SINGAPORE (Aug 19): Hong Kong International Airport was paralysed this past week as swarms of protesters in black shirts blocked the departure and arrival gates, causing numerous flights to be cancelled. “It was so packed, I had trouble getting out of the train,” says one entrepreneur, who tried and failed to board a flight out of Hong Kong on Aug 12.
While travellers might have been finding it hard to leave Hong Kong, financial capital is having no difficulty fleeing amid the unrest. According to sources, private bankers in Hong Kong have been discreetly testing the waters for some time by transferring small amounts of funds to Singapore on behalf of their clients. Now, the floodgates are said to have opened, with some wealth management industry watchers saying that as much as $10 billion could be flowing into Singapore from Hong Kong every week.
Meanwhile, Hong Kong-based businesses are beginning to hedge themselves too. “About two weeks ago, we noticed that we were getting business queries — Hong Kong-based firms [are] starting to make enquiries about setting up operations in Singapore on an urgent basis, including those from finance,” says Bryan Tan, partner at Pinsent Masons MPillay.
Protests in Hong Kong, now in their third month, have gone on for longer than many observers expected, sparking nervousness across the business sector about the future of the former British colony. “The protracted and escalating political unrest in Hong Kong is creating an increasingly negative impact on the Hong Kong economy. Widespread protests in central areas of Hong Kong and major disruptions to the railway system and [air travel] are resulting in increasing disruption to Hong Kong’s commercial activities,” says Rajiv Biswas, Asia-Pacific chief economist at IHS Markit.
The protests are also souring relations between Hong Kong businesses and the authorities in China, putting at risk their ambitions of tapping the vast mainland economy. Notably, Cathay Pacific Airways was ordered on Aug 9 by China’s aviation regulator to ban staff from flights to the mainland if they were involved in the protests. Cathay Pacific has fired two pilots recently over incidents connected to the protests. One was arrested and charged with rioting in Sheung Wan on July 28, and the other was sacked for misusing company information on flight CX216 on Aug 13.
“Cathay Pacific Group has a zero-tolerance approach to illegal activities. Specifically, in the current context, there will be disciplinary consequences for employees who support or participate in illegal protests. These consequences could be serious and may include termination of employment,” says Cathay Pacific CEO Rupert Hogg in a message to staff.
Originally triggered by the Hong Kong government’s attempt to pass a controversial extradition law, the protests have since morphed into a general demand for democracy. The protesters have five demands: a complete withdrawal of the proposed extradition bill; a withdrawal of the use of the word “riot” in relation to protests; the unconditional release of arrested protesters and the withdrawal of charges against them; an independent inquiry into police behaviour; and the implementation of genuine universal suffrage.
“The protests in Hong Kong started with a legitimate concern: to sustain meaningful democracy in the context of a looming extradition law. However, the situation has become increasingly risky for all involved and threatens the city’s reputation as a safe and stable business hub, served by a world-class airport,” says Loizos Heracleous, professor of strategy at Warwick Business School.
Troubled times
The unrest is likely to exacerbate the negative impact of the US-China trade war on Hong Kong’s economy. Advance estimates of Hong Kong’s 2Q2019 GDP show a 0.3% q-o-q contraction to 0.6%. “Due to the significant economic disruption to business activity in July and early August caused by ongoing political demonstrations, the outlook for 3Q2019 GDP is also very weak, with negative growth expected on a q-o-q basis. Hong Kong is likely to enter a technical recession in 3Q2019 due to the negative impact of the protests on business activity and retail sales,” says Biswas of IHS.
Beyond the economic numbers, Biswas warns that the news headlines of the turmoil are doing Hong Kong no favours. “The large-scale cancellation of flights into Hong Kong and occupation of the airport by protesters over recent days are compounding the disruption to Hong Kong’s international business hub. This political turbulence is reducing the attractiveness of Hong Kong as an international financial centre for wealth management and asset management, and is reinforcing the position of Singapore as Asia-Pacific’s leading international financial centre,” he says.
Yet, even if the protests fade and economic activity improves, Hong Kong probably will not be the same again. Simon Littlewood, a regional business analyst, notes that Hong Kong just is not all that important to China anymore. And, after this bout of protests, it could be further marginalised. “In the 1990s, Hong Kong was over 20% of China’s GDP,” Littlewood says. “Now, it is single digits. This is the final straw really.” The way he sees it, MNCs will realise that Hong Kong is not the indispensable regional hub that it used to be. “Companies are not going to put up with the increasing risks in Hong Kong,” he adds.
Chong Ja Ian, associate professor at the Faculty of Arts and Social Sciences, National University of Singapore (NUS), says much depends on whether the governments of China and Hong Kong can convince investors of their physical safety as well as the integrity of the rule of law in Hong Kong. “Remember, the rule of law is not simply that laws exist and there is general compliance,” Chong says. “It means an independent judicial system that is able to restrain even the rich and powerful, including the executive and legislative powers of the state. Without such safeguard being effective, Hong Kong could see talent and capital departing. That is what could really shake its position as a financial hub.”
Havard Chi, director and head of research at Quarz Capital Asia, says a key determinant of whether Hong Kong can maintain its position as a preeminent regional hub is its ability to solve the underlying grouses of the protesters. Chief among these is housing affordability. According to him, home prices in Hong Kong have tripled over the last decade, and are now about 18 times the annual median income. Home ownership has fallen to less than 50%, and the average waiting time for public rental housing is five years. “The only winners in the property market are property developers and owners,” Chi says.
He adds: “The irony is that China seems to be doing a much better job in sharing the wealth of the nation. Given the consistent failure and neglect of the Hong Kong government since 1997 to resolve these pertinent social issues, perhaps it is better that China takes a more active approach, providing clear [key performance indicators] to make sure that the Hong Kong administration performs for the people as compared to the freedom they have now.”
What’s next?
The big question is what happens next. Some market watchers fear that China may resort to sending its own security forces into Hong Kong to quell the protests. According to some news reports, uniformed members of the People’s Armed Police Force (PAP) with riot shields and batons have been seen gathering in Shenzhen.
Heracleous of Warwick Business School says: “While the disruption caused by the protests at Hong Kong airport may be bad for business, a wholesale crackdown would have even worse consequences for the territory’s reputation. That could linger for decades if handled inappropriately. A better approach would be peaceful and meaningful engagement between the parties, which should ideally be handled internally.”
Alfred Wu, associate professor at the Lee Kuan Yew School of Public Policy at NUS, figures that any escalation of the issue by the authorities would be “a big concern”. In fact, he believes a softer approach by the Hong Kong government will quickly extinguish the anger among the protesters. “If [Chief Executive] Carrie Lam starts an independent inquiry, [the protests] will die very soon. [The] majority of people will [support that].”
Chi of Quarz thinks it is only a matter of time before the protesters tire themselves out. “We think the situation might get worse before it improves. However, we see a temporary resolution by the end of the year,” he says. “This provides an opportunity for the government to pursue a reconciliatory move to accept a ‘watered down’ version of the ‘Five Demands’.”
Whether this stops the flow of funds from Hong Kong to Singapore is another matter. The fact is that Hong Kong is part of China, and some businesses and investors will prefer to have their assets beyond the reach of the Chinese authorities. “Whether it is safe to keep money in Hong Kong, you have to be very optimistic to keep money here, knowing that at any point, the Chinese government will [change the rules]. That illusion [of autonomous region] is not there anymore,” says Lucas Lee, an investment manager based in Hong Kong.
Yet, the biggest threat to Hong Kong probably is not Singapore but Shanghai, according to a financial professional in Hong Kong who only wants to be known as Shaun. “In the longer term, the bigger question challenging [Hong Kong’s] status as Asia’s financial hub is the emergence of Shanghai and the continuing liberalisation of the Chinese financial system,” he tells The Edge Singapore. “Even today, we have already seen many investment firms reallocating resources out of Hong Kong and into mainland China. Once Shanghai is ready to integrate more closely globally, that will threaten Hong Kong’s status as a financial hub.”
