The Demise Of Hong Kong's Economic Dominance

Summary

• There’s an elevated short-term risk for Hong Kong or Hong Kong-related investments based the increasingly violent political instability.
• Additional emerging factors that were emerging well before the demonstrations are greasing the skids for the beginning of the decline of Hong Kong economic dominance in Asia that will adversely.
• Unabated intense mass demonstrations increase political risk and may prompt foreign firms reduce operations and possible decampment from Hong Kong.

Hong Kong's profile in the Asia region is without peer as articulated in the 2019 Index of Economic Freedom. However the crisis continues to metastasize to the point of adversely impacting key businesses specifically banking, real estate, retail and tourism as continued violent demonstrations with the possibility of PRC intervention. These factors could set off a steep downgrade in Hong Kong's ability to retain and attract business.

According to the article dated 28 July 2019 in the Financial Times titled "Hong Kong Property Weakens on China Slowdown," there are other factors that are hurting diverse businesses in Hong Kong as follows:

• US-China trade war.
• Drop in property market demand by mainland Chinese companies since peaking in 2017 as a result of Beijing's new measures to control capital outflows.
• Multiple and simultaneous mass demonstrations have adversely impacted retail, catering services and tourism.
• Overall Chinese economic slowdown with whom Hong Kong conducts more than 50% of their economic trade.

A short and superb Wall Street Journal video titled "Hong Kong's Status as a Global Hub Under Threat," released on June 14, 2019, neatly summarizes other underlying risks.

The enormous legal and business freedoms and benefits as Hong Kong serving as a conduit with trade with the PRC under western rule of law are vulnerable. For this reason there's the growing threat of change in investment dynamics in Asia with Hong Kong's greatly diminished economic role in the region. Should matters turn for the worse it may result in the operational reduction and even decampment of major foreign businesses to elsewhere in Asia, notably Singapore, one of the few remaining Asian countries that offers similar open business opportunities and legal protections as Hong Kong with historically strong Chinese connections.

Here are various investment vehicles specific to Asia that could be vulnerable to downward pressure should the Hong Kong situation take a turn for the worse:

• Hang Seng Index (HGSFX) Hong Kong stock market.
• MSCI AC Asia Pacific Index (MXAP:IND) includes large and mid-cap firms including those from Hong Kong and China.
• ABF Hong Kong Bond Index Fund (2819) (HDKOWD) an ETF which holds Hong Kong government and quasi-government bonds.
• ABF Pan Asia Bond Index Fund (2821) (HKG:2821) an ETF comprising Asian local currency debt.
• Schroder Asian Equity Yield (SCHEQYF:SP) a fund that holds an array of Asian blue chips that pay generous dividends.
• Aberdeen Global - Asia Pacific Equity Fund that is a play on a rising Asia Pacific economies and is exposed to all the volatilities of such growth.

Finally, from the political risk perspective, continued intense mass demonstrations can provoke an equally intense reactionary law enforcement response and possible Chinese intervention. The Hong Kong police have been overwhelmed by the frequency, intensity and simultaneously protests at multiple locations. According to Hong Kong's Basic Law, Hong Kong is responsible for their internal security. However the National Peoples Congress can declare a state of emergency or if turmoil "endangers national unity or security."

In an ironic twist as the sun set on the British Empire decades ago it may very well set on its last colonial remnants in Hong Kong, the global capitalists' "Jewel in the Crown."

Recommendation

Short-term investment risks are dramatically elevated, specifically in the property market, banking and finance, retail, and tourism sectors, which may suffer dramatically should the situation is escalated to a state of emergency. These diverse disruptive elements are likely to continue from an economic and political perspective.

Depending how everything plays with respect to medium to long-term investments, Hong Kong will continue as an important global and Asian business hub but in a greatly diminished capacity. I believe that those investors with considerable investments in Hong Kong, and to a lessor extent China and Asia, develop either an exit strategy should things deteriorate further or develop a shorting strategy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.