Hong Kong’s deepening political crisis now risks becoming an economic one.
After protesters brought the city’s airport to a standstill on Monday, investors and business leaders are growing increasingly alarmed by the fallout from 10 weeks of anti-government demonstrations that show no sign of letting up.
The short-term worry is that Hong Kong’s economy is headed for a recession as local unrest combines with the U.S.-China trade war to pummel retail sales, weigh on real estate prices and sink the city’s $4.9 trillion stock market.
But an even bigger fear is that Hong Kong’s standing as a safe and reliable commercial hub will face irreparable damage — a potential death blow for an economy that has leveraged its business-friendly reputation to become the primary gateway between China and the rest of the world.
“Longer term, this poses fundamental challenges to Hong Kong’s status as an international financial center,” said Rory Green, a London-based economist at TS Lombard.
To be sure, few are predicting the imminent demise of Hong Kong as we know it. The city has demonstrated a remarkable penchant for overcoming crises over the past two decades, powering through everything from the Asian financial implosion of the late 1990s to the SARS scare of 2003.
And while Hong Kong Chief Executive Carrie Lam has yet to offer a solution for quelling the city’s unrest, she has said the government is considering “bold” measures to shore up growth. Optimists are betting that the protests will eventually subside without much lasting economic damage, as they did during the city’s so-called Umbrella Movement five years ago.
“Those who purchased Hong Kong stocks during the 2014 protests triumphed,” said Zhuang Jiapeng, a fund manager at Shenzhen JM Capital Co.
Like many of his peers in China, Zhuang has been a buyer of Hong Kong in recent weeks. Investors from the mainland, where news on the protests is heavily censored, have boosted holdings of the city’s shares via cross-border trading links for 17 straight days, data compiled by Bloomberg show.
Still, that hasn’t been enough to offset a broader exodus by international investors. Hong Kong stocks have lost nearly $500 billion of value since the protests kicked into high gear in early June, with benchmark indexes sinking to seven-month lows on Monday after clashes between demonstrators and police turned increasingly violent over the weekend.
The unrest is “longer and more violent than I had expected,” Steven Leung, executive director at Uob Kay Hian (Hong Kong) Ltd. “As long as we keep having such incidents every week, no investors will buy assets in Hong Kong.”
Stock-index futures extended declines in late trading on Monday after Hong Kong’s airport authorities canceled all remaining flights for the day — an unprecedented shutdown for a transport hub that economists at Societe Generale SA estimate accounts for as much as 5% of Hong Kong’s gross domestic product through direct and indirect contributions.
The airport, which handled 427,725 flights last year, is the busiest hub for international passenger traffic in Asia and the world’s largest by air cargo traffic.
“Many executives are likely to start re-evaluating their travel plans to and from the city, which will undoubtedly have flow-on effects for their the daily operations of the companies they work for,” said Benjamin Quinlan, chief executive officer of Quinlan & Associates, a financial-services consultancy in Hong Kong.
While the crowd of demonstrators thinned out on Monday evening and the airport announced plans to reopen Tuesday morning, Hong Kong’s unrest is unlikely to ease any time soon.
The Civil Human Rights Front, a group that has organized some of the city’s largest rallies, said on Monday that it would hold another “mass march” on Aug. 18. Even though Lam has shelved the controversial extradition bill that initially led to the demonstrations, she has refused to formally withdraw it or yield to other demands from protesters, such as her resignation and the appointment of an independent inquiry into the unrest.
Meanwhile, Lam’s backers in Beijing have hardened their stance. Yang Guang, spokesman for China’s Hong Kong and Macau Affairs Office, said on Monday that protesters have committed serious crimes and showed signs of “terrorism.”
Further unrest risks worsening an already dismal economic outlook. Hong Kong’s GDP fell by 0.3% in the second quarter from the previous three months, while a key purchasing-managers index dropped to the lowest since March 2009 in July. Property transactions sank by 35% in the same period and retail sales have slumped for five straight months. “We expect Hong Kong will go into recession,” said Iris Pang, an economist at ING bank NV.
Worries about how China will respond to the protests are adding to investor unease. Shares of Cathay Pacific Airways Ltd., Hong Kong’s dominant airline, tumbled to a decade low on Monday after China’s aviation regulator barred staff who had taken part in demonstrations from flying to the mainland. At least two state-owned companies told employees to avoid using the carrier.
The protests “will hurt the economy, retail sales and most importantly Hong Kong’s relationship with the mainland,” said Hao Hong, head of research at Bocom International in Hong Kong. “Look at Cathay Pacific. The impact is very big and it’s very hard to say if all the negative impact has been reflected in the market.”
The biggest concern for many in the city is that China will eventually use force to restore order. Such a move would undermine the “one country, two systems” principle that has underpinned Hong Kong’s success since 1997, and potentially lead to a crippling withdrawal of special trading privileges by the U.S. On Monday, the Communist Party-backed Global Times reported that the Chinese People’s Armed Police have been assembling across the border in Shenzhen ahead of “apparent large-scale exercises.”
Even if Hong Kong avoids worst-case scenarios, the city’s appeal may already be waning in the eyes of many international companies and investors, according to Brock Silvers, managing director at a Kaiyuan Capital.
The protests represent “one of the more serious threats to Hong Kong’s economy in recent decades,” Silvers said. “Ongoing unrest will surely soon start to make other destinations, and certainly Singapore, look better by comparison.”
— With assistance from Young-Sam Cho, Bruce Einhorn, April Ma, Ken Wang and Cathy Chan.