As protests continue in Hong Kong, where it has been seven days since students first took to streets, attention has shifted to the impact on Hong Kong’s economy and its unique role as a financial gateway to China. Many commenters pointed to Hong Kong’s stock market selloff and luxury store closures as a sign protests were dramatically hurting Hong Kong. The People’s Daily, the Communist Party’s mouthpiece, said yesterday, “It’s not fair that Hong Kong’s stock market tumbles day after day.”
But in a sign of how fears have gotten ahead of reality, Hong Kong’s Hang Seng stock index actually rose half a percent on Friday. Closed bank branches reopened and protestor barricades were removed from some roads.
“As far as the economic impact is concerned, it’s only in retail sectors,” says Raymond Yeung, a senior economist at Australia and New Zealand Banking Group in Hong Kong. “Financial markets have performed smoothly. There’s no impact on banking or their stock exchange.”
The fear was that tourism and retail, which make up 10% of Hong Kong’s GDP, would collapse amid street protests. The city is a draw for mainland tourists – particularly this week, which is a national holiday and one of the busiest travel times in China – who enjoy prices sometimes 40% less than what they pay in Beijing or elsewhere because of Hong Kong’s lack of value added tax and duties. Some retailers say 90% of their business comes from mainland tourists.
But a real collapse remains far off. Visitors to Hong Kong during Wednesday’s National Day, commemorating the Communists’ rise to power 65 years ago, only fell 7% from a year earlier. Yeung has estimated that protests cost Hong Kong’s retailers about $280 million, or 6% of their monthly sales. Of the city’s total retail sales, he estimates about a third are generated in the affected districts of Admiralty, Causeway Bay, Canton Road and Mongkok.
“The long-term impact is business sentiment and consumer confidence,” says Yeung. “But we need to see what will happen over next few days—we don’t know whether the government will take more action, or whether the protests (will) finish peacefully.”
Before protests clogged streets, Hong Kong’s luxury shops were already suffering from a Chinese anti-corruption campaign, now well into its second year, that has dramatically hit sales of luxury gifts. Prada SpA (PRDSY), Burberry Group Plc (BURBY) and France’s LVMH SA (LVMUY) have all warned this year that business in China was cooling off more or less sharply.
Analysts at Barclays in London said in a note to clients Friday that they expected the decline in luxury sales in Hong Kong to continue, even though the situation has now stabilized in the mainland.
Others are more upbeat: CLSA analysts, meanwhile, didn’t expect protests to have any lasting impact on the stock market, and some investors are even stepping in to take advantage of the gloomy mood. Templeton’s Emerging Markets Group, led by Mark Mobius, said they were planning to buy Hong Kong stocks that had sold off during the protests.
Late Thursday night, Hong Kong’s leader CY Leung refused protestors’ calls for his resignation and instead agreed to talks with the protest leaders. It seemed like a tactic to stall protestors’ momentum while the government looks for an end. Protestors continued barricading the government’s main office on Friday while they waited for talks.
The bigger fear is that protests shut down commerce for an extended stretch. That remains possible, but on Friday Hong Kong was resuming some normalcy. Barricades protestors had erected around the shopping area Causeway Bay were removed and police were visiting other sites to remove protest remnants.
Political protests have a long and mostly peaceful history in Hong Kong. Since its handover to China in 1997, Hong Kong citizens have staged annual July 1 protests to demand democracy and universal suffrage. Some years they’ve reached 500,000 people.
The analysts at Gavekal Dragonomics in Beijing included a cheeky quiz about the protests’ impact on stocks in a report today:
“China’s People’s Daily newspaper… has slammed this week’s pro-democracy demonstrations in Hong Kong, promising “unimaginable” consequences for the city and its people if the protests continue. The democracy movement “has undermined Hong Kong’s unwavering prosperity.” … “It’s not fair that Hong Kong’s stock market tumbles day and after.”
The quiz asked how much has the index fallen since the start of the protests?
- A) -4.1%
- B) -6.5%
- C) -14.5%.
The correct answer is A. “That means since the start of the protests,” Gavekal writes, “the Hong Kong market has managed to outperform several other major stock markets including Japan (-4.2%) and Italy (-4.3%). Over the same period it is streets ahead of emerging markets including Brazil (-6.5%) and Argentina (-14.5%).