Unrest in Hong Kong stokes fears of capital outflows

No evidence yet, but worry grows with fresh protests over new Bill

Chinese premier Li Keqiang, seen speaking on an outdoor video screen in Hong Kong on Thursday. The emergence of China's national security Bill and the United States response that it can no longer certify Hong Kong's political autonomy is stoking conc
Chinese premier Li Keqiang, seen speaking on an outdoor video screen in Hong Kong on Thursday. The emergence of China's national security Bill and the United States response that it can no longer certify Hong Kong's political autonomy is stoking concern of capital outflows from one of the world's biggest financial hubs. PHOTO: NYTIMES

HONG KONG • 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 is 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 United States 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 US 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 Mr 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 over the laws.

One gauge of stress in Hong Kong's financial system is the flow of capital and whether companies and savers pull their money out.

The Hong Kong Monetary Authority (HKMA) argued this week that there have not been noticeable fund outflows from either the Hong Kong dollar or banking system.

CAPITAL CONTROLS

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.

Ms 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, its strong rule of law and ease of doing business are factors too powerful for China to discard, Ms Kong said.

There is also a 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 is no one measure that shows how capital is moving in and out of Hong Kong and certainly, 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 HKMA - 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 is 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 Mr 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.

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 sank the most in almost five years.

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 Mr Tianlei Huang, research analyst at the Peterson Institute for International Economics. "Confidence is a fragile thing," he said.

BLOOMBERG

Join ST's Telegram channel and get the latest breaking news delivered to you.

A version of this article appeared in the print edition of The Straits Times on May 30, 2020, with the headline Unrest in Hong Kong stokes fears of capital outflows. Subscribe