Hong Kong Gets a Reprieve—if Only for Now

Democracy protests in Hong Kong on Oct. 4 Photograph by Philippe Lopez/AFP via Getty Images

Even before pro-democracy protests rocked the city, Hong Kong’s economy was struggling. In a city that depends largely on demand from the rest of China, the slowdown in the mainland economy was already hurting tourism, retail, and other industries fueled by free-spending visitors from across the border. After six consecutive quarters of growth ranging from 2.6 percent to 3 percent, Hong Kong’s economy grew at an annualized rate of just 1.8 percent in the second quarter.

And that was before the students took to the streets.

For some businesses the picture is going to get darker—even as the risk of confrontation seemed to ease on Monday—since the protests are likely to scare away Chinese tourists during the mainland’s weeklong National Day holiday. “There’s no doubt that Occupy has had a devastating impact on retailing in Central,” Joanne Ooi, chief executive of jewelry retailer Plukka, told Bloomberg Television. The protests could “subtract anywhere from 10 to 30 percent of jewelry retail’s revenue for the month.”

Still, the impact on the rest of the economy might not be so bad. The benchmark Hang Seng stock index closed 1.1 percent higher today, following a 1.8 percent jump on Friday. For all the worries about the disastrous impact on the Hong Kong economy, the Umbrella Revolution has had only a mild effect on stocks. Since the start of the student-led protests, the market is now down only 1.5 percent.

The situation could get ugly again, especially if anti-Occupy groups stage more attacks on students. But with the students and the government now talking, optimists see a way for the protests to end without further violence. “The de-escalation limits the downside risks to the economy,” Bloomberg economist Fielding Chen wrote in a report published today. “The economic impact of Hong Kong’s demonstrations will probably be limited.”

That could all change if the People’s Liberation Army soldiers left their barracks (conveniently located in Central, just across the street from the main protest site). A violent crackdown by the PLA or even Hong Kong’s own police “could lead to heavy casualties,” Daiwa economist Kevin Lai wrote in a report last week. “The damage to the democratic movement, the government and the economy would be immense and long-lasting.” That’s not a risk President Xi Jinping is likely to take at a time when the Chinese economy is struggling, added Lai, who put the chances of this worst-case scenario at 10 percent.

Ratings agencies are sanguine—for now. The showdown between Leung Chun-ying and the students is “not significant enough” to undermine the strengths of the Hong Kong economy, Moody’s said in a statement published today. Fitch also released a statement saying it “does not expect the situation to affect [Hong Kong's] ratings in the short term.”

But Andrew Colquhoun, head of Asia-Pacific sovereign ratings for Fitch, still expressed concern about the impact of the dispute. “The central issue is whether the territory has a government, however chosen, that rests on a basic degree of consent among the population, allowing it to draw up and implement effective policies,” he said. “Without this, the quality of policy-making could suffer and protests and disruption could even flare up again in future and ultimately undermine Hong Kong’s perceived attractiveness as a place to invest.”

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