Hong Kong's Role in Global Finance Intact Despite Unrest


Wednesday, December 25, 2019 10:00AM / by Fitch Ratings/ Header Image Credit: Reuters 


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, Fitch Ratings says. 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 our 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% 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% from their May 2019 peak. Growth in 2020 could improve slightly, supported by the HKD25 billion of fiscal relief measures (0.9% 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.


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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 believes 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 could eventually weaken its status. This suggests potential further downside risks to its credit rating. A recent Hong Kong government survey shows that foreign firms particularly value the territory's rule of law and independent judiciary, and its political stability and security. Firms may begin to question these assumptions if political uncertainty continues, a factor underscored by an ongoing debate regarding the Hong Kong courts' authority to conduct constitutional review of the Basic Law, notably in relation to the government's emergency legislation banning masks.


The recent passage of the Hong Kong Human Rights and Democracy Act in the US, 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 could also affect the rating directly. The World Bank's Worldwide Governance Indicators carry a 20% weighting in Fitch's sovereign rating model, the highest among all rating factors. Given that the latest scores are based on information compiled prior to the start of the ongoing unrest, the territory's governance indicators could well show deterioration in areas such as political stability, voice and accountability, and government effectiveness during subsequent updates. Fitch can take what it believes to be pending changes to World Bank governance scores into account in its rating decisions.


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