Hong Kong protests far from norm
I'm just back from a business trip that took me to several cities in Western and Eastern Europe. One of the stops was in Paris where the first thing I saw when approaching our office was a loud demonstration. Nothing unusual for France, I thought. However, the same cannot be said for Hong Kong, where I am now. Thousands of protesters have joined the Occupy Central movement, which has paralysed large parts of central Hong Kong. Even though we have only a limited exposure to Hong Kong in our emerging Asia fund, we are monitoring the situation very closely.
Occupy Central (OC) is a political movement that was founded by Benny Tai, a law professor at the University of Hong Kong. OC’s main demand is that completely free elections should be allowed when a new chief executive is elected in 2017. People were angered by an announcement by China’s National People’s Congress on 31 August that election candidates will be vetted by a pre-screened committee of 1,200 people. Initially planned to start on China’s National Day on 1 October, the event kicked off over the weekend instead, with a few thousand students gathering around the Hong Kong Central Government Building. More protesters joined the cause after the police started spraying tear gas. Now named the “Umbrella Revolution” – in honour of the protesters' use of umbrellas to protect themselves against the sun (and tear gas) – it is already regarded as the largest social unrest since the 1997 return to Chinese sovereignty. Estimates indicate that there are around 1 million people supporting the pro-democracy movement and thousands of protesters blocking the streets of the Asian financial center. There are also around 1 million opponents of the movement, who criticise the “civil disobedience” as something that hurts business and the reputation of Hong Kong.
To be fair, besides some local bank branches operating in the protesters’ districts that had to close in the beginning of the week, the banking sector and the stock market have operated normally, even if the usually smooth commute to work has been more challenging. However the market fell 1.9% on the first working day after the start of the protests, while volatility spiked to a six-month high. In the short term, there will be negative consequences for Hong Kong's important retail sector as several shopping districts have been blocked by protests.
Hong Kong retail sales have already been under pressure lately, due to the changing spending behaviour of Chinese tourists, increasingly from the middle class while the high end shoppers from the mainland prefer to go to Korea, Japan or Europe. Tensions have also increased between the people of Hong Kong and Chinese tourists, which has had an effect on Hong Kong’s attractiveness. The current situation will not improve the sentiment of Chinese tourists.
Longer term, Hong Kong is already under pressure due to the change in US monetary policy that will bring about higher rates because the local economy has record-high domestic leverage and high property prices. The territory itself is facing some challenges, such as income inequality, which is one of the highest in the world and delayed infrastructure investment. In addition, besides the perceived increased local political risk, the current situation might have implications related to the positioning of Hong Kong, long considered as the gateway to China. As Beijing continues liberalising and reforming its onshore markets, Hong Kong already now seems to be losing its unique position. The soon to start Shanghai-Hong Kong Connect program, which is a decisive step in opening up the Shanghai stock market through Hong Kong, has been hailed as an important reform to reinforce Hong Kong strategic positioning. At the same time Hong Kong's role is going to weaken if the development of democracy is stopped. Long term, it would be best for both China and Hong Kong if Hong Kong maintained its unique position, which was set out in the UK-China agreement when the British handed Hong Kong back to the Chinese.
