HONG KONG (BLOOMBERG) - The fresh political turmoil engulfing Hong Kong in recent days is reviving worries over capital outflows from one of the world's biggest financial hubs.
While there's little evidence so far that investors, large companies or expat residents are rushing to move their money, the emergence of China's national security Bill and the US response that it can no longer certify Hong Kong's political autonomy is stoking concern.
The developments come after Hong Kong in the past year was pushed into a deep economic crisis triggered by political upheaval and, since late January, the coronavirus outbreak. The growing worry is that Beijing's latest intervention will finally undermine confidence in the city's prized legal system.
The announcement on Wednesday by Secretary of State Michael Pompeo on Hong Kong raises the potential for far-reaching consequences for the city's special trading status with the US.
"Hong Kong's international financial centre has been built on a huge talent and expat pool," said Kevin Lai, chief economist for Asia excluding Japan at Daiwa Capital Markets. "Many people may leave. They will also take their money with them."
For international investors and executives, much will depend on details of China's new security law and how it affects Hong Kong's judiciary and exactly how the US chooses to respond.
Another big concern is whether political unrest will flare up again after months of relative calm - police and protesters have clashed in recent days in central shopping districts over the China-backed laws.
"Investors are clearly concerned about this," Timothy Moe, chief Asia-Pacific equity strategist at Goldman Sachs Group Inc told reporters in an online briefing on Tuesday. "Political issues will remain at the forefront of market awareness."
US President Donald Trump is considering a range of sanctions to punish China for its crackdown on Hong Kong. Options range from visa restrictions and asset freezes for top officials to imposing tariffs on goods coming from Hong Kong.
One gauge of stress in Hong Kong's financial system is the flow of capital and whether companies and savers pull their money out.
It's a fear that dominated sentiment through 2019 as political upheaval roiled the city, though ultimately capital flows remained broadly stable. The Hong Kong Monetary Authority argued this week that there haven't been noticeable fund outflows from either the Hong Kong dollar or banking system.
Unlike mainland China - where the capital account is tightly controlled - Hong Kong allows money to flow unrestricted. Sustained periods of outflows have occurred during previous bouts of stress such as the global financial crisis and SARS epidemic, and when the Federal Reserve was raising interest rates.
Teresa Kong, a portfolio manager at Matthews Asia in San Francisco, said a lot will depend on how the security law is enforced - a heavy-handed approach could prompt money to flow out of the city.
For now, Hong Kong's role as a source of capital, strong rule of law, ease of doing business and educated labour force are factors too powerful for China to discard, Kong said.
"Hence, my base case is not material capital flight out of Hong Kong," she said.
There's also a powerful counterforce in the form of unprecedented volumes of money flowing in from mainland China, a trend set to continue if Chinese firms increasingly opt to list in Hong Kong instead of the US.
There's no one measure that shows how capital is moving in and out of Hong Kong and certainly, and trends in the currency, stocks and property markets can be skewed by other factors. Instead, analysts rely on a variety of metrics to determine capital flows.
The change in the aggregate balance of interbank liquidity - bank funds held with the Hong Kong Monetary Authority - is among the most visible indicators of fund-flow pressures. Recent intervention by the HKMA to defend the local dollar's peg to the greenback has helped.
A rapid withdrawal of deposits or reversal of portfolio flows would drain confidence in Hong Kong's economy, though there's little sign in the data of a sharp decline.
By one estimate, Hong Kong had most recently registered cumulative net inflows of foreign currency assets from last October through January, before seeing modest outflows in February and March, according to data from Lai at Daiwa.
Any weakness in the Hong Kong dollar can also reflect capital outflows, but the currency's usefulness as an indicator is limited because it has been pegged to the US dollar since 1983. The city's de facto central bank says it remains committed to keeping the currency in a tight trading range against the greenback.
When the national security proposal was announced in Beijing on May 22, the MSCI Hong Kong Index, the city's benchmark of local stocks, plunged 6.9 per cent. That was its biggest slide since October 2008. The Hang Seng Index, which includes Hong Kong-listed mainland stocks, sank the most in almost five years.
City officials including Financial Secretary Paul Chan are trying to allay worries that the moves will threaten confidence in the financial sector. Yet local business groups including the American Chamber of Commerce have voiced concern about the "vaguely defined" law.
Others warn that the line between political tensions and freedom to do business is becoming increasingly blurred.
The recent sequence of events could be the trigger for companies to move out of Hong Kong, taking capital and labour with them, according to Tianlei Huang, research analyst at the Peterson Institute for International Economics.
"Confidence is a fragile thing," he said.