As protests in Hong Kong continue into the New Year, the city will need to address a new hurdle: a slowing Asian economy. The World Bank says the continent is beginning to contend with weakening global demand, an issue exacerbated by the unresolved trade war between Washington and Beijing. Singapore, a harbinger of regional and global economic outlook, eked out growth of just 0.7 percent in 2019, its slowest rate in a decade. Tensions have been bubbling away between Japan and South Korea, and China is struggling to maintain its breakneck economic expansion with GDP figures showing growth of 6.1 percent in 2019, the lowest for almost 30 years.
During past slowdowns, Hong Kong was seen as the lighthouse in stormy waters — an economic powerhouse and political haven that could withstand both regional and global pressures. Carefully cultivated fiscal policies have made the city an indispensable base for multinational banks and corporations. Hong Kong has also maintained the top spot on the 2019 Index of Economic Freedom, which noted that the territory is “an exceptionally competitive financial and business hub that remains one of the world’s most resilient economies.”
Heading into the new decade, however, the reality is more nuanced. Continuing protests have shaken confidence in the city’s financial hub, stymied tourism, and hurt its retail sector. The third quarter of 2019 saw Hong Kong’s economy contract by 2.9 percent — a decline blamed on a mix of protest movements, political uncertainty, and reverberations from the trade war on the mainland.
Fortunately, this downturn is conservatively forecast to end in the latter half of 2020, with the International Monetary Fund (IMF) predicting overall GDP growth of about 1.5 percent for the year. Interestingly, these predictions take into account protest-based disruptions, meaning a healing of the political rifts between the city’s people and its legislature could ease economic stress in 2020.
That, in addition to the tough lessons learned from financial crises in 1997 and 2008, could make Hong Kong one of the region’s best economic performers this year.
Hong Kong’s Past Crises
In 1997, Asia was hit by an economic crisis when currencies across the east of the continent — starting with Thailand — began to fall precipitously, triggering bailouts in some cases by the IMF. As a sell-off intensified, Hong Kong took advantage of its vast foreign exchange reserves to swiftly protect the peg that linked its currency’s value to that of the U.S. dollar. At the time, economists described this peg as “the indicator of political confidence,” and said its loss would have caused capital flight, tumbling property prices and collapsing banks.
Thanks to the foresight to build such large foreign reserves, and the insight to harness them, Hong’s Kong’s stock market was the best performing market in the region during the crisis. The territory’s banking system also remained solvent despite persistent attacks from currency speculators.
Although the contributing factors to the 2008 global recession were different, catalyzed by the U.S. subprime mortgage crisis, lessons learned from the downturn 10 years earlier helped the territory stay on its feet. Donald Tong, Hong Kong commissioner for economic and trade affairs, said the city defied the downturn because of improvements in risk management, a more transparent regulatory environment, a continued focus on financial innovation, and sound fundamentals including “prudent fiscal policies and healthy fiscal reserves.”
Measures were enacted to boost public confidence, including a government guarantee on all bank deposits without a ceiling, prioritizing public infrastructure projects, and a multibillion-dollar plan to unfreeze credit for businesses. Singing praises for the Hong Kong Treasury’s actions, Janet Yellen, who went on to chair the U.S. Federal Reserve, noted Hong Kong was recovering “impressively” from the global recession — more so than the United States.
Third Time Lucky?
The city’s resilience, underpinned by an elastic and dynamic monetary policy, should instill a sense of confidence that it is well-positioned to handle global economic uncertainties in 2020. Yet this time around, Hong Kong will fight a slightly different battle.
Adding to regional economic stress, Hong Kong is beginning to grapple with a new coronavirus that has sent major cities in China into lockdown and sickened thousands of people. Hong Kong has reacted swiftly by deploying temperature screening at airports and rail stations, scaling back cross-border transport connections, and putting hundreds of isolation wards on standby. The full extent of the outbreak is unclear, but for now, Hong Kong’s modern health facilities appear to be proactive in keeping the virus under control, with just 10 cases reported (compared to over 7,700 on the Chinese mainland).
An outbreak would, of course, add significant stress to an economy already weakened by protests. Amid the mass demonstrations and accompanying violence, Hong Kong’s visitor numbers fell by almost 40 percent in the second half of 2019, fueled by uncertainty in public safety. Trips from mainland China have taken a nosedive, and in October were down more than 45 percent compared with the same period last year. The unrest has also hurt retail — in November, sales were lower than the year before, with footfall declining because of how many recent demonstrations had taken place in shopping districts. Small businesses are under strain, and unemployment is rising as a result.
While threats to Hong Kong’s political and economic cohesion do exist, the city is beginning to show cause for strong optimism — not least because of Alibaba’s blockbuster secondary listing in Hong Kong in November of last year. It was the biggest IPO of 2019 by a wide margin and was seen by many as a vote of confidence in the city.
During the crisis of 1998, Joseph Yam, then the chief executive of the Hong Kong Monetary Authority, affirmed, “We are committed to maintaining our position as the world’s freest economy. Hong Kong has built its reputation on free market principles.” With a similar determination, Hong Kong can make it through the challenges of 2020.
Yet for Hong Kong to stay true to form as financially resilient, protest groups and the government will need to begin tough negotiations on how to revive the city’s civility. No doubt this will focus on a cohesive political agreement, and one that reaffirms the functional “one country, two systems” doctrine that has allowed Hong Kong to embrace the West and China so successfully. Yet for serious and credible negotiations to take place, violent protests must also subside. The city’s political and economic future depend on it.
Mohammed Shihab runs a consultancy practice for Middle Eastern funds and businesspeople seeking to invest in Indonesia and the broader Southeast Asian region. He was formerly at the Indonesian Ministry of Foreign Affairs.