On January 19, 1969, the front page of The Japan Times read “students holed up in Tokyo University’s Yasuda Auditorium withstood a 10-hour siege by 8,500 riot police who had seized control of 16 other buildings held by the students on the university’s Hongo campus.  The students hurled blazing Molotov cocktails, acid bottles and huge chunks of concrete slabs and rocks at the policemen from the roof of the auditorium.”

The following day the paper reported that the auditorium “lay devastated … after riot police completed their sweep, arresting more than 370 students who had holed up there end[ing] more than six months of occupation of the auditorium.”

Concern that the Japanese miracle of the prior two decades might be at an end emerged.  But what was seen as a sign of conflict and disarray proved to be a great opportunity to invest in Japan.   Within one year, the benchmark Nikkei 225 Stock Index rose over 30%.  Within four years, the Nikkei Index had risen from 1,755 to 5,233—almost tripling.

On the morning of May 18, 1980, following the imposition of martial law in South Korea, students gathered at the gate of Chonnam National University in defiance of its closing.  Soldiers and the students soon battled, and the protest moved downtown where it quickly spread to the general population (known as the Gwangju Uprising).  Additional soldiers were engaged and at least 200 people perished before calm was restored.

After the imposition of martial law and the brutish suppression of the protests, concern that the Korean miracle would not reach its full potential emerged.  According to the World Bank data, after 5 years of GDP growth of over 10%, GDP declined by 1.7% in 1980.  Like Japan, what looked like an emerging threat to the country turned out to be a great opportunity to buy Korean equities.   Over the following 11 years Korean GDP grew by an annual 9.97%.

Just as importantly, within seven years, major political reforms were enacted, and, today Korea enjoys an admired position among the community of nations and May 18 is commemorated as a national holiday.  In the decades following similar student unrest, both Korean and Japanese pluralism and human rights improved markedly as the forces of development and advancement required.  Markets followed.

Just as at Tokyo University and Chonnam National University in Korea, last year students occupied Hong Kong’s Polytechnic University trading Molotov cocktails, bows and arrows and catapults with police tear gas, water cannons, and crowd-control projectiles.   The students’ concerns largely mirrored the broad issues facing their Japanese and Korean peers in prior decades.  In November, following six months of escalating protests, the student siege was forcefully ended after at least 1,300 arrests and over 300 serious injuries.  A tense calm remains.

International investors have long considered Hong Kong as a beacon lighting the way for China’s future.  Hong Kong’s capital markets exemplify best-practices as related to market risk, liquidity, transparency, law and regulation.   These recent events have muddied expectations that China’s financial system will match the standards of Hong Kong.  These events also raise questions about the Chinese government’s long-stated intent to fully open their financial system to the world. As such, the world investment community will closely watch future developments.

Protests and strife are unsettling and sometimes frightening.  But observers should keep the lessons of Japan and Korea in mind while watching these developments.   As a country prospers, it is normal for its citizenry to become more engaged in public forums.  And as these new expressions of pluralism find their voice, strife can arise.  With people, growing up can occasionally involve tension between parent and child.  This is a normal part of progress and development.

Depending how this strife is resolved, Chinese (and Hong Kong) equity markets could also produce handsome returns like the Japanese and Korean markets before.   Long-term investors should keep this in mind.


Patrick Pascal,
Co-President of AC One China Fund



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