Hong Kong’s economy has so far weathered the protests and US-China trade war, but anti-mask law may be the tipping point
- Hong Kong is not Argentina – its financial buffers are strong and the damage of the past few months is not permanent. But the mask ban could signal tougher measures to come, undermining confidence at an especially ominous moment
The charge of complacency is not one that can be levelled against equity investors in Hong Kong. Since its peak on May 3, the Hang Seng Index has plunged more than 14 per cent, with over half of the decline occurring in the third quarter, the worst quarter for the gauge in four years.
Still, there have been no signs of panic in the financial system as a whole since the mass anti-government protests erupted in early June.
Hong Kong’s exchange rate peg to the US dollar, the world’s longest-running currency board, has held strong, backed by an enviably high level of foreign exchange reserves. Partly for this reason, there has been no major capital flight, with just a modest month-on-month decline in local currency deposits in August.
Even in the city’s more vulnerable stock market, the Hang Seng is down only 4.2 per cent since the first mass protest was held on June 9.
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While Asia’s leading financial centre has been on a slippery slope for some time, as the unrest has spiralled out of control, Lam’s introduction of emergency powers is a red rag to a bull in the current, deeply politicised, environment.
This is the kind of reassurance that often backfires in a financial crisis, mainly because it ends up making depositors and investors more nervous than they already were.
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Hong Kong is not Argentina. A cursory glance at the latest credit rating assessments of Fitch Ratings and Moody’s, which lowered their respective ratings on the territory last month, shows how strong the city’s financial buffers are, exemplified by Hong Kong’s status as one of the world’s largest net external creditors.
Until now, the negative domestic determinants of sentiment towards the territory have been offset by supportive external factors.
While escalating trade tensions have put Hong Kong’s economy under significant strain, major central banks’ dovish responses – in particular the US Federal Reserve’s efforts to try to prevent the global downturn from taking hold in America – have relieved pressure on the city’s debt markets and currency.
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Since the mass protests began in early June, the yield on the benchmark 10-year US Treasury bond has fallen a further 75 basis points to come within striking distance of its all-time low.
What is more, mounting fears over a potential global recession in the coming year (which intensified last week due to a raft of bleak economic data across the globe) have made it more difficult to disentangle the external determinants of sentiment towards Hong Kong from the city-specific ones.
Concerns that the backlash against the government’s use of emergency powers marks a new, more treacherous, phase in the crisis make it more likely that the domestic drivers of markets will hold more sway in the coming days and weeks.
Sentiment towards Hong Kong is approaching a dangerous tipping point beyond which investor confidence in Asia’s financial hub may be fatally undermined.
Nicholas Spiro is a partner at Lauressa Advisory