The latest bout of social unrest in Hong Kong was kicked off on September 22nd by a student boycott. Amid a tough response from police that generated public sympathy for the students, Occupy Central's organisers brought forward their planned action. Their sit-ins, centred around Admiralty, Causeway Bay and Mongkok, gathered further popular support after police used tear gas and pepper spray against unarmed protesters. The security forces subsequently dialled back their approach, standing down riot police.

Although the students took the first step, Occupy Central had been planning direct action since late August, when China's government came out with electoral reform proposals for Hong Kong that fell short of its demand for full democracy. China's leaders raised the prospect of direct elections for the post of chief executive (the territory's top political position), but only candidates who secured backing from a majority of a screening committee would be able to stand in the election. It is assumed that this committee would resemble closely the current committee that selects the chief executive, which is stacked with members of the local establishment. Most of these take their cue from the government in China's capital, Beijing.

The cause of democracy has been a rallying cry for the sit-ins, and has brought in backing from many politicians in Hong Kong's pro-democracy camp. However, other factors have fed a sense of dissatisfaction that has fuelled the protests. Rapid increases in the local cost of living—and especially for house prices—have generated resentment among young residents, as well as the less well-off. Income inequality in the territory is extreme, and although unemployment is low and economic growth has been respectable in recent years, many feel that they are being left behind or marginalised.

The primary target of this resentment is China. Purchases by wealthy mainlanders have been one of the reasons that house prices have soared to unaffordable levels. Hordes of mainland tourists contribute to overcrowding and to the multiplying number of luxury retail outlets that flaunt wealth in the face of less prosperous locals. Immigration by mainlanders (including by expectant mothers seeking Hong Kong residency status for their children) is another concern. Adding to the friction is a sense that these mainland arrivals behave poorly. Accusations that the Beijing government is restricting political freedom, or eroding the freedom of the press and the independence of the judiciary, tap into this wider antipathy towards the mainland.

The local political and business elite have failed to address the public's concerns, and are increasingly seen as stooges of the Beijing government. Hong Kong's tycoons were once seen as representatives of its dynamic economic culture, but are now portrayed more as cosseted fat cats. The reputation of the territory's politicians has been undermined by a series of scandals, many of which have suggested inappropriately close ties between them and wealthy corporate executives. Matters have not been helped by the ongoing trial of Rafael Hui, formerly the head of the civil service, who testified that he had received HK$11.2m (US$1.4m) from "someone in Beijing" when he was in financial trouble. Many wonder what favours such sums bought.

Although the cause of full democracy has been the rallying cry for the protests, the aggressive response by police seems to have been an important factor in bringing out additional crowds to support them. Indeed, many in the territory remain ambivalent about, or opposed to, Occupy Central itself. Some brand the students entitled lay-abouts, and argue that the sit-ins cause traffic disruption and prevent hard-working people from going about their business. The Chinese government seems to favour this perspective, and has also suggested that "foreign forces" are promoting the demonstrations.

Others believe that a more pragmatic approach should be taken on political reform, given that the central government is very unlikely to change its mind. However, this ignores the fact that the electoral reform proposals in many ways represent a backwards step from the current status quo, in which only one–eighth of the selection committee's votes are needed for a candidate to run for the chief executive's office.

Concerns about the impact of the protests on the economy have been partly offset by the fact that they have spanned the October 1st–2nd National Day holiday in the territory. Even so, the local retail sector is likely to have been badly hit, as Mongkok and Causeway Bay are two of the territory's top retail locations. The Chinese government has suspended tour group visits to Hong Kong, and arrivals from the mainland more generally during the "golden week" holiday over the first week of October will be lower than in 2013. Retailers of luxury goods, cosmetics, jewellery and consumer electronics will be particularly affected, but restaurants and hotels are also likely to see lower revenue.

The longer-term effect on the business environment is hard to predict at present. The unrest has made investors think deeply about the long-term stability of the territory, putting political risk much higher on the agenda than it has been in the past. However, should the scale of the protests diminish in the near future, there is likely to be little lasting impact.

 

For China's leadership, the demonstration has been unsettling. The man in charge of Hong Kong affairs, Zhang Dejiang, and the head of the central government's local liaison office, Zhang Xiaoming, will face difficult questions. Many will doubtless call for a tougher approach towards Hong Kong's disruptive elements—but both men were already considered hardliners prior to the protests. Moreover, it is notable that the increasing level of interference by the central government in Hong Kong affairs has been one of the reasons why the local authorities have been so unsuccessful at handling the unrest. Forced to parrot policy lines laid out in Beijing by politicians with little experience in handling the public in a more liberal political and media environment, the chief executive, Leung Chun–ying, and his administration have not sounded credible.

Despite all this, suggestions that the Beijing authorities could move to quell the demonstrations by force look wide of the mark. Any such move would severely harm the territory's economy, and could spell the end of its status as a hub for international business. It would also probably have major repercussions for China as a whole. Chinese exports and investment would face additional barriers to entry in most developed markets, even if formal sanctions were somehow avoided. With the domestic economy already slowing, that would have very worrying effects on China's economic stability. With no sign at present that the Hong Kong sit-ins are catalysing unrest on the mainland, there is little incentive for the central government to risk this sort of outcome.

The Economist Intelligence Unit believes that the most likely scenario is that the protests will last for several weeks, but at a much-diminished level. It is likely that the "occupation" will be trimmed to a more modest site around the government's offices in Tamar—reports suggest that the sit-in in Causeway Bay has already been wound down and that attendance at the others has also fallen. The lingering Tamar protest will cause disruption, but not on a scale that should significantly hamper business.

However, more disruptive outcomes remain a possibility. Anger within the democratic camp could be reignited if the government adopts a dismissive approach in the talks that it has promised with representatives from the sit-in movement. A hardcore of protesters could take more provocative action, such as storming government offices (as some have already threatened) or launching hunger strikes. A harsh response by the authorities could bring people back onto the streets. In any event, having staged one successful demonstration the democratic camp may look to stage similar events in the future. Regular disruption would irk businesses and could polarise political views in the territory, making it harder to govern.

The positive aspects of the protest should not be dismissed. The sit-in has been largely peaceful and participants well behaved. The action will stimulate the government to do more to address non-political public concerns, such as housing and social inequality. Nonetheless, on the issue of democratisation it remains unlikely that the government will give any ground and Mr Leung will not resign. Further clashes over the issue of political reform are likely. More worryingly, anti-mainland feeling will continue to build. In the longer run this may pose even more dangers for the territory than the debate over democracy