Paper Dragon Vs Virile Elephant ?
Disclaimer: This article touches upon recent political events and like everything political there are voices on all sides who believe their version is the ‘real’ truth. My perspective in this article is from a purely Asset Management perspective i.e. Diversification, Country Risk, Political Risk.
Introduction
Two distinct events have occurred in last few weeks in Asia.
- The Repealing of the Special Status given to the state of Jammu & kashmir in India
- The Hong Kong Extradition Bill
Each of these events are not isolated events in their respective regions but have a long Geo-political and historical background and requires substantial scholarship to appreciate the nuances. I will try to summarize these events to the extent that it enables you to follow along. Although inquisitive readers should read further.
Background
1.The Repealing of the Special Status given to the state of Jammu & Kashmir
India obtained it’s Independence from British Rule in 1947. The British partitioned British India into present day India, West Pakistan(present day Pakistan) and East Pakistan(present day Bangladesh).
At that time India constituted of about 500+ princely states, which were under the indirect control of the British Government. Post-Independence most of the states ceded to the Union of India but a few states vacillated, mainly the state of Jammu &kashmir (J&k).
J&K is located in a strategic location(See Map below)
It has borders with India, Pakistan, Afghanistan, China and former Tibet. As part of the military and political wrangling with external actors (mainly Pakistan) the government of India gave special status to J&K under the so called Article 370 and the related Article 35A.
In summary, these articles implied that J&K could have it’s own constitution, the J&K legislature had complete mandate on all aspects of governance except for Defense, External Affairs and Communications. In addition, the residents of J&K had exclusive rights to own land, apply for jobs and access to education. Mainland Indians did not have any of these privileges.
2.The Hong Kong Extradition Bill
After about 150 years of British Rule( with a brief 3 year occupation by Japan during WW II ) Hong Kong was ‘transferred’ to China.
Under the conditions of the transfer, Hong Kong continued to have substantial autonomy as a Special Administrative Region of China. It could have its own Constitution, Control Immigration but Defense was under the control of Mainland China.
Chinese can technically ‘buy’ land in Hong Kong but, there is no concept of freehold property for anybody in Hong Kong. All land is owned by the government and is leased for 50, 99 etc, years.
One can see the broad strokes similarity between J&K and Hong Kong and these are not the only ones.
How not to pass a controversial bill a.k.a The Hong Kong Extradition Bill
The government of Hong Kong proposed the Hong Kong Extradition bill in April of 2019. The bill implied that residents of Hong Kong and foreign nationals passing through Hong Kong could be sent to trial to Mainland China where the courts are under the control of the Chinese Authorities.
Before looking at the cons of the Bill, let us look at the pros. If Hong Kong is part of China as defined by China (One country, two systems). Then it seems only fair to be able to have a relatively easier policy of extradition when compared to extradition agreements with other countries.
Of course the cons are many, mainly the concern that China can intimidate political activists and dissenters.
The mere proposal of the Bill lead to widespread chaos and protests. The busy Hong Kong airport was shut-down for days in August. The unrest is widely covered in media. All this despite the desperate appeals to calm and promises to kill the bill by the chief Executive Carrie Lam.
Amidst all this ruckus the ‘powerful’ Chinese machinery seems to be powerless and is only issuing vague statements despite escalating violence and demands of the protesters which now include complete independence from China!!!
The Chinese government is also facing a global PR crisis and risk at the same time with regards to its actions or any perceived actions that it takes on the ground.
All of these events show the lack of tact and control to enact a bill within it’s own walls makes China lose face which in Chinese culture is often considered worse than death.
How to do it a.k.a Repealing of the Special Status given to the state of Jammu & Kashmir
India took these precautions during the democratic process of Repealing the Articles—Sent 38,000 army personnel in advance, Imposed curfew in the state of J&K, Shut down Internet and all forms of communication, Placed separatist leaders under house arrest.
Following these precautions, the democratic process was followed and the special status was removed and the state of J&K was re-organized into two separate Union territories. The concept of Mainland Indians Vs residents of J&K no longer applies. The precautionary restrictions that were placed are slowly being eased.
There has been muted reaction from the international community except for Pakistan and China. Pakistan with the support of China tried to internationalize the event by taking it to the UN Security council where UNSC declined to entertain it in a formal session through its voting mechanism.
These Political and PR victories were rounded off by the Uber sophisticated bullet-proof(or killed it in hipster speak) press meet by the Indian Diplomat Syed Akbaruddin after the UNSC session.
Paper Dragon Vs Virile Elephant
China is often compared to a Dragon. High-flying, fire-breathing, Iron-clawed demi-God who can intimidate all the countries in the region. In contrast, India is often compared to an Elephant. Rolly-polly, slow moving, docile creature that lacks both the political will and the ambition to take any decisive actions.
But the recent actions suggest something very different. Just to re-enforce the significance of these events let me provide a scale of the challenges between the two scenarios.
The state of J&K is a hotbed of terrorist activity given it’s proximity to Afghanistan and Pakistan. These terrorists have both political and military sympathizers in Pakistan with which the state shares a vast and extensive border through mountainous terrain. Some of the terror groups have direct links to the Al-Queda and the Taliban.
In short, the kind of people India has to deal with are not High School students with Umbrellas like in Hong Kong but trained, hard-core, suicidal, armed terrorists.
To be fair I do have to cut China some slack as it has been a particularly bad year with the ongoing trade-war with USA and a slowing economy.
Also, regardless of the parallels Hong Kong is no J&K economically speaking. The GDP of J&K is about 17Billion$ while Hong Kong’s GDP is more than 20X at 360Billion$s in spite of having only half the population of J&K at ~7 Million.
Conclusion
From an investment perspective there is a case that can be made for increasing the weight assigned to India as part of a Globally Diversified Portfolio.
These recent past events could re-define the geo-political and hence the economic landscape of the region. Sustained Political will and the ability to implement reforms while working well within a transparent democratic system leads to assigning lower country risk premiums and raising growth forecasts and hence valuations.
On the other hand lack of political will and the inability to implement reforms in a closed system leads to lower valuations.
The Virile Elephant could be a better bet than a Paper Dragon!
