaking up for us. They are always speaking up for Beijing," said Martin Lee, a former legislator and a pro-democracy leader.

"We haven't been asking for anything more than what was promised, and Beijing has yet to deliver," Lee added.

On the other side are those who urge greater patience.

"The freedom that we were so concerned about as a community before 1997 is still here and in fact (there is) more (freedom now)," said Rita Fan, a National People's Congress Standing Committee member, citing fierce criticism of the current administration and chief executive that was not seen during British rule.

Universal suffrage, she said, will happen—eventually.

The issue is that "there are people in Hong Kong who think democracy must be their way," said Fan.

Despite differences, Hong Kong and China are intrinsically linked.

"The most important thing is that Hong Kong, as part of China, should play and important role to serve China's global ambitions," said Commerzbank's Zhou.

China will also do well to keep Hong Kong autonomous to serve the mainland's own interests, said the pro-democracy Lee.

"(President Xi) has got this grandiose plan of One Belt, One Road that involves numerous countries. If things go wrong, they want to make sure there is a good system, a legal system to enable them to have their disputes sorted out in court. Apart from Hong Kong, can you find another Chinese city which has the rule of law?" said Lee.

—Reuters contributed to this article.