Hong Kong's long-term economic role at stake amid demonstrations, say analysts

Protesters face off with police after they fired tear gas during a rally against a controversial extradition Bill in Hong Kong on June 12, 2019.
Protesters face off with police after they fired tear gas during a rally against a controversial extradition Bill in Hong Kong on June 12, 2019.PHOTO: AFP

HONG KONG (BLOOMBERG) - The mass protests in Hong Kong this week are likely to have limited short-term impact on the city's economic outlook, but a potentially more serious one on its long-term prospects.

There are immediate, localised effects: Pacific Place, a luxury shopping mall with about 200 outlets, closed on Thursday (June 13) due to ongoing protests in the area.

Dragon Boat races scheduled for Friday, which had been expected to draw around 60,000 spectators, were cancelled.

A further protest is being planned for Sunday.

While the demonstrations over the proposed extradition law are still at an early stage compared with the Occupy movement that locked down the Central district in 2014, the external headwinds are higher and growth has already slowed to the weakest since the 2009 financial crisis this year.

If unrest over the Bill continues, it will underscore the existing worries that the gradual erosion of autonomy from China will damage its appeal as a financial hub.

"Hong Kong is a Chinese city with Western institutions and a rule of law, and if these qualities are threatened, what would be the advantage of Hong Kong compared with other cities in China?" said Mr Gareth Leather, a senior Asia economist for Capital Economics in London.

 
 
 
 

Protesters blocking key roads in the city's centre and clashing with police resemble the events of late 2014, when pro-democracy activists "occupied" the city for more than 11 weeks.

Hong Kong's economic growth slowed in the fourth quarter of 2014 from the previous period, and the government back then partially blamed that weaker performance on the protests, saying it "affected tourism, hotel, catering, retail and transport industries".

The government also said then that "prolonged political bickering is detrimental" to Hong Kong's international image as a stable and efficient city.

Hong Kong's equity benchmark Hang Seng Index plunged 1.7 per cent on Wednesday amid the most serious unrest so far, with local property developers among the biggest losers, while the Hong Kong dollar strengthened as much as 0.26 per cent, the largest gain in seven months. The one-month interbank borrowing cost, known as Hibor, rose to the highest since 2008.

The city's transport operator had to temporarily suspend train services to Admiralty Station, which is at the heart of the protest area and takes customers directly to the Pacific Place shopping mall.

Hong Kong's government on Thursday postponed the tender for a plot of residential land estimated to fetch as much as US$1.7 billion (S$2.3 billion). Officials cited blocked access to government buildings as a reason.

Separately, Goldin Financial Holdings said it is dropping its bid for another parcel of land, citing "recent social contradiction and economic instability" that would negatively affect Hong Kong's commercial property market.

"I expect to see more cases like this one in the future, as the Bill is considered as a serious threat to Hong Kong's 'one country, two systems' framework, the foundation on which international companies come to Hong Kong to conduct businesses," said Ms Ines Lam, an economist at CLSA.

"I also believe that more companies have not expressed their concerns publicly due to their fears of reprisal from Beijing on any criticism of the Bill."

Prior to the protests, the Hong Kong government's official forecast was for the economy to grow between 2 per cent and 3 per cent this year. Economists surveyed by Bloomberg saw the expansion coming in at 2.2 per cent this year, down from 3.0 per cent in 2018.

Hong Kong's General Chamber of Commerce, which says it represents businesses employing a third of the local workforce, said on Thursday that large-scale protests show the public has "serious apprehensions" about the Bill.

"We sincerely urge the government to continue to listen to stakeholders and engage in meaningful dialogue with the public," said Mr Aron Harilela, the group's chairman, adding that it agrees with the underlying principle of the Bill.

The extradition Bill has been criticised by Western governments and international businesses as a threat to the "one country, two systems" framework credited with maintaining Hong Kong's status as a global financial centre.

US Congressional leaders have vowed to review Hong Kong's special trading privileges if the Bill is passed. Following a previous agreement, the US has been treating the former British colony as fully autonomous for trade and economic matters even after China took control in 1997. That means that, for now, Hong Kong is exempt from President Donald Trump's punitive tariffs on China.

Any change to that status would be a major blow for the territory and its status as a free trading hub.

The International Chamber of Commerce said the risk of being removed to a jurisdiction that doesn't provide the same rule of law as Hong Kong will lead people to reconsider whether to choose the territory as their base of operation or regional headquarters. The American Chamber of Commerce last month also said the legislation would reduce the appeal of Hong Kong.

While there are plenty of concerns about the current protests, Hong Kong's appeal for investors has repeatedly shown resilience, including after the outbreak of the deadly Sars virus in the early 2000s, according to Ms Iris Pang, an economist at ING Bank NV in Hong Kong.

"If Occupy Central and Sars didn't stop foreign investments in Hong Kong, I don't think this one will," she said.