Hong Kong Has Officially Entered Recession

Hong Kong officially entered recession on Wednesday as it rounded out its fifth consecutive month of antigovernment protests.

Tourist arrivals dropped 50% year-on-year in the first half of October and gross domestic product reached its worst performance since 2009, in the midst of the global financial crisis. Capital investment, private consumption, imports, and exports all dropped.

“Looking ahead, we expect the economy to contract further, as there is no end to the protests in sight,” Tommy Wu, senior economist at Oxford Economics, said in a Wednesday report.

The domestic demand slump caused by the ongoing protests is being compounded by a decrease in external demand caused by “tepid global trade and the U.S.-China trade war,” the Oxford Economics report said.

At first glance, the city’s market for initial public offerings appears to be one bright spot. The Hong Kong Stock Exchange beat out NASDAQ to lead the world in IPOs since the beginning of September, in defiance of concerns that the protests would discourage firms from listing.

Michael Wu, a senior equity analyst at Morningstar Investment Management, points out that despite HKEx’s number one spot for listings, its overall revenue is weaker than last year. Listing revenue is small relative to the exchange’s overall revenue, the majority of which comes from trading and clearing fees.

HKEx’s lower revenue, Wu says, “has less to do with the political events as equity market conditions were generally weak prior to the protests in Hong Kong.”

“The situation is not unique to Hong Kong as IPO activities have been down around 20% globally,” Wu says, citing wider market uncertainties caused by U.S.-China trade tensions and a global growth slowdown.

China’s largest company, Alibaba Group Holding Ltd., will apply to list in Hong Kong in November and aim to raise $10 to $15 billion, according to a Wednesday Reuters report. Alibaba, which is already listed in New York, planned a Hong Kong IPO for August but delayed it due to protests.

The protests started in June with demonstrations against a now-retracted extradition bill, and have progressed into broader calls for democratic reform, among other demands.

Many protesters object to what they see as an increasing erosion of the “One country, two systems” framework that defines the relationship between mainland China and the specially administered region of Hong Kong.

In a rare instance of criticism from a prominent Hong Kong official, the HKEx chief executive, Charles Li, said there are “fundamental flaws” in the “One country, two systems” policy.

“China never really felt confident… that people in Hong Kong were not opposed to one country,” Li said on Tuesday at the London Metal Exchange, which is owned by HKEx. “So that lack of trust is the key reason why China is reluctant to give Hong Kong people, the local people, the local self determination, the two systems.”