Hong Kong is a free marketer’s dream. The tiny island has a GDP bigger than many industrialised countries, low tax and abundant cheap labour, and is a world-class financial centre boasting a stock market with a total value of more than £2.5tn.
No wonder then that the city’s most powerful vested interests are showing signs of nerves after 11 weeks of street protests that have paralysed the city, prompting its biggest political crisis since the handover to China in 1997 and threatening to push it into recession. Even worse, some observers believe the standoff could destroy Hong Kong’s cherished entrepot status and send it on a journey of no return into China’s orbit.
Last week it was Hong Kong’s richest man, Li Ka-shing, and then it was the turn of the former colony’s big banks to take out full-page adverts in local newspapers pleading with protesters to stop the rallies and marches.
Li, a billionaire whose conglomerate has just bought the British brewer Greene King for £2.7bn, pleaded for an end to the unrest “in the name of love”.
Standard Chartered bank, which is based in Hong Kong but also listed on the London stock market, said in Thursday’s advertisements that it supported the city’s government to uphold social order and “guard the status of Hong Kong as an international financial centre”. HSBC condemned “violence of any kind” and called for talks to resolve the dispute.
They have good reason to be worried. The city, which enjoys special economic status out of Beijing’s reach, was already showing the strains of the slowdown in China and the country’s growing trade war with the US. The three months to June were the weakest since 2009. Retail sales fell 6.7% in June and tourist numbers crashed by 13% in the same month.
The city’s spectacularly expensive property market, where average values are 21 times higher than the median income, has also been creaking.
But the regular displays of defiance by hundreds of thousands of citizens against the widely despised city government and the knock-on impact of strikes in the aviation, transportation and healthcare sectors appear certain to push growth down further in the coming months.
In Hong Kong’s Wan Chai district, which has been at the centre of mass marches since June, small businesses say they have seen a drop of 30% to 40% in sales on protest weekends.
Ashley Yue, whose Hong Kong Food Crawlers business takes tourists on food tours of the city, says there has been a 50% drop in private bookings since July.
“There is definitely concern,” she says. “Within the first month of the protest people weren’t so concerned. But the last few weeks, starting in July, things went absolutely crazy. I think a lot of foreigners, when they watch the news, they see a lot of clashes between police and protesters and … are just kind of put off by coming [to Hong Kong].”
She says it is difficult to plan because of the spontaneity of protests. “That really affected my business because as a guide I can’t really tell my guests whether it’s safe or not.”
The consultancy Capital Economics predicts a recession in the next quarter as visible signs of weakness emerge from the fog of protest.
“Retail sales are particularly badly affected and mainland tourism has fallen,” says Capital’s Julian Evans-Pritchard. “Four per cent of Hong Kong’s GDP is from tourism and 75% of tourists are from the mainland and they’ve stopped going because of the way the protests are portrayed there. We see this continuing deep into [the third quarter] with a technical recession – the first since the global financial crisis.”
The economy could bounce back, of course. But the wider question is whether corporations around the world, seeing the way that the Cathay Pacific boss, Rupert Hogg, was summarily forced out of his job after some of his staff came out in favour of the protesters, may find reasons to take their business and their headquarters to cities such as Singapore.
“The bigger concern is more to do with Hong Kong’s image as a stable business environment,” says Evans-Pritchard. “I think this perception has been permanently damaged by the protests. The 2014 umbrella movement was shrugged off. But this time it increasingly feels like a broader form of protest.”
Gary Ng, an Asia Pacific economist at Natixis, agrees that the ousting of Hogg as head of the Hong Kong-based airline, apparently after pressure from Beijing, sent a clear signal to businesses.
“From an economic perspective, multinationals could re-evaluate Hong Kong’s role as a regional business headquarters if domestic political and geopolitical risks continue to rise, which could include pressure from all stakeholders,” he says.
Kyle Bass, founder of the American hedge fund Hayman Capital Management, goes further: he believes US companies will cease capital investment in Hong Kong and that wealthy local families will stop buying property there.
Predicting massive capital flight, he also says they would be “fools” not to change their Hong Kong dollars into greenbacks while the two currencies are still pegged.
But he thinks the clouds over Hong Kong’s economy are darker still. It is not just the denizens of global boardrooms and the city’s elite that fear a loss of order. The much more powerful elite sitting in Beijing, which sees the protests as a direct challenge to its authority, is also rethinking its relations with its increasingly troublesome special administrative region. The Chinese troops massed across the border in Shenzhen suggest a day of reckoning awaits.
“The pattern is set,” says Bass, whose fund has a focus on world events. “Beijing can’t afford to back down and the forces massed in Shenzhen will come in. When that happens all bets are off. If you had family in Hong Kong you would be trying to get them out.
“If you look at geopolitics through history, when people lose faith in their leadership, when they lose faith in their police, there is no getting this back. The bottom line is that the leadership in Hong Kong has abandoned their constituency in favour of Beijing.”
