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The View | Markets remain confident about Hong Kong’s future, even though poor leadership is undermining it
- Despite the unrest and Fitch’s downgrade, markets do not believe Hong Kong’s special status as a financial centre is in danger. Rather, it is Hong Kong’s own government that has done more to sow uncertainty about the city’s stability
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Financial markets are notoriously poor at assessing and pricing “tail risks”, improbable yet dramatic events that spread panic across asset classes and often pose a systemic risk.
The threat of military intervention to quell the protests that have wracked Hong Kong for the last three months is one of several tail risks investors are having to contend with. A crackdown would put an end to the “one country, two systems” arrangement, affecting the safe haven status that underpins the city’s role as Asia’s premier financial centre.
Mounting concerns about the impact of the political crisis on Hong Kong’s distinct system of governance led to last Thursday’s move by Fitch Ratings to lower its credit rating on the territory the first time since it reverted to Chinese sovereignty in 1997.
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Fitch said the unrest had “inflicted long-lasting damage to international perceptions of the quality and effectiveness of Hong Kong's governance system and rule of law” and was “testing the perimeters and pliability of the ‘one country, two systems’ framework”. More ominously, it warned that Hong Kong’s institutions and creditworthiness are likely to come under greater strain as the city’s integration with the mainland gains momentum.
However, markets’ reaction to the downgrade was muted, a function of both the lack of new information to trade on and the usual divergence of views between credit rating agencies and investors.
Indeed, ever since the anti-government protests began in early June, there have been scant signs of panic. The Hang Seng Index has been down just 1 per cent since June 6, having already lost 10.5 per cent since its peak on April 9.
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