Hong Kong’s democ­racy protests

Financial Mirror (Cyprus) - - FRONT PAGE - Mar­cuard’s Mar­ket up­date by GaveKal Drago­nomics

The peo­ple of Hong Kong were treated over the week­end to the un­usual spec­ta­cle of po­lice bat­tling po­lit­i­cal pro­test­ers in the city’s streets. Ba­ton charges and vol­leys of tear gas might be common enough tac­tics in New York or London, but not in Asia’s lead­ing in­ter­na­tional fi­nan­cial cen­tre. The rapid es­ca­la­tion of the protests over the week­end and the po­lice’s strong-arm re­sponse shocked lo­cals, and trig­gered a -2% fall in the city’s bench­mark Hang Seng stock in­dex on Mon­day as in­vestors wor­ried about the im­pact of con­tin­ued un­rest on Hong Kong’s mar­kets, its econ­omy and its fu­ture as Beijing’s lab­o­ra­tory of choice for China’s fi­nan­cial lib­er­al­i­sa­tion.

Only a few weeks ago it seemed that Hong Kong’s prodemoc­racy move­ment was a spent force. After Beijing ruled out open elec­tions for the chief ex­ec­u­tive of the ter­ri­tory’s gov­ern­ment, the leader of Oc­cupy Cen­tral ad­mit­ted that his civil dis­obe­di­ence move­ment’s pur­suit of democ­racy had “failed”. How­ever, Hong Kong’s stu­dents and high school pupils did not take heed. Last Fri­day, a group of around 200 stormed se­cu­rity fences block­ing off the ‘Civic Square’ out­side the gov­ern­ment’s head­quar­ters to stage a sit-down protest against of­fi­cial ob­du­racy. The heavy-handed po­lice re­sponse prompted thou­sands more pro­test­ers to de­scend on the site over the week­end and on Mon­day morn­ing the city woke up to find a civil dis­obe­di­ence cam­paign dis­missed as ir­rel­e­vant just weeks be­fore had paral­ysed the area sur­round­ing Hong Kong’s gov­ern­ment head­quar­ters. With the mood highly febrile ahead of a pub­lic hol­i­day on Wed­nes­day to mark the Com­mu­nist Party’s as­sump­tion of power in China, the fear is that the crowds of pro­test­ers could swell fur­ther over the course of the week, prompt­ing an even more un­com­pro­mis­ing re­sponse from the city’s Beijing-backed gov­ern­ment.

The worst case sce­nario—that the Beijing gov­ern­ment will de­ploy the Peo­ple’s Lib­er­a­tion Army to re­store or­der at the bar­rel of a gun—is ex­tremely im­prob­a­ble. It would be a pub­lic re­la­tions dis­as­ter for China’s lead­ers. How­ever, it is equally hard to en­vis­age any last­ing rap­proche­ment be­tween Hong Kong’s pro-democ­racy move­ment and the city’s gov­ern­ment.

As a re­sult, even if this week’s protests end peace­fully, the dis­con­tent will rum­ble on. And if slow­ing Chi­nese growth and ris­ing US in­ter­est rates in­flict eco­nomic hard­ship on the city, the dis­sat­is­fac­tion is only likely to mount. In re­cent years, the com­bi­na­tion of main­land money flows and rock-bot­tom mort­gage rates have pro­pelled the city’s prop­erty prices to record highs, up 300% from their 2003 low. While any slump would make prop­erty more af­ford­able, it would also ham­mer the bal­ance sheets of the city’s mid­dle class prop­erty-own­ers, many of whom are in­clined to sym­pa­thise with the week­end’s demon­stra­tors.

Against that back­drop, an ex­tended cam­paign of civil dis­obe­di­ence is likely to weigh fur­ther on Hong Kong’s stock mar­ket, al­ready down -8.3% since early Septem­ber. A new eq­uity trad­ing link be­tween the Hong Kong and Shang­hai mar­ket, which is due to go live to­wards the end of Oc­to­ber, may not help much. With the val­u­a­tions on Hong Kong list­ed­stocks bang in line with their main­land peers, there are cur­rently few ar­bi­trage op­por­tu­ni­ties to be ex­ploited. And with Beijing’s ‘mini-stim­u­lus’ to support the main­land econ­omy run­ning out of steam and the Peo­ple’s Bank of China re­sist­ing pres­sure for a full-scale mon­e­tary eas­ing, the chances that a con­tin­ued rally in main­land stock prices will support the Hong Kong mar­ket look slim.

Hopes that Hong Kong in­vestors will ben­e­fit from a new spate of main­land lib­er­al­i­sa­tion mea­sures look ex­ag­ger­ated. With China’s growth rate now slow­ing to­wards 7%, ex­pos­ing the vul­ner­a­bil­i­ties of China’s fi­nan­cial sys­tem, com­plete in­ter­est rate lib­er­al­i­sa­tion and a full open­ing of the cap­i­tal ac­count are re­ced­ing fur­ther into the fu­ture. That may pre­serve Hong Kong’s pole po­si­tion. But along with the gath­er­ing mo­men­tum of pro-democ­racy protests, it will also limit fu­ture op­por­tu­ni­ties for growth.

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