Group Economics
Emerging Markets
Asia Watch
Arjen van Dijkhuizen,
+31 20 628 8052
Turmoil in Hong Kong
2 October 2014
Social protests in Hong Kong have intensified over the past weeks, after Beijing made clear that only pre-approved
candidates can run for the post of Chief Executive in 2017. The authorities are caught in a balancing act between restoring
order and protecting Hong Kong’s status as international financial and trade hub. Should the protests continue for longer or
escalate further, uncertainty will rise and so will the economic fall-out of the protests.
Beijing ruling triggers political turmoil
Since late August, political turmoil in Hong Kong intensified
after a ruling of the Standing Committee of the National
People’s Congress. This ruling stated that Hong Kong’s Chief
Executive elections in 2017 would only allow for a selection of
pre-approved candidates. Protesters claim that this ruling
undermines the democratic principles of free elections and
universal suffrage, which are laid out in the 1984 Sino-British
Joint Declaration and the Basic Law ratified in 1990. With the
latter agreements, China had agreed to the ‘one country, two
systems’ principle, under which Hong Kong would keep a high
degree of autonomy over the 50 years after the transfer from
the UK to China, except for areas such as defense and foreign
affairs. The latest wave of protests were initiated by student
groups, joined by the Occupy Central movement. The protests
have taken the form of large-scale civil disobedience and
blockading of parts of the major financial district. While the
protests have so far been generally remained non-violent and
quite peaceful, the number of protesters has grown to tens of
thousands around the start of the Chinese national holiday
week (in a city of 7 million). Sporadically, there have been
some encounters with the Hong Kong police in recent days.
The protesters have called for the resignation of the incumbent
Chief Executive, Chung-ying Leung, without success so far.
two-year low of 1.8% yoy (Q1: 2.6% yoy), while quarterly
growth was negative (-0.1% qoq). The Manufacturing PMI fell
below the neutral 50 mark in August (49.6). The political
turmoil likely adds further negative effects, increasing the risk
that he economy will enter recession. Also taking into account
the developments in the first half year, we have lowered our
2014 growth forecast to 2%, while keeping our 2015 forecast
at 2.5% so far. The longer the protests continue (certainly in
case of a true escalation), the stronger the knock-on effects
over the longer term will be. Should for instance Hong Kong’s
status as a global financial and trade hub be really impacted,
that could have stronger negative effects, which are yet very
hard to quantify. Moreover, in such an adverse scenario, we
could see a sharp property market correction, with contagion
effects to the economy and the banking system.
Economic growth and Manufacturing PMI
% yoy
index
8
65
60
4
55
0
50
45
Difficult balancing act
Although quite difficult to call, the protests could linger on for
one or more weeks. Possibly, some form of compromise could
be found, after which the protests could gradually fade out.
Still, the authorities are faced with a difficult balancing act.
They would obviously prefer to restore civil order as soon as
possible. However, acting with (too much) repression could
negatively impact Hong Kong’s status as an international
financial and trade hub (further). This could also backfire on
China, which uses Hong Kong for instance as a gateway for
the internationalisation of the renminbi. If the turmoil continues
for longer and/or even escalate, this could possibly trigger a
stronger response by the Hong Kong police or even by China
itself. Certainly in the latter scenarios, the spill-over effects to
mainland China could become more serious as well.
Political turmoil not helpful for the economy
The economy has slowed since late 2013, being partly hurt by
lower import demand from China. In Q2, annual growth fell to a
-4
40
-8
35
08
09
10
11
12
Economic growth (lhs)
13
14
Manufacturing PMI (rhs)
Sources: Bloomberg, Thomson Reuters Datastream
Key forecasts for the economy of Hong Kong
2011
2012
2013
2014e
2015e
GDP (% yoy)
4.8
1.5
2.9
2.0
2.5
CPI inflation (% yoy)
5.3
4.1
4.3
3.6
3.3
Budget balance (% GDP)
3.8
3.2
1.4
0.8
0.3
Government debt (% GDP)
39
38
37
37
37
Current account (% GDP)
5.6
1.6
1.9
2.4
0.5
Gross fixed investment (% GDP)
29.7
26.8
25.6
26.0
23.8
Gross national savings (% GDP)
23.5
25.4
23.9
23.2
23.1
USD/HKD (eop)
7.8
7.8
7.8
7.8
7.8
EUR/HKD (eop)
10.1
10.2
10.7
9.7
9.0
Budget b alance, current acc. for 2014 and 2015 are rounded figures
Source: EIU, ABN AMRO Group Economics
2
South Korea Watch, Turmoil in Hong Kong – 11 September 2014
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