As Hong Kong’s chief executive Carrie Lam led a huge delegation to this week’s World Economic Forum in Davos, Switzerland, aimed at soothing investors’ nerves given the ongoing domestic strife in the city, she found herself fending questions about a new threat- a coronavirus that has killed 17 people in neighbouring China.
Ms Lam said Hong Kong remained vigilant about the threat as people across China began travelling for the new Year of the Rat that begins on January 25 and highlighted the lessons that had been learned from the outbreak of the SARS virus in 2002.
Yet she also confirmed the first “highly suspected” case of the coronavirus in Hong Kong on Wednesday, and the Hang Seng index was one of several markets that witnessed a sell-off on Thursday, closing 1.5 per cent lower.
“The prospect of the 2019-nCoV virus outbreak getting out of control is a key downside risk for Hong Kong,” said Connie Bolland, who heads Economic Research Analysis, a Hong Kong consultancy.
Hong Kong's economy is already under pressure. The International Monetary Fund forecasts the city's economy will shrink 1.9 per cent for the full year and expand just 0.2 per cent in 2020. "The risks to outlook are titled to the downside," the IMF said.
The Hong Kong government is expected to record its first budget deficit since 2004 this fiscal year, which ends on March 31, financial secretary Paul Chan said last month. Meanwhile, foreign direct investment flows fell 48 per cent to $55 billion in 2019, according to United Nations Conference on Trade and Development data released this month.
“Social unrest will continue to be the major headwind for economic development in Hong Kong,” said Wang Chunxin, principal economist at Bank of China (Hong Kong). He expects the city’s economy to rebound slightly in 2020 with annual GDP growth at about 1 per cent.
The impact of ongoing protests led Moody’s to downgrade Hong Kong's sovereign rating to Aa3 from Aa2 this month. The ratings agency said the move principally reflected an “absence of tangible plans to address either the political or economic and social concerns of the Hong Kong population”.
The city’s reputation as tourist destination and shoppers’ paradise is also taking a hit. Retail sales are down 20 per cent from a year ago, while tourist arrivals have collapsed 35 per cent, with mainland Chinese particularly put off by perceived anti-Beijing sentiment among protesters.
The protests’ effect on the economy has dismayed retail business owners. “With Hong Kong in recession, the future looks bleak,” said Dickson Poon, group executive chairman of Dickson Concepts, which owns the Harvey Nichols department stores and distributes Ralph Lauren apparel in Asia. “Mainland Chinese tourists all but disappeared. The group is extremely pessimistic about the retail climate in Hong Kong.”
Multinational groups are also concerned. While luxury goods maker Burberry Group grew sales in mainland China in “the mid-teens”, Hong Kong declined in “double digits”, according to chief executive Marco Gobbetti. Anglo American chief executive Mark Cutifani, blamed weaker trade in rough diamonds partly on Hong Kong protests affecting retail demand.
Markets are bracing for a ripple effect of into broader Asia-Pacific and beyond. “Unless a solution is found, even more is at stake, which may cause a spillover to broader regional and even global financial markets,” Citigroup Global Markets noted.
The number of mainland China visitors to Macau, the gambling centre 60 kilometres west of Hong Kong, fell 11.1 per cent year-on-year in November, which Andrew Chung, an analyst at Daiwa Capital, attributed to ongoing protests in Hong Kong.
In Taiwan, the independently ruled island that China claims as its own, president Tsai Ing-wen was re-elected with a record majority this month. “Taiwanese scepticism over ties with China [have] only been further deepened by recent social unrest in Hong Kong,” said Vincent Tsui, Asia analyst at Gavekal Dragonomics.
The protests, which began peacefully late in April 2019, then turned violent in June, were sparked by a proposal to amend fugitive offenders legislation that would have allowed extradition to mainland China. Although the bill was shelved, demonstrations calling for its permanent withdrawal morphed into a broader set of grievances, some of which focused on economic inequality.
Hong Kong’s Gini coefficient – in which zero represents maximum equality and 1 represents maximum inequality – now stands at 0.539, its highest level in 45 years and far worse than the US’s 0.411.
While the continuing protests have dented rents, Hong Kong still has the least affordable middle-income housing, according to Demographia, a US-based urban development consultancy. An average residential home in Hong Kong costs $1.2 million, or $2,091 per square foot, compared with $526 in New York and $776 in London, according to real estate company CBRE.
“A deterioration of the socio-political situation and delays in addressing structural challenges of insufficient housing supply … could further weaken economic activity and negatively affect the city’s competitiveness in the long term,” the IMF noted.
The protests have exacerbated a decline in Hong Kong’s office market — one of the world’s most expensive — already hit by China’s economic slowdown and global trade ructions. Overall rents declined by 1.5 per cent quarter-on-quarter in the fourth quarter of 2019, following a 1 per cent dip in the third quarter, according to Savills data.
“Given how hard hit the retail and hospitality industries have been, these sectors are coming under severe cost pressures,” said Ricky Lau, head of office leasing at Savills. He expects office rents to fall 5-15 per cent in 2020.
The residential property market has also been hit. Data compiled by Midland, a real estate agency, showed that an average of 4,649 transactions occurred monthly in the June to August 2019 period, 37 per cent fewer than the 7,410 average monthly transactions in March to May.
The IMF noted that Hong Kong’s “robust policy frameworks and ample buffers” would help it meet challenges. “This has demonstrated Hong Kong’s resilience,” said Simon Mak, chairman of Ascent Partners, a financial consultancy. “I am highly optimistic about the Hong Kong economy in 2020.”
The city is a key international finance centre and its proximity to China is vital.
“Hong Kong remains a favourite of multinational corporations who consider the city a golden gateway to the China market,” said Mr Lau.
That should help fend off competition from potential rivals such as Singapore, which is seeing an increasing number of inquiries from asset management funds about relocation. “Singapore is an obvious alternative but longer flight times to China and high operational costs are still factors which will render any mass corporate migration unlikely,” Mr Lau said.
Hong Kong-based companies have also weathered the storm. “Infrastructure groups directly targeted by protests – such as [mass-transit operator] MTR Corporation and Airport Authority Hong Kong [are] vulnerable to declining passenger flow, damage to properties and lower rental reversions,” said Cindy Huang, credit analyst at S&P Global Ratings.
“But,” she added, “what is perhaps more surprising is how resilient Hong Kong companies have been so far. This is attributable to [their] high historic profitability, robust cash holdings and conservative leverage, and their often oligopolistic market positions.”
Hong Kong also has to weather external factors beyond the local protest movement, such as a slowing China and continuing trade tensions. “The development of China-US economic relations, in either direction, has the potential to have a significant influence on the overall economy of Hong Kong,” said Ulrich Boettger, Hong Kong director of the German industrial giant BASF.