Following the political turmoil in Hong Kong over the past year, and with the coronavirus pandemic putting a damper on the tourism sector and local demand, recession in Hong Kong is worsening this year. In the second half of the year, multiple unfavorable factors are threatening the Asian financial hub’s future. These factors include the recent third wave of Covid-19 infections, growing tension on the trade front, and the enactment of the National Security Law in Hong Kong,

Hong Kong has long enjoyed a unique status of a city state. The tertiary industry is the mainstay of the local economy. Through its division of labor in international trade with mainland China, Hong Kong has played the role of a “shop” and mainland China a factory. All this, together with the high-leverage operation, means the Hong Kong economy can grow or decline at a rate much faster than countries with well-established primary and secondary industries. In August 2020, the Hong Kong Monetary Authority slashed the city’s growth forecast for the year to somewhere between -6 percent and -8 percent from the previous forecast of -4 percent and -7 percent. The contraction rate will be higher than the 5.9 percent recorded in 1998 and may well be the steepest fall since World War II.

Meanwhile, Hong Kong’s GDP in the second quarter has declined by 9.1 percent from the same period last year. The contraction rate was 0.1 percent higher than the -9 percent recorded in the previous quarter. Gross domestic fixed capital formation shrank by 21 percent, exports of services fell significantly by 46.1 percent, and private consumption declined by 14.2 percent. In terms of sectors, the accommodation services and food services sector were the hardest hit, recording a negative growth rate of -47.6 percent, followed by the transportation, storage, postal and courier services sector (-32.3%) and the import and export sector (-21.5 percent). All these figures represent a sharp fall from the previous quarter. As there is a time lapse in financial institutions' response to recession trends (such as the trend involving bad loans), one should pay attention to the impact of the current economic turmoil in Hong Kong and the Chinese government’s response.

Hong Kong’s favorable business environment has attracted foreign businessmen from all over the world who want to make big money. Recently, the National Security Law has been promulgated and implemented in Hong Kong. Nearly 80 percent of Hong Kongers are of the view that many details in the legislation are unclear. This has to do with the opaque way the legislation was enacted. The provisions of the law had been kept under wraps, and no one was able to comment on it. In what is a politically-driven feature, the law deliberately allows the Hong Kong government and Beijing to have the flexibility to enforce the law selectively against certain individuals, so as to create a chilling effect.

For foreign businesses in Hong Kong, what they care most is whether there is rule of law and transparency, rather than democracy and human rights. But according to a survey conducted by the American Chamber of Commerce in Hong Kong in early August, 53 percent of interviewees said that after the enactment of the National Security Law, they started to think about leaving Hong Kong. The poll also indicated that the number of people intending to leave the city was on the rise. In addition, 44 percent of the respondents were pessimistic about the business prospect of Hong Kong, and 10 percent said even if things looked positive in the short term, they felt pessimistic about the medium and long-term prospect. When asked whether they would move their capital out of Hong Kong because of the new law, 39 percent of the companies surveyed said they would quit in the short, medium or long term. It is now clearer than before that more and more foreign firms are contemplating moving out of Hong Kong.

Meanwhile, with the further “Chinafication” of Hong Kong, it is getting harder for foreigners in the financial sector to find work here. Eventually, Hong Kong’s financial industry will become a Chinese financial clique. Foreigners account for about five percent of the Hong Kong population and most of them hold leading positions in the banking and investment sectors. Less than 10 years ago, financial institutions needed talents capable of connecting with the capital market in the West. Today, many Chinese speakers (mainly immigrants from mainland China) can do just that. Demand in the financial industry for people who can speak Chinese is on the rise. Such demand is especially keen and high in areas that involve interactions with customers, such as merger and acquisition, private equity, fixed incomes, stock investment and asset management.

The preference for Chinese speakers in Hong Kong’s financial sector today also reflects China’s growing influence over the international financial hub. According to many headhunters, it is increasingly difficult for people with no knowledge of Chinese to land a job in Hong Kong. Some of them have to take Chinese language classes now. The phenomenon is especially noticeable in jobs that involve direct interactions with people, including sales and research. Yet for jobs related to technology, risk management and product design, one does not necessarily need to speak Chinese.

Beijing’s move to impose the National Security Law on Hong Kong has triggered an international backlash. Because of the law, the city no longer enjoys a high degree of autonomy or meets the requirements for enjoying trade privileges under U.S. law. Because of its declining status, Hong Kong’s position and good reputation as an open business hub are also under threat. It also signifies a collapse of the world’s confidence in Hong Kong’s judicial system. Bearing the brunt is Hong Kong-U.S. trade, which amounted to USD35.5 billion in total value in 2019, compared with USD43.6 billion in 2018. In 2019, China’s exports to the U.S. had a total value of USD451.7 billion, with the surplus standing at USD345.2 billion, which was lower than the USD419 billion in 2018. Some 85,000 American people living in Hong Kong and more than 200,000 citizens from free countries and regions including Europe and Australia are now having to decide whether to stay in or leave Hong Kong. Some 1,300 American companies may also quit the city. All these pose enormous economic and social challenges to Hong Kong.

America’s knowledge-intensive products account for five percent of Hong Kong’s imports. Restrictions on Hong Kong companies purchasing high-tech products will wipe out Hong Kong’s business advantage over China. Besides, Hong Kong may no longer have any delegate to organizations such as the World Health Organization and the Asian Development Bank. It may also become harder for Hong Kongers to travel to the U.S.. With the Pearl of the Orient covered in dust, a window for China to get to know the world properly will also be shut.

When it comes to investing abroad, the number one cardinal principle is to avoid places that are dangerous and unstable. The same rule applies to international financial institutions coming to Hong Kong. Replacing Hong Kong’s “one country, two systems” with “one country, one system” has never taken hold in mainland China because it is not in line with the economic interest of the core group of the Chinese Communist Party (CCP). Besides, no one in Hong Kong supports the idea. Yet “one country, two systems” did get replaced by “one country, one system”. The only explanation is that those involved in the internal power struggle within the CCP want to take full control of Hong Kong’s economic interest through the National Security Law. Now is the time that tests foreign investors' ability to withstand risks in the process of making money, as well as the determination of different factions within the CCP to control Hong Kong.

(Chiu Wan-jung, Professor of Finance, Northeastern University, Boston)

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