An escalation in Hong Kong could result in economic recession and an attack on the currency board of the city.
There are already hedge funds betting against the Hong Kong dollar by selling the currency and changing it to US dollars, she said. However, these greenback deposits are susceptible to be withdrawn from Hong Kong because of a lack of capital controls as most are owned by offshore investors.
If Hong Kong does impose capital controls to control these deposits, the city will lose its relevance as an offshore centre.
Hong Kong’s foreign exchange reserves of $448.5 billion at the end of July only cover a small amount of the city's more-than-$3 trillion in deposits, [representing some] 850% of its GDP. That could leave in a day. Iceland is the only other country with that level of deposits.
The offshore bond market is also very large and it could easily dry out if there is no demand from foreign investors to buy paper from the Hong Kong market, especially from Chinese corporates.
Hong Kong is also a large IPO market for China. Chinese companies will also have a harder time finding US dollar financing from Hong Kong’s US dollar bond market.
So far, the protests have been no more violent than, say, the Gilets Jaunes protests in France, which have also had little wider economic or political impact. A significant escalation would be needed before markets more broadly started to worry.Trade wars, slowing global growth and a downturn in corporate earnings growth dwarf localised politics as a market driver, so far. That’s partly because the former issues have, globally, more economic significance as long as major escalation is avoided in Hong Kong.
Hong Kong’s economy is problematic, being buffeted by a deep and persistent Chinese slowdown, worsening trade situation, and wobbly real estate market. Hong Kong’s recent unrest only worsens matters and perhaps with devastating effect.
Increasing levels of violence and the disruption of crucial infrastructure are inviting a dramatic response from Beijing. Overt military action remains unlikely, as it would devastate Hong Kong’s economy and risk Hong Kong’s raison d’etre – its global “special status” ... But even under more likely circumstances, the failed extradition law and the resulting social unrest have significantly impacted Hong Kong’s attractiveness as a regional financial and trading hub.
Capital seeks stability and a time when the US is strongly encouraging supply-chain relocation away from China, Hong Kong is adding new urgency to those efforts. Over the medium term, it’s hard to see a Hong Kong resolution that doesn’t favour other Southeast Asian economies, particularly Singapore and Vietnam.
And in the short-term, with faltering global growth and a newly inverted US yield curve, Hong Kong is further increasing global recessionary risks.
Michael Every, Asia-Pacific head of financial markets research
Rabobank, Hong Kong
China has been pushed into a corner. It is just trying to decide how it responds – and when it does it will go hard. Let’s see what happens when President Xi Jinping re-emerges from Beidaihe.
Protests in Hong Kong and a possible hard reaction from Beijing could risk US and Western sanctions and action on China's access to the US dollar through Hong Kong.
This could have a huge spillover effects on debt repayments (for Chinese companies) and Chinese access to foreign currency for imports and other requirements.
A very direct result of this investor anxiousness is the rise in gold price beginning almost simultaneously with the persistent return of volatility in the equity market in the third quarter of 2018.
It is important to note that this effect may seem to imply that gold is a volatility hedge, but more precisely it is a hedge against an anticipated bear market. As volatility continues to return to the equity markets and with further turbulence in the geopolitical landscape, I see both equity volatility on the rise and lower-volatility asset classes such as developed market bonds and real assets such as gold being a defensive position for many investors.
Positioning portfolios to lower correlated asset classes and defending against downside risk using hedge strategies is going to be key to navigating the market turbulence ahead.
The peg of the Hong Kong dollar to the US dollar will continue to be here until 2047 as this is written in the basic law (constitution).
The Hong Kong Monetary Authority is expected to defend the peg in normal times but especially in bad times ... This will keep at least the financial system stable.
If Chinese troops enter Hong Kong then the Hong Kong economy will collapse, as much of it is based on the sanctity of the 'one nation, two systems' policy ... [But] it is highly unlikely that China would mobilise major forces because the Chinese government understands the need for Hong Kong to stay independent as many Hong Kong businesses control significant resources in China.