Hong Kong protests start to hit the economy

The waves of demonstrations that began in June show no signs of abating. Indeed, the protests have been backed by strike action that has caused, for instance, stoppage of most of Hong Kong’s public transport. A substantial deterioration in economic conditions would complicate resolution of the special administrative region’s already messy political problems.

While the economic impacts from strikes and protests are hard to quantify, it is clear that strikes immediately affect production and add to political uncertainty and instability that drive away potential investors and tourists.

Hong Kong’s on-year GDP growth fell to 0.6 % y-o-y already in the first and second quarters of this year. More recent data show Hong Kong’s Hang Seng index fell by nearly 10 % last 30 days. There were no similar declines on any other major stock exchanges. Retail sales and real estate shares, which are highly dependent on condition of the Hong Kong economy, have been hit hardest. The share prices of Chinese firms listed on the Hong Kong stock exchange have also tanked. The slowdown in mainland China’s economic growth is a major factor in Hong Kong slowing growth.

The Hong Kong Monetary Authority (HKMA) has pegged the Hong Kong dollar to the US dollar for decades with fixed exchange rate (currency board). Possible loss of confidence in the HK dollar would call the HKMA to intervene to prop up the HK dollar which would show up in the money market. So far, the situation seems to be stable and interest rates show no particular stress. The recent increase in forex reserves helps the HKMA defend the currency peg.