Commentary: Amid gloomy outlook, Hong Kong wrestles with novel coronavirus. But it’s surprisingly resilient
The Hong Kong economy has weathered two recent economic crisis over recent decades. But the novel coronavirus and continuing protests pose a different challenge, says Mohammed Abdul Shihab.
DUBAI: As protests in Hong Kong continue into the New Year, the city is grappling with a new challenge: A slowing Asian economy made worse by the novel coronavirus outbreak.
The coronavirus shows no signs of slowing, having infected more than 30,000 people and claiming hundreds of lives in mainland China.
Hong Kong has reported more than 20 cases and at least one death. At least four of the reported cases were transmitted locally, leading some to say that the city is on the brink of a community outbreak comparable to SARS.
Meanwhile, the World Bank says the continent will have to contend with weakening global demand – a challenge exacerbated by the largely unresolved trade war between Washington and Beijing despite a Phase 1 deal.
Growth in East Asia is projected to ease to 5.7 per cent in 2020, reflecting also a moderate slowdown in China and external headwinds. But these projections may be downgraded again in light of the worsening effects of the novel coronavirus on the Chinese, and thus the Asian, economy.
Markets were stable early last week on the back of estimates that this new virus would have little economic impact given the 2003 SARS outbreak did little damage.
Last Thursday, however, global markets dove after news of an uptick in new infections, and, that the lockdown imposed in China has effectively shut down vast swathes of its working population. The selloff continued in China on Monday as stocks there dropped 8 per cent.
READ: Commentary: We know more about the novel coronavirus but uncertainty remains about how virus spreads
THE LIGHTHOUSE IN STORMY WATERS
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.
Compounded with reverberations from the trade war, Hong Kong’s economy contracted 2.9 per cent in the fourth quarter of 2019, marking the third consecutive contraction in the city state’s first recession in a decade.
This downturn is conservatively forecast to end in the latter half of 2020, with the International Monetary Fund predicting overall GDP growth of about 1.5 per cent for the year.
Interestingly, these predictions already take into account disruptions arising from the months-long protests, meaning an easing of these disturbances could ease economic stress in 2020.
That, in addition to the tough lessons learned from financial crises in the 1997 Asian financial crisis and the 2008 global crisis, could make Hong Kong one of the region’s best economic performers this year.
HONG KONG HAS SURVIVED 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 International Monetary Fund.
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 US dollar.
At the time, economists described this peg as “the indicator of political confidence,” and predicted a loss would have fuel capital flight, tumbling property prices and collapsing banks.
Having the foresight to build such large foreign reserves and the insight to harness them led to a strong defence of the currency against a speculative attack.
Hong Kong officials also reacted swiftly to shore up targeted companies after speculators turned their eye to the stock market.
In all, Hong’s Kong’s stock market remained the best performing market in the region during the crisis, despite the Hang Seng falling by 60 per cent that year and property prices slumping.
Although the contributing factors to the 2008 global recession were different, catalysed by the US subprime mortgage crisis, lessons learned from the downturn 10 years earlier helped the territory stay on its feet and turned the economy around in the same year.
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, a prioritising of 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 US Federal Reserve, noted Hong Kong was recovering “impressively” from the global recession - more so than the United States.
A NEW ERA?
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: A battle against the novel coronavirus outbreak.
Chief Executive Carrie Lam announced the closure of all but two land border crossings to China, as well as a mandatory two-week quarantine for all travellers arriving from mainland China this week.
But criticism has grown over the government’s perceived slow response to the outbreak, amid calls for Hong Kong to fully close the border with the mainland.
Hundreds of medical workers went on strike starting from Feb 3, demanding the government seal off the border to stop the spread of the virus and ease pressure on strained health facilities.
An escalation of the outbreak, not just in Hong Kong but also in China, would add significant stress already imposed by the city’s divisive protest groups.
The protests alone were responsible for visitor numbers falling by almost 40 per cent in the second half of 2019, fuelled by uncertainty in public safety. Trips from mainland China have taken a nosedive, and in October, were down more than 45 per cent compared with the same period last year.
READ: Commentary: China’s coronavirus lockdown on cities was necessary. But there are more important lessons
The unrest has also hurt retail. Last November, sales were lower than the year before, with small businesses feeling under strain, unemployment rising, and footfall declining because of how many recent demonstrations had taken place in shopping districts.
On the other hand, Alibaba’s blockbuster secondary listing in Hong Kong in November last year, the biggest IPO in 2019, eased fears of a recession and was seen by many as a vote of confidence in the city.
THE WORLD’S FREEST ECONOMY
During the crisis of 1998, Joseph Yam, the then 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.
Indeed, 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.
Already, outbreak fears risk becoming a new flashpoint in the city’s unrest. The Hong Kong government had to halt work on turning a housing estate as a possible quarantine facility after violent protests erupted on Monday (Jan 27) as protesters hurled a molotov cocktail at the site.
No doubt, any new negotiations will focus on a cohesive political agreement, and one that reaffirms the “one-country, two-systems” principle that has allowed Hong Kong to embrace the West and China so successfully.
But now that challenge is compounded by a deadly virus outbreak – a threat Lam’s administration must respond to decisively to avoid opening up another front for violent protests. The city’s political and economic future depend on it.
Mohammed Abdul Shihab is Managing Director of Al-Sharq Advisory.