By Greg Torode
HONG KONG (Reuters) - Hong Kong leader Leung Chun-ying is facing fresh uncertainty over the political support he has from China after his campaign manager and close ally quit the cabinet last month because of a police investigation into his commodities trading business.
It was the latest in a series of scandals to hit Leung since he took office last July in a move orchestrated by Beijing. In other embarrassments, his development minister has been arrested, there have been mass public protests against the government and opponents have attempted to impeach him.
Local media said the police investigation of Barry Cheung, the latest scandal, could be the last straw. But the senior mainland Chinese official in charge of Hong Kong affairs made the unusual move last week of denying reports that Beijing was preparing to replace Leung.
"It is certainly damaging to his (Leung's) political credibility," said Joseph Wong, a former head of Hong Kong's civil service, of the scandal. "The isolation is there ... and people will question whether he really has the ability and confidence of the people to lead."
How Beijing reacts to the scandal will reflect how far Beijing will go in maintaining the "one country, two systems" formula that underpins Hong Kong's ties with a Communist Party-ruled mainland.
Some analysts say with Leung weakened, and Hong Kong preparing for an annual round of anti-China protests to mark the 1989 Tiananmen Square crackdown, Beijing could move to stamp more authority in the financial hub, which is part of China but has limited autonomy until 2047.
Cheung, Leung's close ally and friend, resigned from the cabinet and other official posts 10 days ago. He is now helping police with their inquiries into the failure of the Hong Kong Mercantile Exchange (HKMEx) that he founded and chaired until it closed last month.
Despite prominent shareholders that included the En+ Group of Russian billionaire Oleg Deripaska and the Hong Kong arm of China's biggest lender, the Industrial and Commercial Bank of China (ICBC), HKMEx's volume of gold and silver future trades had been thin.
The city's market regulator, the Securities and Futures Commission, last month warned of "serious irregularities" in the exchange's operations - sparking police investigations that have led to the arrests of six people.
Three of them, all men, have been charged with possessing false bank documents, including a cheque worth $460 million. Cheung, who was not among those arrested, denied any illegality and pledged full co-operation with authorities.
POLITICAL CLOUDS GATHER
Cheung however resigned from Leung's core policy-making body, the Executive Council, and as chief of Hong Kong's powerful Urban Renewal Authority, which can take over private buildings to guide urban regeneration. He also stepped down from the boards of Deripaska's locally-listed Russian aluminum miner United Company RUSAL Co., and the insurer, AIA Group Ltd.
Known locally as a consummate networker and the "king of public office", Cheung had also headed a civilian committee that reviewed the pay and conditions of Hong Kong's police and other services. At one point he also headed an advisory panel on corruption prevention.
Mounting opposition to China in Hong Kong is also a headache for Leung.
Tens of thousands of people are expected on the streets this week to mark the Tiananmen Square crackdown and, later, the 16th anniversary of Hong Kong's handover from British rule on July 1.
The protests loom just as a wider campaign of choreographed civil disobedience gathers steam. The Occupy Central movement is demanding firm government proposals toward the planned universal suffrage target of 2017, and its threat to shut down Hong Kong's financial district with a mass rally on July 1 next year is already causing disquiet in Beijing.
One Chinese official has warned that Hong Kong must not attempt to undermine mainland politics while the Communist Party mouthpiece Global Times newspaper wrote that Hong Kong could not survive by confronting the mainland.
"China has adequate power to stop Hong Kong (from) ... becoming an adversary," it said in an editorial in March.
Zhang Baohui, a mainland academic based in Hong Kong, said he did not believe the Cheung saga would be enough to deliver a "fatal blow" to Leung, but warned the Occupy campaign would be viewed far more seriously in Beijing.
It could also lead to Beijing taking a more hands-on role over the top of Leung, he said.
Local pro-Beijing political heavyweight Rita Fan said it was unlikely Beijing was considering replacing Leung.
"It is rather early in the day to consider the possibility of changing the chief executive," she told reporters, without elaborating.
Even if Occupy is the ultimate challenge, the Cheung issue threatens to rumble on. Leung and his government are facing calls from opposition legislators to reveal when they first knew about the exchange's troubles.
A long-time confidant of Leung, Cheung acted as his campaign chairman in the Hong Kong leadership race last year. It was a bruising election that saw Cheung reach out to various business factions to ensure the victory.
In a commentary in the South China Morning Post newspaper written the day after Leung was sworn into office by then-Chinese President Hu Jintao last July, Cheung acknowledged a "serious sense of discontent" in Hong Kong.
"What we desperately need is a political ceasefire," Cheung wrote in the piece headlined "Let the government govern" that is still publicized on the website of the Urban Renewal Authority.
"I would like to urge members of our opposition to please give the new government the chance it deserves to respond to the mandate of the people by doing the right things."
(Additional reporting by James Pomfret and Grace Li; Editing by Raju Gopalakrishnan and Michael Perry)