ANALYSIS-Battered Hong Kong faces financial recession, existential disaster

* Hong Kong to face its first recession in a decade

* All progress pillars shaken by commerce warfare, civil unrest

* Beijing more and more assertive, corporations going through local weather of worry

By Noah Sin and Lukas Job

HONG KONG, Aug 26 (Reuters) – As one of many world’s most necessary commerce and enterprise hubs, Hong Kong was all the time going to battle this yr due to the escalating U.S.-China tariff warfare.

However after three months of anti-government protests, the semi-autonomous Chinese language metropolis, a consumer’s paradise and connoisseur vacation spot for hundreds of thousands of vacationers every year, is going through an existential in addition to an financial disaster.

The world’s greatest fairness deal this yr was to unfold in Hong Kong later this month however has been placed on maintain. Banks are issuing unprecedented revenue warnings, whereas lodges and eating places are half-empty. A number of world occasions have been postponed and economists say retail gross sales might drop by 20%-30% this yr.

Hong Kong is going through its first recession in a decade, with all its progress pillars below important stress.

Whereas protesters are disrupting day-to-day actions, Beijing has displayed its paramilitary would possibly close to the border, elevating questions over town’s political, monetary and financial future.

“Hong Kong is going through a disaster nearly unprecedented in its historical past,” mentioned Edison Lee, equities analyst at Jefferies.

Within the April-June quarter, when the affect of the protests was delicate, the financial system shrank 0.four % from the earlier quarter. Since then, demonstrations have unfold throughout the territory, disrupting site visitors, paralysing buying and vacationer areas and shutting down town’s sprawling airport at instances.

The third quarter is certain to verify the recession by its technical definition of two consecutive quarters of financial contraction.

For the entire yr, the federal government expects progress at 0-1%, however some analysts anticipate it to shrink. Forecasting at this juncture, given the myriad of pathways the social disaster would possibly take, is of little worth, however the contraction could possibly be extreme.

“When you have got a increase for thus a few years, and now you get a bust, the bust goes to be fairly large additionally,” mentioned Kevin Lai, chief economist for Asia ex-Japan at Daiwa Capital Markets.

CORPORATE WARNINGS

Citing political unrest, China’s greatest e-commerce firm Alibaba Group Holding Ltd has delayed its as much as $15 billion itemizing in Hong Kong, two individuals with data of the matter instructed Reuters earlier this week.

Financial institution of East Asia, after reporting a 75% plunge in first-half internet revenue on account of writedowns in China, warned on Wednesday concerning the affect additional protests might have on small and medium enterprises.

Greater than 20 different corporations, together with developer Henderson Land, lodge group Shangri-La Asia, Emperor Watch & Jewelry, division retailer operator Life-style Worldwide and rail operator MTR Corp, mentioned in latest earnings studies the protests have been damaging.

The Catering and Resort Industries Workers Common Union instructed Reuters employers had requested a few of its members to take non-paid depart this month due to the downturn in enterprise.

Yiu Si-wing, Chairman of China Journey Service (HK) Ltd, a serious mainland tour operator, mentioned income from room gross sales was set to plunge 50% in August.

“Visits from mainland China that normally account for 80% of arrivals are down most as individuals worry for his or her security,” Yiu instructed Reuters.

Organisers of a number of conferences and exhibitions are scrambling to postpone occasions.

Commerce representatives of the world’s largest diamond buying and selling centres have requested the organiser of the Hong Kong Jewelry and Gem Honest to postpone the high-profile occasion, which usually welcomes greater than 54,000 guests. The honest is because of be held in September.

BlackRock Inc, the world’s largest asset supervisor, has postponed a two-day September convention on the 4 Seasons Resort till February “in order that as many companions as attainable from throughout Asia are in a position to be a part of.”

On Thursday, the Hong Kong Retail Administration Affiliation, which represents greater than 8,000 companies, urged all landlords to halve rents for six months and warned if the state of affairs continued “many retailers could must sack employees”.

HANDS TIED

Hong Kong chief Carrie Lam has repeatedly warned that protests are hurting the financial system. She has persistently declined to fulfill any of the protesters’ core calls for.

As an alternative, this month, she introduced stimulus measures price $2.four billion, from subsidies for schooling and utilities to mortgage reduction for small companies.

However analysts warn that within the present local weather, handouts are ineffective as corporations and shoppers are in no temper to spend.

With no apparent infrastructure upgrades wanted, and with the federal government having an extended observe file of failing to adequately enhance housing provide, analysts solely anticipate bulletins of extra handouts and tax breaks at Lam’s annual coverage deal with in October.

Because the flip of the century, each time Hong Kong’s financial system acquired in hassle, the mainland’s financial increase or its stimulus measures got here to the rescue. Now Beijing is going through its sharpest slowdown in almost three a long time and file debt.

“Hong Kong is by itself this time,” mentioned Tommy Wu, senior economist at Oxford Economics.

GRIM FUTURE

Ranking companies have raised long-term questions over the standard of Hong Kong’s governance.

However an more and more assertive Beijing is fuelling bigger issues. Mainland regulatory scrutiny on airline Cathay Pacific over the involvement of a few of its staff within the protests will have an effect on Hong Kong’s picture as a protected place for enterprise.

A 1992 U.S.-Hong Kong Coverage Act permitting Washington to have a special customs regime with Hong Kong than with mainland China can be essential for financial stability. For it to face, U.S. authorities have to see Hong Kong as sufficiently unbiased from Beijing, subsequently actions of mainland troops on the border in Shenzhen are worrying.

However for now, the uncertainty is disruptive sufficient.

“The social state of affairs tugs in any respect our heartstrings,” Kaisun Holdings, an funding holding firm, mentioned in an announcement.

“Many buyers have chosen to go away Hong Kong, and a few banks and (multinationals) have began planning on transferring their base to different close by Asian cities. Kaisun Holdings can also start to search for alternate markets for a few of our service-based companies.”

(Further reporting by Kevin Liu, Donny Kwok and Clare Jim; Writing by Marius Zaharia; Modifying by Raju Gopalakrishnan)

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