Hong Kong has now been gridlocked by over a week of daily protests that have shut down entire portions of the city. And the chaos doesn't seem likely to end soon. 

Protesters continue to disavow a government they feel is only accountable to Beijing and a police force that they believe has crossed the line into thuggery too many times. But some of their efforts have also gone too far; one man remonstrating with protesters was set on fire last week, while at the weekend a police officer was struck in the leg by an arrow.

With the idea of 'One Country, Two Systems' now seriously damaged, perhaps irreparably if no solution is found, fear is mounting over what China will do in order to quell this latest escalation. Its media have incessantly harangued the protesters, insinuating they are “brain-washed” and whipped up by foreign actors. President Xi Jinping has been quoted by Chinese state media as supporting police violence to end “continuing radical violent crimes”. 

On Saturday, members of the People’s Liberation Army took to Hong Kong’s streets for the first time since the protests began, albeit in t-shirts and shorts, to clear up debris left by protesters. It was a far from subtle message from Beijing: next time, they could come carrying weapons.

Meanwhile, Hong Kong's actual government has been hapless in the face of profound societal problems. Chief executive Carrie Lam is largely invisible, only periodically surfacing to denounce protester violence and refuse any compromises – while also offering no solutions. 

It’s a monumental failure of leadership over what is fundamentally a political problem. Hong Kong’s hard-earned reputation as a well-run commercial and financial centre may never recover.

CHINA’S DILEMMA

But China faces fallout too. For better or worse, Hong Kong has become a prism for international concerns about how it operates. 

The propaganda of Beijing’s political machine has been laid increasingly bare, underlining the Party’s obsession with enforcing its version of events. In contrast, the protesters have been media-savvy, leading international politicians to decry police violence on young students demanding democracy and government responsibility. 

Last week, the US Senate began to fast-track a bipartisan bill supporting democracy in Hong Kong. Floridian Republican senator Marco Rubio introduced a bill on November 6 that would prevent federal employees and military personnel from investing in retirement funds that contain Chinese assets.

At the same time as Hong Kong's protests have caught the world's attention, reports have emerged that Xi personally ordered a crackdown on the Uyghur minority population in China's Xinjiang province, which has led to over one million people ending up in re-education camps. 

If events in Hong Kong deteriorate further, and more disturbing news about human rights abuses emerge in Xinjiang, it’s entirely possible the US and the European Union will feel compelled to ratchet up the financial pressure on China.

There are plenty of ways this could happen. For example, the US Committee on Foreign Investment into the US (Cfius) could be intensely pressured to tighten up its standards over any Chinese investment into the country. That would be bad news for the country's asset owners – China Investment Corporation is a major offshore investor and the country's life insurers are also likely to want to resume large offshore investments once capital rules are eased. 

Meanwhile, US corporations could fall under the microscope of the government, regulators and media for any prominent investments they want to make in China or with mainland companies. The likes of Google, Apple and others may also find their willingness to censor their devices and services in return for access to the Chinese mainland comes home to bite. 

Deteriorating events in Hong Kong would also be bad for US President Donald Trump. He would no doubt like to strike a trade deal that alleviates the trade war ahead of his re-election campaign, but if Beijing bear-hugs Hong Kong any tighter he will come under irresistible pressure to punish it instead.

Indeed, sanctions could begin to be bandied around if the situation in Hong Kong explodes into battle with multiple fatalities, or if evidence of the news about camps in Xinjiang gains more traction. 

CONFIDENCE VS. CONTROL 

The smartest thing Beijing can do to avoid the risk of such escalations would be to let Lam to strike a compromise with protesters (that would also force them to organise well enough to give her representatives to talk to). 

While the protesters' demands of universal suffrage is likely out of the question, it’s possible she could promise that an independent judicial commission would be appointed to review the worst actions of both police and protesters. If she buttressed this by promising to step down quickly (perhaps by year’s end), it could lance much of the city’s ugly mood. 

From Beijing’s perspective, this relatively little degree of compromise would do wonders for its international image. It would demonstrate its willingness to permit some difference in operations of the city it had promised to leave to its own affairs for another 28 years. 

It would also nullify the arguments of its most vocal international critics, win it friends overseas, and reassure American companies and investors that they are dealing with a (relatively) open-minded country that sticks to its promises. 

That would be a far better for China than to lean into its current perception as a suspicious, controlling power that brooks no dissent and tears up agreements once they’re no longer useful.