Win or lose big? Hong Kong’s hub status a double-edged sword amid Middle East war

HONG KONG – As war plays out in Iran, Hong Kong’s cherished role as a global hub for trade and wealth is cutting both ways.

The ongoing conflict in the Middle East has both laid bare the open economy’s vulnerabilities to market volatilities, and revealed its strengths as a haven to ride out the instability.

The Iran war leaves Hong Kong heavily exposed to risks on several fronts. The city – like many others around Asia, including Singapore – is at the mercy of a massive spike in global energy prices, as it imports nearly the entirety of its fuel needs.

Iran’s closure of the strategic Strait of Hormuz, through which a fifth of the world’s oil supply passes, has disrupted global shipments, driving the benchmark Brent crude beyond US$100.

With no clear end in sight to the conflict that began between the US-Israel alliance and Iran on Feb 28, prices are expected to remain high and volatile for a time.

In Hong Kong, the surging oil prices are already being passed on to consumers, pushing up prices across the city’s transport sector, which will in turn raise inflation.

The city’s flagship Cathay Pacific Airways will from March 18 double its fuel surcharge for most routes from the aviation hub that connects travellers to more than 220 destinations worldwide.

The fuel surcharge per flight for long-haul trips from Hong Kong to cities in Europe, for example, will rise to HK$1,164 (S$190) from HK$569.

Its competitors Greater Bay Airlines and Hong Kong Airlines have followed suit.

The price hike comes as Cathay’s business has recovered only in recent years after heavy losses and layoffs during the Covid-19 pandemic that lasted from 2020 to 2023.

While it announced on March 11 a 9.5 per cent rise in profit in 2025, the carrier has said supply chain disruptions and cost inflation brought on by the war will inevitably affect its operations, such as deliveries of its new aircraft and parts.

It has already cancelled all flights to Dubai and Riyadh for the month of March, and the airline’s stock price has fallen more than 12 per cent since the conflict began.

The climbing oil prices have also hurt bus operators’ and truck drivers’ earnings as their daily fuel expenses jump.

Passenger fares for buses, ferries and other means of transport across the city may soon have to be raised, industry representatives say.

Motorists are crossing the border to mainland China to refuel, where petrol prices are “three times cheaper than in Hong Kong”, according to the Hong Kong, China Automobile Association’s honorary life president Ringo Lee.

The trend has led the authorities to crack down on vehicles illegally transporting large amounts of mainland petrol into the city for sale.

As a global trade hub, Hong Kong is also being hit by the higher shipping costs and delayed logistics timelines due to the surging oil prices and closure of the Strait of Hormuz.

Fuel costs per voyage have risen “20 per cent to 30 per cent”, while rerouted shipments are adding “15 to 20 days” to their overall journey time, transport sector legislator Lothair Lam said.

The upheaval in the Middle East is a blow to Hong Kong’s diversification strategy as well.

The Asian financial hub has in recent years gone big into building trade ties with countries in the wealthy Middle Eastern region amid China’s sustained tensions with the West.

Now, however, the city’s entrepreneurs who have set up operations there will have to rethink their plans, potentially relocating their businesses to safer regions to hedge against the war.

But it’s not all doom and gloom.

Hong Kong officials and some businessmen are seeing opportunities in the conflict.

Finance chief Paul Chan and labour minister Chris Sun have said Hong Kong’s status as a “safe, stable haven” stands it in good stead to attract new capital and talent in times of war.

Treasury chief Christopher Hui reiterated the point on March 15, stressing on a radio programme that “within this crisis lies an opportunity” for Hong Kong.

Since Feb 28, the city’s law firms and banks have received a marked increase in global inquiries to relocate family offices and seek other asset management services, he noted.

“This strongly signals that amid geopolitical conflicts, Hong Kong remains the safest, most stable and ideal asset management platform and hub,” Mr Hui said.

Hong Kong aims to become the world’s top wealth management hub and help set up at least another 220 family offices in the city by the end of 2028, he added.

There are at present more than 3,380 family offices in Hong Kong, with 680 of them having been set up in just the past two years.

The war could also boost Hong Kong’s bid to become a commodities trading hub, the treasury chief pointed out. “In the past, investors primarily considered prices when it came to commodity storage. But now they will also factor in safety,” he said.

Transport minister Mable Chan has also weighed in, saying that Hong Kong can benefit as a “catch-up port” by capturing cargo and passenger traffic redirected from the Middle East.

“We can increase our capacity by adding direct flights to Europe and the United States or by expanding our scope for transit services,” Ms Chan told a radio show on March 14.

Insurers, for their part, are banking on the conflict raising Hong Kong’s status as a marine insurance hub over London, with the city offering cheaper war-risk cover for Chinese ships.

Iran, which maintains warm ties with Beijing, is considering letting Chinese oil tankers through the vital Strait of Hormuz, through which China receives nearly half its oil.

Investment banking firm Natixis’ senior economist Gary Ng believes, however, that Hong Kong has more to lose than gain in the conflict, especially if war is prolonged.

In the worst-case scenario, Mr Ng said, Hong Kong would see net losses if the world enters a period of recession and high inflation as a result of the war.

“The biggest risk (for the city) is the drag from weaker growth and higher inflation, which can hurt overall demand and increase business costs,” the economist said. “Such a negative sentiment can also affect the financial markets and the slowly recovering wealth effect.”

The “wealth effect” refers to the propensity for consumers to spend more as their household wealth, such as asset values and stock prices, increases, even if their income stays the same.

While Hong Kong can serve as a shelter from the storm for global talent and capital seeking to reduce risks by relocating to the city from the Middle East, “such trends can help only marginally for specific sectors, but they cannot fully offset the gravity of weaker global demand”, Mr Ng added.