August 14, 2019

The Washington Post
By Jeanne Whalen

With the mainland’s economic rise, Hong Kong is no longer the undisputed center of business and finance in the region. But it still plays an indispensable role that Beijing will be loath to undermine, according to bankers, economists and business leaders.

Pro-democracy protests that have intensified over the summer on Hong Kong’s streets have raised concerns about how far China’s Communist Party will go to quell the unrest. From a business and finance point of view, it walks a fine line, experts say.

Hong Kong is still an essential bridge between China and the wider world, providing a place where Chinese companies can easily raise money from global investors, and where thousands of foreign companies feel secure basing their operations.

“Hong Kong is just a very convenient construct for both China and the rest of the world,” said Richard Marston, an emeritus finance professor at University of Pennsylvania’s Wharton School. “It’s not in China’s interest nor in the rest of the world’s interest to have Hong Kong’s status changed.”

Weeks of instability have shaken that foundation. Hong Kong retail sales fell 6.7 percent in June from a year earlier, hurt by store closures and weakening consumer sentiment amid the protests, according to a retail association. The Hang Seng Index, representing stocks traded in Hong Kong, is down 16 percent from its high point in April.

“The uncertainty, the lack of seeing any kind of outlook as to a more positive and reasonable resolution to this situation is deeply worrying,” said Charles Mok, a tech entrepreneur and pro-democracy lawmaker representing the IT sector, an official constituency, in Hong Kong’s 70-seat legislature. This week, Carrie Lam, Hong Kong’s chief executive, offered little in terms of substantive measures to quell the upheaval, he said. “Basically, she hasn’t said anything,” Mok said.

Hong Kong’s economy has been slowing since January 2018 and grew just 0.6 percent in the first and second quarters of this year, which economists attributed largely to China’s economic slowdown and the U.S.-China trade war. Some warn that continuing unrest could further weaken the economy.

“I expect we will see large falls in output in July and August this year when we get the data,” said Neil Shearing, the group chief economist at Capital Economics in London. If the protests wane as students return to school in the fall, Hong Kong’s economy could quickly rebound, he said. A worst-case scenario, in which Beijing sends troops into Hong Kong, could trigger an outflow of capital from the territory, a spike in interest rates and the collapse of the property market, which is overvalued, he said.

Fitch Ratings has held Hong Kong’s AA+ credit rating steady this summer, saying that any disruption from the protests would not alter the territory’s fundamental strength.

“Nevertheless, some of the assumptions underpinning that rating are currently being tested, including the effectiveness of the territory’s governance and its rule of law,” Fitch said in a July 29 research note.

Tara Joseph, president of the American Chamber of Commerce in Hong Kong, said recent events “have really harmed Hong Kong in the short term.” Some business travelers have canceled trips to the territory, and some are wondering whether upcoming conferences will be scrapped, she said.

Mainland Chinese cities have increasingly challenged Hong Kong’s role in recent years. Some U.S. companies have moved their Chinese headquarters to Beijing or Shanghai. Shenzhen has incubated a fast-growing tech sector. Beijing is home to the largest state-owned banks, and the Shanghai Stock Exchange competes closely with the Hong Kong Stock Exchange.

But those cities cannot duplicate some of the advantages that make Hong Kong important to Beijing and the West, business people say. Unlike China, Hong Kong has no capital controls, meaning investors can freely move money in and out of the territory. That has made it a logical place for Chinese companies seeking international investors to list their shares on a stock exchange. Markets inside China are largely geared toward domestic investors.

And Hong Kong’s legal system, based on English common law, makes the city a more secure and familiar place for international companies to sign contracts, engage in arbitration and base their operations.

“Despite the protests, which hopefully will be resolved by the Hong Kong and the Chinese governments soon, there are still some fundamental factors that will keep Hong Kong as the preferred financial center in the region,” said Anthony Siu, managing director in Shanghai for BDA Partners, an investment bank.

Hong Kong also gives China a kind of soft power that is valuable to Beijing, economists say.

“It’s a global city, a global financial center where people from all over the world want to be. There are very few of those in the world — New York, London, Paris, Hong Kong,” Shearing, of Capital Economics, said. It’s an important place “from the perspective of China’s role in the world,” he said.

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