Half a million democracy activists are marching through Hong Kong's Central district singing "Glory to Hong Kong," as the skyscrapers of HSBC and Bank of China look on. The marchers include corporate lawyers, financial market players, small business owners, schoolkids and startup executives, a few retirees. They don't fit the image of typical anti-government demonstrators, but then Hong Kong was always unique.

Hong Kong has thrived in its role as a gateway to mainland China, facilitating the runaway global economic success story of the past four decades. Underlying Hong Kong's success of recent years is the concept of "one country, two systems", which is the core of the Basic Law constitution introduced in 1997 and guarantees Hong Kong autonomy.

It is this "one country, two systems" model that gives Hong Kong its uniqueness, appealing to both international investors and those from mainland China, who value the territory's position as the freest place in the world to do business. And yet, this special status also makes finding a resolution to the current wave of anti-government protests so difficult.

"I sell insurance, and for me 'one country, two systems' is like a good insurance policy. It means Hong Kong is a good place to do business. But we don't like it when China wants to make it weak," says one insurance industry worker, surnamed Lam.

The economic situation in Hong Kong is deeply complex. For sure, Hong Kong has seen capital flight, although this has eased as the intensity of the protests has lessened in recent months. There has been around $5 billion (€4.47 billion) in capital outflows from investment funds in Hong Kong since April, soon after the introduction of the extradition bill. This amounts to around 1.25% of gross domestic product (GDP). At the same time, mainland investors tripled their purchases of Hong Kong stocks last year.

Despite months of protest, the benchmark Hang Seng Index clocked up a nine-percent gain in 2019.

Tackling demands of society

Law Ka Chung resigned as chief economist at the mainland Chinese lender Bank of Communications' Hong Kong branch in October, without any official announcement. He says his pro-Hong Kong views are the reason he was asked to leave after more than 14 years.

The protests, along with the US-China trade war and global uncertainty, dragged Hong Kong into a recession for the first time in a decade. While Law believes the protests won't help, overall he argues their impact is limited.

He believes the only way to resolve the economic slowdown is for the government to directly tackle the requests or demands emerging from society.

"But the government isn't going to do that because the Chinese Communist Party doesn't want to show some kind of weakness towards the masses. Whenever you get a riot or demonstrations, they think that it's a bad signal to the market that they are going to let go that sort of behavior," he says in an interview at his home.

Law's views directly contradict the official Chinese view as seen via the state-controlled media. His stance also illustrates the deep levels of mistrust between many Hong Kongers and mainland China.

Pro-Beijing political parties were roundly defeated in district council elections in November. Democracy advocates secured 87% of the seats, up from less than a third. The election was a clear message to embattled chief executive Carrie Lam, who is widely seen as a pawn of Beijing who does nothing to defend Hong Kong.

Beijing has been largely silent since the election. Its main action so far has been to replace Wang Zhimin as the head of the Central Liaison Office in Hong Kong with Luo Huining, a party official known as a troubleshooter.

'One Country, Two Systems' is the key

Hong Kong's destiny is so intertwined with China, it's hard to see how it can be unraveled. Mainland Chinese banks control 38% of bank assets in Hong Kong. In 1997, when the former British colony reverted to Chinese rule, Hong Kong stocks accounted for 90% of the Hang Seng Index constituents. Half of the shares listed on the index now are mainland firms.

Protests in the city were initially sparked by a bill allowing extraditions to China. They later morphed into broader anti-government demonstrations that include demands such as greater democracy and universal suffrage. The protests have, at times, seen violent clashes between protesters and the police.

China, ruled with an iron fist by the Communist Party, does not savor the prospect of democracy on its soil and chafes against the terms of the handover laws. Beijing has said on several occasions the agreement behind Hong Kong's Basic Law is a historical document that no longer has any practical significance.

The democracy side says its unique liberties are what makes Hong Kong so appealing. "Hong Kong heavily relies on trading, financial markets and foreign investment, asset market investment and direct investment," says Wu Chi Wai, chairman of the Democratic Party.

"(They) hope their investment in Hong Kong can be protected under the 'one country, two systems' situation," says Wu. "We hope that the market mechanisms can still be secured … a lot depends on whether Hong Kong can continue to be treated as 'one country, two systems'. Our values are different from the mainland," he says.

Fears of catastrophe are overdone

In 2019, the Hong Kong stock exchange raised HK$314.5 billion ($40.3 billion, €36.2 billion) through 169 initial public offerings (IPOs), the highest amount of any global IPO market. This was boosted by a large secondary listing by Chinese technology giant Alibaba and an initial public offering by brewery Budweiser's Asia Pacific business.

Hong Kong is expected to retain its position as one of the world's top three centers for IPOs in 2020, helping issuers raise as much as €30 billion ($33.5 billion), according to a report by accounting firm PwC.

The economy is expected to contract 1.9% this year, the International Monetary Fund said. This is worse than the government's forecast of a 1.3% decline. Among the sectors bearing the brunt of the downturn are retail and tourism. Wolfgang Niedermark, chief representative of the territory's German Chamber of Commerce, says the effect on German firms is not as severe as expected.

"The bulk of our member companies is in sourcing and they have their regional headquarters here. Also the German Mittelstand [small and medium-sized businesses]. One of those people told me: 'Well, I don't have a single client in Hong Kong. I sell my machines to Vietnam, and to China of course, and the Philippines, and my business is not that much affected'," says Niedermark.

Gateway to China … still

Investors want to do business in China but have reservations about the restrictions to capital flow, the lack of transparency and the absence of freedom of speech. Hong Kong's special status is also important to Beijing, which still uses the city as its main gateway to global capital.

Even with Shanghai becoming an important financial hub and the rise of Shenzhen, Chinese cities lack a truly international dimension. China has few checks and balances beyond those to protect the Communist Party's interests and has nowhere near the kind of freedoms of movement of capital seen in Hong Kong.

Despite the fact that Hong Kong is troublesome, Beijing still needs the former Crown colony. Having said that, the freedoms enshrined under the Basic Law expire in 2047 — who knows what happens to Hong Kong's status after that?