Analysis: Battered Hong Kong faces economic recession, existential crisis

Shangri-La Asia

26/08/2019 01:05

* Hong Kong to face its first recession in a decade
    * All growth pillars shaken by trade war, civil unrest
    * Beijing increasingly assertive, firms facing climate of
fear

    By Noah Sin and Lukas Job
    HONG KONG, Aug 26 (Reuters) - As one of the world's most
important trade and business hubs, Hong Kong was always going to
struggle this year because of the escalating U.S.-China tariff
war.
    But after three months of anti-government protests, the
semi-autonomous Chinese city, a shopper's paradise and gourmet
destination for millions of tourists each year, is facing an
existential as well as an economic crisis.
    The world's biggest equity deal this year was to unfold in
Hong Kong later this month but has been put on hold. Banks are
issuing unprecedented profit warnings, while hotels and
restaurants are half-empty. Several global events have been
postponed and economists say retail sales could drop by 20%-30%
this year.
    Hong Kong is facing its first recession in a decade, with
all its growth pillars under significant stress. 
    While protesters are disrupting day-to-day activities, 
Beijing has displayed its paramilitary might near the border, 
raising questions over the city's political, financial and
economic future. 
    "Hong Kong is facing a crisis almost unprecedented in its
history," said Edison Lee, equities analyst at Jefferies.
    In the April-June quarter, when the impact of the protests
was mild, the economy shrank 0.4 percent from the previous
quarter. Since then, demonstrations have spread across the
territory, disrupting traffic, paralysing shopping and tourist
areas and closing down the city's sprawling airport at times.
    The third quarter is bound to confirm the recession by its
technical definition of two consecutive quarters of economic
contraction. 
    For the whole year, the government expects growth at 0-1%, 
but some analysts expect it to shrink. Forecasting at this
juncture, given the myriad of pathways the social crisis might
take, is of little value, but the contraction could be severe. 
    "When you have a boom for so many years, and now you get a
bust, the bust is going to be quite massive also," said Kevin
Lai, chief economist for Asia ex-Japan at Daiwa Capital Markets.
    
    CORPORATE WARNINGS
    Citing political unrest, China's biggest e-commerce company
Alibaba Group Holding Ltd  BABA.N  has delayed its up to $15
billion listing in Hong Kong, two people with knowledge of the
matter told Reuters earlier this week.  urn:newsml:reuters.com:*:nL4N25H123
    Bank of East Asia  0023.HK , after reporting a 75% plunge in
first-half net profit due to writedowns in China, warned on
Wednesday about the impact further protests could have on small
and medium enterprises.  urn:newsml:reuters.com:*:nL4N25H0YX
    More than 20 other companies, including developer Henderson
Land  0012.HK , hotel group Shangri-La Asia  0069.HK , Emperor
Watch & Jewellery  0887.HK , department store operator Lifestyle
International  1212.HK  and rail operator MTR Corp  0066.HK ,
said in recent earnings reports the protests have been damaging.
    The Catering and Hotel Industries Employees General Union
told Reuters employers had asked some of its members to take
non-paid leave this month because of the downturn in business. 
    Yiu Si-wing, Chairman of China Travel Service (HK) Ltd, a
major mainland tour operator, said revenue from room sales was
set to plunge 50% in August. 
    "Visits from mainland China that usually account for 80% of
arrivals are down most as people fear for their safety," Yiu
told Reuters.
    Organisers of several conferences and exhibitions are
scrambling to postpone events.
    Trade representatives of the world’s largest diamond trading
centres have asked the organiser of the Hong Kong Jewellery and
Gem Fair to postpone the high-profile event, which typically
welcomes more than 54,000 visitors. The fair is due to be held
in September. 
    BlackRock Inc  BLK.N , the world's largest asset manager,
has postponed a two-day September conference at the Four Seasons
Hotel until February "so that as many partners as possible from
across Asia are able to join."
    On Thursday, the Hong Kong Retail Management Association,
which represents more than 8,000 businesses, urged all landlords
to halve rents for six months and warned if the situation
continued "many retailers may have to sack staff". 
    
    
    HANDS TIED
    Hong Kong leader Carrie Lam has repeatedly warned that
protests are hurting the economy. She has consistently declined
to meet any of the protesters' core demands.
    Instead, this month, she announced stimulus measures worth
$2.4 billion, from subsidies for education and utilities to loan
relief for small businesses.
    But analysts warn that in the current climate, handouts are
ineffective as firms and consumers are in no mood to spend. 
    With no obvious infrastructure upgrades needed, and with the
government having a long track record of failing to adequately
boost housing supply, analysts only expect announcements of more
handouts and tax breaks at Lam's annual policy address in
October.
    Since the turn of the century, every time Hong Kong's
economy got in trouble, the mainland's economic boom or its
stimulus measures came to the rescue. Now Beijing is facing its
sharpest slowdown in nearly three decades and record debt.
    "Hong Kong is on its own this time," said Tommy Wu, senior
economist at Oxford Economics.
    
    GRIM FUTURE
    Rating agencies have raised long-term questions over the
quality of Hong Kong's governance.
    But an increasingly assertive Beijing is fuelling larger
concerns. Mainland regulatory scrutiny on airline Cathay Pacific
 0293.HK  over the involvement of some of its employees in the
protests will affect Hong Kong's image as a safe place for
business.  urn:newsml:reuters.com:*:nL4N25H0MR
    A 1992 U.S.-Hong Kong Policy Act allowing Washington to have
a different customs regime with Hong Kong than with mainland
China is also crucial for economic stability. For it to stand,
U.S. authorities need to see Hong Kong as sufficiently
independent from Beijing, therefore movements of mainland troops
at the border in Shenzhen are worrying.
    But for now, the uncertainty is disruptive enough.
    "The social situation tugs at all our heartstrings," Kaisun
Holdings  8203.HK , an investment holding company, said in a
statement. 
    "Many investors have chosen to leave Hong Kong, and some
banks and (multinationals) have started planning on moving their
base to other nearby Asian cities. Kaisun Holdings may also
begin to look for alternate markets for some of our
service-based businesses." 

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Losing steam Hong Kong economy    https://tmsnrt.rs/2Z6FMvT
Protest pressure Hong Kong economy    https://tmsnrt.rs/2ZabubG
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 (Additional reporting by Kevin Liu, Donny Kwok and Clare Jim;
Writing by Marius Zaharia; Editing by Raju Gopalakrishnan)
 ((Noah.Sin@thomsonreuters.com; +852 2841 5782; Reuters
Messaging: noah.sin.thomsonreuters.com@reuters.net; Twitter: https://twitter.com/noah_sin))