Bracing for a drop in Hong Kong

It’s hard to see where Hong Kong is headed, now that the government has decided to invoke emergency powers to ban the use of face masks at protests. There are at least two evident certainties: that protesters will be energized, leading to a rise in violence levels; and that arrest numbers will climb. Beyond that, however, it remains to be seen whether the announcement will hasten a decision in Washington to restrict financial flows through Hong Kong or result in any other damage to the city’s economy caused by a loss of investor confidence.

Key to monitor is whether the decision can be effective in quelling the protests. This, too, is hard to guess at the moment. It will likely embolden the more radical protesters, and radicalize others who had previously been hesitant to commit acts of violence. Yet it will also likely result in violent protesters being taken out of action quicker, blunting the protests as their more charismatic leadership is neutralized. Whether this turns out to be net positive or negative will take time to ascertain.

In the meantime, and apologies if this sounds Cyclopian, but the Greater Bay Area is not likely to be able to chug along as normal and pretend that what’s happening in Hong Kong won’t affect the rest. Putting aside the damage inflicted on the region by plunging international tourism – especially business tourism – it is important to be realistic about the effects of the Hong Kong crisis on the pace and scope of reforms being implemented in the GBA.

Already, there are instances of important regulatory changes being delayed by the protests. One example is the postponement of the Insurance Connect scheme. This had previously been seen as a way to grow the regional insurance industry by allowing Hong Kong-based insurers to offer products to residents of Guangdong, and vice-versa. Now that mainland residents are hesitant to visit Hong Kong to sign paperwork and hand over their WeChat Pay QR codes, that delay is likely to have a deep impact on the industry. It was worth HK$26.33 billion in the first half of this year, and had been growing at nearly 20% YoY before the protests began.

Will this mean the Wealth Connect scheme is further delayed, and the widening of the Stock Connect scheme is put on ice? It seems reasonable to guess so.

Then there is the cancellation of events in Hong Kong aimed at attracting investment into the GBA. It’s not just sporting events; business events are being called off, too. Some, if not many, are GBA-related. One of the most important coming up is Fintech Week, for example. No announcement has been made yet about whether it will be cancelled. But it would be highly surprising if this event is still able to attract the +10,000 attendees it had been hoping for, or whether it still plans to conduct tours for attendees across to Shenzhen.

To be sure, if Shenzhen thinks it is immune to the problems afflicting the city with which it shares four border crossings, it had best think again. This time next month, the Shenzhen World Convention and Exhibition Center opens (look out for our feature next week). How will the world’s largest expo center manage to fill its hallways without Hong Kong as a fully open conduit?

Meanwhile, Paul Chan, Hong Kong’s Finance Secretary, has a lot on his plate. We would be curious to know whether he still thinks it is feasible to push ahead with efforts to attract Guangdong companies to Hong Kong to meet private-equity investors, or to entice so-called “family offices” to set up in Hong Kong so they can tap the potential of the GBA.

All these concerns would be drops in the bucket of investor confidence compared to what happens if the US government does indeed cite the protests as a reason to restrict US portfolio flows into China, the vast majority of which flow through Hong Kong. A few days ago this seemed fantastical. Yet with impeachment hearings against US President Donald Trump gathering momentum, the likelihood is rising that the Hong Kong government’s mask-ban decision could be invoked to launch financial curbs against the city, if not China as a whole.

It is still a highly speculative scenario. Yet it is worth considering, if only because it would be catastrophic for the region, not only Hong Kong. Never mind the drying up of American fund flows via Hong Kong destined for cities inside the GBA. Think also of the GBA wealth that would be at risk of plunging if asset markets start to shudder. There is no hard evidence to back a belief that Guangdong has a heavy exposure to Hong Kong asset prices. But it wouldn’t take a math quant to guess that Hong Kong’s property and stock markets are heavily supported by people living in the GBA. And it is hard to see how Shenzhen’s sky-high property prices would be invulnerable to a decline in Hong Kong’s.

This is not meant to induce panic among readers. Hong Kong has a lot of stabilizers in its toolkit to cope with any crisis caused by a US-China financial war, which remains a remote possibility. The GBA’s nine other cities, as well as the Macau SAR, are well fortified against the worst that could happen in Hong Kong. This is evident in the continuing record-breaking numbers of mainland visitors going into Macau over the current Golden Week holidays, as well as the recent rise in passenger throughput at the Shenzhen and Guangzhou airports. It is at times like these that a non-convertible currency on the capital account is a blessing, too.

It is meant to shake any complacency that may have set in among those who imagine the GBA can shrug off what is happening in Hong Kong. The flip side of greater integration among the “9+2” is that when one suffers, all will feel it worse than before.

Having said that, it can only be hoped that Hong Kong’s suffering does not further deter reformers, or embolden conservatives, at this crucial juncture of the GBA masterplan. The GBA needs to keep embracing its role at the forefront of China’s accelerated opening to the global community. So far, the signs are that the big picture is intact, and momentum is on the side of reformers. Vigilance, however, is needed.

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