Hong Kong has faced sustained protests over the past four months. The unrest was initially sparked by a proposed bill that would have made it easier to extradite people to mainland China. Protesters have since increased their demands to include, among other things, a move towards universal suffrage.
On a range of measures, Hong Kong’s institutional arrangements more closely resemble those of the UK, its former ruler, than those in China. This includes measures of corruption (or lack thereof), regulatory quality and the rule of law. Indeed, these rankings have moved further away from China since 1997, suggesting that Hong Kong has enjoyed relative autonomy since the handover, as was agreed. One notable outlier in terms of institutional make up is ‘Voice & Accountability’, which captures how much say a country’s citizens have in selecting their government. Hong Kongers have much less of a say than people in the UK. This ‘democratic gap’ may help to explain dissatisfaction among protesters.
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The Hong Kong economy was already facing economic headwinds from Sino–US trade tensions, with exports and imports down by 6% and 11%, respectively, over the past year in August. Domestic political turmoil appears to have exacerbated that weakness. Hong Kong’s PMI was 41.5 in September (50 is the threshold that separates contraction from expansion), implying a large fall in output.
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It is not just businesses that are being affected. Households have suffered from reduced levels of confidence, too. Visitor arrivals were down almost 40% year-on-year in August, helping to explain a 25% drop in retail sales volumes that month. The available evidence points to an outright contraction in GDP in the third quarter. It is still early days, but with protests showing little sign of abating, a fourth quarter contraction, and technical recession, cannot be ruled out either. While the negative shock will cause a headache for businesses and households in Hong Kong, at just 0.4% of world GDP (at market exchange rates), a Hong Kong recession is unlikely to rattle global investors.
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The breadth and persistence of the protests in Hong Kong have surprised many. While living conditions may have played a role, the unrest appears to go beyond economics. The negative economic shock so far has been concentrated on Hong Kong itself, with tourism and household spending in a slump, and business confidence in the doldrums too. The question for global investors is: what happens next?
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