The economic consequences of the Hong Kong protests and COVID-19 pandemic

Covid-19 News | Economy & Politics | International | Reports

By Bob Pain, Chairman at The Carlton James Group

The Hong Kong Protests – what many consider a battle for continued independence – has made major news headlines around the world in 2019 and 2020 and shows no sign of stopping. In fact, this particular struggle for sovereignty has been labelled the “worst crisis in Hong Kong” since 1997.

With instances of 800,000 people marching the streets with intent of peaceful protest, military police forcibly attempted to quash their efforts, escalating the violence we’ve seen media wide, ultimately causing Hong Kong to fall into recession for the first time in a decade during Q3 of 2019.

With the protests starting anew during lockdown in Hong Kong over outlawing criticism of China’s national anthem, the end to the protests are by no means in sight.

The crisis has led to Boris Johnson, Prime Minister of the United Kingdom, offering refuge to nearly 3 million people living in Hong Kong.

The initial public revolt began back in June 2019 against the strategy to go ahead with legislation allowing extradition to mainland China. Up until 1997, the nation of Hong Kong was controlled by Britain as a colony but then after came back to China as part of the “one country, two systems” agreement.

When the extradition bill was removed in September 2019, political tension between Hong Kong and mainland China increased significantly due to the fact Hong Kong wanted their own full autonomy and to no longer be included in the “one country, two systems” agreement.

But how have the protests impacted Hong Kong’s economy?

Ultimately, the protests of Hong Kong have created many economic consequences, such as the 18 billion HK dollar decrease in retail sales between Q1 and Q3 of 2019, which was caused by the lack in tourism due to travel safety concerns to the area. In addition, this caused a 3.7% decrease in GDP during the same time period, which explicitly states the impact that the protests have had on the nation’s economy.

Even though the protests will inevitably come to an end, allowing global investments to more regularly flow as confidence returns, the chances of this occurring again are likely. The legacy of the political tension that has been left behind is indicative of the Hong Kong community demanding full democratic autonomy.

So, knowing this can happen again, what does the future hold for the protests of Hong Kong?

Despite the significant decrease of protestors in the streets due to the COVID-19 pandemic and the strict enforcement of social distancing, the protests have resumed during lockdown even with the threat of arrests.

Retail and Tourism

The retail sector is one of the main reasons for Hong Kong’s economic downturn due to the steep decline in retail sales in the country.

As with tourism, the protests coupled with lockdown restrictions have had a similar impact on retail in terms of the amount of sales being produced, causing a major decrease in sales from around 48 billion HK dollars in January 2019 to 30 billion HK dollars in October 2019, an astounding drop of 18 billion HK dollars that would have seemed unthinkable two years ago.

Tourism has a significant impact on the Hong Kong economy – in 2017, accounting for 4% of Hong Kong’s GDP, generating 257,100 jobs (7% of Hong Kong’s employment) with 64.15 million visitors in 2018.

State-enforced flight bans amidst lockdown after protestor-police conflict arising within airports themselves have exacerbated the already faltering desire for tourists to visit the cultural hotspot.

With major contributions from tourism, other complimentary markets such as service and accommodation are taking a substantial hit with an occupancy rate of 29% in February 2020 as opposed to 91% during the same period in 2019.

With tourism gone and the streets empty, even before the pandemic and government-enforced social distancing arrived, visitors to the financial hub plunged 98% during February 2020. Additionally, with no one visiting the city, the service industry, including restaurants, has suffered the same fate.

COVID-19 has tipped the already struggling economic pillars of Hong Kong over the edge.

Local Impact

As private consumption accounts for 65% of the city’s GDP, retail sales amongst local stores have been impacted massively as they fell 25% during October 2019. Locals became ever more cautious of spending as confidence in the global economy waned during the US-China trade war. Inevitably, local businesses were the ones suffering the most. Additionally, the housing market took a hit as the initial volatility of the protests deterred home buyers leading to a decrease in the average price of a new home by 25%.

There are no “safe havens,” as commercial real estate too will ultimately take a hit as there is a growing consensus that office workers are largely capable of working remotely. With Hong Kong maintaining heavily inflated real estate prices, we may see companies downsize offices, decreasing demand and reducing commercial real estate prices as a result.

Global Investment

Before the global pandemic, even amongst the dire global economic outlook as economic conflict waged on amid civil unrest, Hong Kong still maintained its position on top for new stock listings globally.

The already fragile economy saw its growth kept afloat as a gateway for foreign direct investment. With COVID-19 decimating share values and eroding investor confidence amid a global-economic environment of slowing growth, the impact of the protests on the Hong Kong economy threaten to push the economy over the edge and into an established recession. Global investments from other countries/businesses have also faced a similar fate, but is this something that will impact them in the long-term?

Since Hong Kong is a gateway to mainland China, the country remains well-positioned in terms of finance, trade and insurance, which is why they still remain the third most important financial centre after London and New York.

Lockdown restrictions, following a second wave of coronavirus cases, are a cause for concern on areas of the economy as well, particularly service-based industries. With government-enforced restrictions on gatherings, markets, and events, all verticals involving interaction with the public are unable to generate revenue by traditional means. As of late, bankers are being allowed to return to their offices with stipulations of social distancing and referencing government recommendations.

Is the coronavirus going to be the biggest problem in terms of global investment in Hong Kong?

Short-term, the answer is yes. Although COVID-19 is Hong Kong’s main concern in 2020 with the likelihood of continuing into 2021 as the global economy halt foreign investments as investor confidence wanes, the protests will proceed and stay relevant longer-term, even as the state has entered lockdown.

Whilst major indices like S&P 500 grow exponentially, data derived from global recessions in 2001 and 2007 suggests that a double dip is imminent. Stimulus packages introduced in both the US and Europe have inflated share prices synthetically. For example, the US has reaching unprecedented levels of unemployment as 36 million jobs have been lost! By comparison, only 1.1 million jobs were lost during the 2007 global financial crisis. Job losses will only get worse and the global economy will reflect the loss of income on consumer spending.

Amongst the global economy, Hong Kong has yet to see the true repercussions of recession generated by worldwide pandemic. We are most likely to see something similar in Q2 2020.

For what the future holds in terms of the protests and the coronavirus will all depend on how Hong Kong approaches jump-starting their economy amid a global recession, and how they’ll ease anti-China sentiments or whether they’ll ultimately ascertain autonomy or not. Once the lockdown and restrictions ease, protests will ensue in full-force, begging the question – will Hong Kong suffer another wave of COVID-19 cases? The trend of conservative spending as consumer confidence plummets will continue, hampering retail sales. The travel industry will drastically change; tourism being such a vital lifeblood for Hong Kong’s economy may falter until confidence in the global economy returns.

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