There is little evidence so far that the social unrest in Hong Kong has adversely affected its role as a global financial centre, even amid severe short-term economic pressures, according to Fitch Ratings.
However, continued turmoil is undermining perceptions of Hong Kong as a stable international business hub as well as the effectiveness of its governance, trends consistent with its negative outlook on Hong Kong’s AA rating. Hong Kong’s short-term economic outlook continues to deteriorate. Fitch now expects the economy to shrink by 1.5 per cent in 2019 with tourism, retail, hotels and catering, and air transport among the sectors most severely hit.
Meanwhile, real estate transaction volumes have dropped sharply and residential property prices are down roughly 5 per cent from their May 2019 peak.
Growth in 2020 could improve slightly supported by the 25 billion Hong Kong dollars of fiscal relief measures (0.9 per cent of GDP) announced since mid-August, but the economic outlook remains vulnerable to lingering social unrest.
Some indicators continue to paint a positive picture of Hong Kong’s medium-term prospects.
“Alibaba’s recent listing on the Hong Kong stock exchange underscores the territory’s role as the flagship off-shore financing centre for Chinese firms, a status that we believe will be further solidified by rising US-China geopolitical tensions and the enduring widespread deployment of capital-account restrictions on the mainland,” said Fitch.
In fact, despite the unrest, Hong Kong’s equity and debt capital fundraising in 2019 remains broadly in line with the average over the preceding three years.
Meanwhile, data for banking-sector deposits (both Hong Kong dollar and foreign currency), business registrations and employment visas show little evidence that the territory’s role as a centre for global commerce has diminished.
All of this underlines Hong Kong’s important role in channelling international finance to Chinese firms, one in which it is unlikely to be easily substituted.
Fitch also said Hong Kong’s simple tax system and low tax rate are unlikely to change for the foreseeable future. These are the attributes that foreign firms ranked as the most important factors affecting their decisions to establish operations in the territory.
Nevertheless, international perceptions of the intrinsic strengths of Hong Kong’s business environment are still at risk which can eventually weaken its status. This suggests potential further downside risks to its credit rating.
The recent passage of the Hong Kong Human Rights and Democracy Act in the United States, while largely symbolic, highlights that changing international perceptions of Hong Kong could have economic spill-overs in the form of revision to its separate customs treatment from the mainland.
It also underscores that the territory’s unique and advantageous relations with the global community are not static. Weaker perceptions of governance in Hong Kong can also affect the rating directly.