Hong Kong’s prosperity as a financial and asset management centre is thought to be at risk only if recent pro-democracy protests in the city become protracted, industry participants have told AsianInvestor.

It comes after thousands of demonstrators rallied from the early hours of Sunday morning under the banner of Occupy Central, a civil disobedience campaign pushing for universal suffrage in Hong Kong. The protests began peacefully enough led by students, but escalated (see accompanying opinion piece in today's newsletter).

But what the Occupy Central demonstrations have exposed is a vulnerability for the city: an over-reliance on Beijing that threatens to undermine its status and international competitiveness. One senior executive described it as a rude awakening for the city.

Fund houses contacted by AsianInvestor, including the Hong Kong asset management arms of Chinese parent companies, generally said they had contingency plans in place in the event of an escalation of the violence.

Protesters had occupied the main streets of business districts including Admiralty, Wan Chai and Causeway Bay, with police in riot gear responding by firing tear gas to disperse the demonstrations.

No statement came from the Securities and Futures Commission, with the government saying only that the SFC was monitoring the situation and keeping in touch with Hong Kong Exchanges and Clearing and market intermediaries. The Hong Kong stock exchange sank by 1.9% yesterday to end at 23,229 points.

The biggest concern of asset managers is the staying power of the demonstrators. The unwelcome scenario would be a garrison of China’s People’s Liberation Army being called upon to assist Hong Kong police.

“That would take things to an entirely different level and be the biggest concern for the business community,” said one Hong Kong-based fund executive and long-term resident of the city.

If the demonstrations continued, he suggested Beijing could decide to parachute someone in to take control of the situation.

He also pointed to the economic reality for Hong Kong: the cancellation of vast numbers of mainland tourists to Hong Kong to celebrate Golden Week, China’s traditional week-long holiday that begins with National Day tomorrow.

In fact, the Hong Kong government announced yesterday that the annual National Day fireworks in Victoria Harbour had been cancelled “having regard to public transport arrangements and safety considerations”.

“It would be negative if the protests are on a wide-enough scale and last long enough to have a material effect on the economy or financial stability, but we don’t currently see this as very likely,” said Andrew Colquhoun, head of Asia Pacific sovereigns at Fitch Ratings, which retains an AA+ rating on Hong Kong, with stable outlook.

In response to AsianInvestor questions, Effie Vasilopoulos, a partner at law firm Sidley Austin, stressed that Hong Kong had experienced protests in the past without any significant long-term economic impact.

She argued that the city’s long-term outlook would be secure provided its free-market economy, transparency and confidence in the stability of the basic legal, political and taxation was not disrupted.

“China’s leadership is sophisticated enough to understand and support these fundamentals, as demonstrated by the cooperative economic and policy measures that it has sought to introduce while working with Hong Kong during these past several years.”

However, she added: “Violence, or the escalation of political rhetoric toward violence, will not help Hong Kong, but rather has the potential to lead to an erosion of confidence in Hong Kong’s basic political stability if sustained over the longer term.”

Similarly Mark Konyn, chief executive of Cathay Conning Asset Management, said Hong Kong had a strong rule of law and a solid reputation for peaceful protest. “The current stand-off does not threaten Hong Kong’s standing as a regional and global financial hub,” he stated.

Moreover, he said the business community had confidence in the one-country, two systems constitutional principle, formulated by Deng Xiaoping during the 1980s and instituted after British rule of Hong Kong ended in 1997.

“This is the very reason we have seen fund management companies continue to set up in Hong Kong to be part of the local, national and regional expansion of the industry,” he said, noting this was the reason CCAM set up in the city in 2011.

On the question of whether Hong Kong could be allowed political autonomy while maintaining a close working relationship with mainland authorities, Konyn responded: “Hong Kong is a part of China.

“So much of what occurs in the mainland affects business in Hong Kong. China faces many challenges as it seeks to restructure the economy. Hong Kong continues to play an important role. This is not a contradiction.”

Vasilopoulos observed that both Hong Kong and Beijing had demonstrated a willingness to cooperate on initiatives in the fund management sector that benefit both sides, with mutual recognition and Shanghai-Hong Kong Stock Connect the most recent examples.

Nevertheless, consensus thinking in the asset management industry is that Hong Kong needs China more than vice-versa, especially in light of Shanghai’s own politically-backed emergence and increasing international access to China’s onshore securities markets.

“Hong Kong has billed itself as an international gateway to China. But China itself is now very welcoming to international business,” noted one fund management executive who spoke on condition of anonymity.

He discussed how international fund houses continue to explore opportunities to set up wholly foreign owned enterprises on the mainland and to take advantage of RMB-denominated licences and increasing quotas for offshore investors.

“To a degree that does marginalise Hong Kong as a centre,” he said. “Fund houses are making plans for China that are independent of Hong Kong. Would we prefer access to China as opposed to Hong Kong if it came to it? Yes, we probably would.”