There is no doubt Hong Kong is in the midst of a crisis with an uncertain path ahead.
August 13th 2019 5:21 am. HONG KONG (Reuters) - Apprehension over capital outflows triggered by escalating political unrest has driven Hong Kong’s stock market to its lowest this year and pressured its currency, with analysts warning of more weakness. The Hang Seng Index (HSI) fell 2.1% to 25,281.30 points on Tuesday, down 16% from the year’s peak, and is at lows last seen in early January.
Now into their third month, those protests ground Hong Kong’s airport to a halt this week and forced flight cancellations even as both protester and police tactics turned increasingly violent. Concerns over China’s slowdown, as the Sino-U.S. trade war remains unresolved, have also dragged on Hong Kong’s economy. The Hang Seng is Asia’s second-worst performer after South Korea’s this quarter. Other risk indicators in markets are flashing red.
It is unlikely Carrie Lam, Hong Kong’s chief executive (or anyone else), back in June ever expected a proposed bill that would allow extraditions to mainland China would ignite the protests now engulfing the Hong Kong Special Administrative Region (SAR) of China. The bill was originally designed to close an extradition loophole with Taiwan (i.e. as part of China). But opponents of the bill feared the legislation’s main purpose was to further extend Beijing’s reach into the largely autonomous Hong Kong. Under the proposed legislation, anyone could be extradited to China for prosecution. This concept is an anathema to many factions of the greater Hong Kong community.
As part of the 1997 handover between the United Kingdom and China, Hong Kong SAR was granted a 50-year period under “Basic Law” [one country-two systems] before being fully re-absorbed back into the Peoples Republic of China (PRC). In response to the unrest, the extradition bill was suspended but not withdrawn exacerbating the demonstrators’ ire with the Lam administration and suspicion of the legislation’s true intent.
But as the staying power of the unrest shows, there are far more grievances than just the extradition bill. And the Lam Administration balancing the aspirations of an unhappy populace against the PRC’s precepts is like being stuck between a rock and a hard place with little room to maneuver.
An Economic Success Story…with a Caveat
As a mercantile city Hong Kong has been remarkably successful with one of the main attributes being the city’s openness and global reach. In this regard, Hong Kong is far ahead of mainland China. And by most economic yardsticks, Hong Kong is an Asian success story in sharp contrast to the saga unfolding in the streets.
According to the World Trade Organization (WTO) in 2018 Hong Kong was the world’s 8th largest exporter of merchandise trade and the world’s 15th largest exporter of commercial services. In 2018 Hong Kong ranked 3rd in the world [only behind China in Asia] in FDI inflow ($115.7 billion) according to UNCTAD’s World Investment Report 2019 report. And Hong Kong ranked 3rd in FDI outflows ($85.2 billion) in Asia behind Japan and China. In 2018 Hong Kong’s stock market ranked the 3rd largest in Asia and the 5th largest in the world in terms of market capitalization. There were 2,315 companies listed on HKEx and the total market capitalization of Hong Kong’s stock market reached US$3.82 trillion.
The City is also the Asian home for many multinationals…particularly from the U.S. According to the Hong Kong Trade Development Council (HKTC) over 18% of the “parent” firms are coming from the U.S. with Japanese companies ranking second at 16.8%.
Even with a population approaching 7.5 million confined to 427 sq./miles the unemployment is at a healthy 2.8%. The region’s GDP in 2018 was 364.8 (US$ bn) up from 2017 GDP figure of 341.4 (US$ bn). The per capita GDP is also a healthy 48,958 (US$) compared to 46,180 (US$) in 2017. [As a point of comparison, the US per capita GDP in 2018 is estimated at 53,500 (US$).]
Besides the turmoil in the streets, Hong Kong is stuck in the middle of the tariff war between China and the U.S. This economic struggle between global heavy weights has taken its toll on an economy built on being a turnstile to the China marketplace. This is the caveat in any economic analysis of Hong Kong – the close ties to the China market can act both to the benefit and the detriment to the fortunes of the City.
According to the Hong Kong government statistics, in 2018, 57% of re-exports were of China origin and 55% were destined for China. For the PRC perspective, Hong Kong is the fourth largest trading partner of China after the US, Japan and South Korea, accounting for 6.7% of its total trade in 2018. Even more importantly, Hong Kong is the largest source of overseas direct investment in China. According to Hong Kong estimates, in 2018 of all the overseas-funded projects approved for the PRC, 46.3% were tied to Hong Kong interests. With such an exposure to the China market, unlike other Asian states, there is little economic cover for Hong Kong.
The Hong Kong Trade Development Council (HKTDC) in their report issued the statement on the impact of the trade war:
In view of the threat posed by prolonged trade disruption and slowing growth in some of the world’s major economies, the HKTDC made a downward revision to its forecast for Hong Kong’s export performance in 2019, from 5% to 2%. Exporters are advised to be more proactive in diversifying their markets and enhancing product competitiveness…
Wider Issues
In an August 7th meeting with the media at the ninth meeting of the Financial Leaders Forum, Financial Secretary Paul Chan in answering a reporter’s question said, “Our [Hong Kong’s] second quarter economic data indicates that, on a quarter-to-quarter basis, the GDP has decelerated in the second quarter, and in fact has come down to negative 0.3 per cent. The economic situation, both externally and domestically was challenging in July. Domestically we are still struggling with our own social issues and externally there are increasing external uncertainties caused by escalating US-China trade conflict as well as other geo-political situations. For the third quarter of this year, if we were to have a negative growth again, then we would be technically in recession…”
Of course, the economics of Hong Kong are tied to the much wider issues facing the community. With recent protests closing the Hong Kong airport, Lam in an interview in the South China Morning Post said, “From what happened in the past week, I am afraid that Hong Kong’s reputation, as a safe society that respects the rule of law, will be in a very dangerous [situation],” she said. “Hong Kong, as an open, free, inclusive, and economically stable city, will also suffer from all kinds of problems.”
The “reputation” of the City could be collateral damage in the overall wrestling match between the protesters and PRC interests. Hong Kong ranked 1st in the Heritage Foundation’s annual “economic freedom score” with a 90.2 tally. On the other hand, China ranked 100th with a 58.4 score just behind Namibia and ahead of Papua New Guinea. If Hong Kong was to become more like any other Chinese city, it is highly likely the ranking would correspondingly fall. Some cracks have already appeared in the distinctiveness of Hong Kong as the City’s ranking in World Press Freedom Index has fallen from 18th in 2002 to 73rd. China is 177th out of 180 nations.
A recent update on the Hong Kong situation from SVA (Steve Vickers Associates), a Hong Kong based company specializing in risk mitigation, corporate intelligence and risk consulting, pointed out that it was unlikely that the PRC would allow the protest to continue past the “70th anniversary celebrations on 1 October 2019. This date may be a “drop dead” deadline.”
How, and indeed when the protests will end is an open question at this writing.
Hong Kong has had to reinvent itself many times and weathered many storms from the initial handover in 1997 and the Asian Financial Crisis in 1998 and the Great Recession in 2009. But the current crisis is a great deal more about how the community measures itself – an existential crisis - than one of any economic event.
It all begs the very large question of what will be the post-crisis new normal in Hong Kong, as the space between a rock and hard place can become suffocatingly narrow.
