Hong Kong can't es­cape the tur­moil next door

The Pak Banker - - OPINION - Wil­liam Pe­sek

Twelve months ago, it seemed Bei­jing's ret­ro­grade pol­i­tics would even­tu­ally sink Hong Kong's ex­alted in­ter­na­tional rep­u­ta­tion. Now China's ail­ing econ­omy seems likely to fin­ish off the job sooner than any­one ex­pected. Hong Kong is deal­ing with a long list of prob­lems, in­clud­ing tum­bling tourist ar­rivals, a dol­lar peg that makes it the prici­est place in Asia, a pre­car­i­ous prop­erty bub­ble and a leader not up to even mun­dane chal­lenges never mind an ex­is­ten­tial cri­sis. And that's be­fore you even get to Hong Kong's big­gest chal­lenge: the fall­out from China's loss of eco­nomic cred­i­bil­ity around the globe.

How else to ex­plain the 9 per­cent drop in the Hang Seng In­dex since Bei­jing's Aug. 10 de­val­u­a­tion? The sell­off put the city's val­u­a­tions at their low­est, rel­a­tive to global eq­ui­ties, since 2003, and rel­e­gated Hong Kong to the same trad­ing or­bit as Pak­istan, a place grap­pling with chronic power short­ages.

Forbes mag­a­zine spoke for many last year when it asked: "Is Hong Kong Still China's Golden Goose?" The con­cern then was that po­lit­i­cal tur­moil would dis­rupt Hong Kong's sta­tus as China's fi­nan­cial green zone, where com­pa­nies can en­joy the rule of law and politi­cians can in­vest ill-got­ten mil­lions in real es­tate and with Bei­jing-friendly bil­lion­aires.

Hong Kong seemed to be the per­fect Chi­nese spe­cial-en­ter­prise zone -- ex­cept for the mount­ing dis­con­tent among the city's mid­dle class, whose needs tended to be ig­nored in fa­vor of the ty­coons lord­ing over the city. When hun­dreds of thou­sands of res­i­dents be­gan protest­ing in fa­vor of democra- cy in Septem­ber 2014, the city's chief ex­ec­u­tive Le­ung Chun- ying, like the good Com­mu­nist func­tionary he is, shut the demon­stra­tions down.

Po­lit­i­cal dis­cord no longer seems an im­me­di­ate ex­is­ten­tial threat to the city's spe­cial sta­tus -- but China's sput­ter­ing econ­omy does. Wan­ing trust in the Chi­nese econ­omy is driv­ing in­vestors away from Hong Kong, while China's de­val­u­a­tion is mak­ing the city less at­trac­tive for main­land tourists en­ticed by cheaper des­ti­na­tions like Ja­pan. Econ­omy Sec­re­tary So Kam-le­ung blamed the 8.4 per­cent drop in visi­tors in July on the strong dol­lar. Re­tail sales in the city de­clined for a fourth straight month in June.

Hong Kong doesn't have many good op­tions. For years econ­o­mists urged Hong Kong to di­ver­sify its growth en­gines -- more tech and science star­tups, fewer hedge funds and prop­erty de­vel­op­ers rid­ing main­land growth. Rather than de­liver the changes Hong Kong needed, Le­ung has squan­dered his three years as chief ex­ec­u­tive kow­tow­ing to his Com­mu­nist Party bene­fac­tors in Bei­jing.

An even­tual Fed­eral Re­serve in­ter­est-rate hike is a huge worry for Hong Kong. But if global in­vestors had more con­fi­dence in Chi­nese Pres­i­dent Xi Jin­ping, they would be treat­ing Hong Kong's down­swing as an op­por­tu­nity to go bar­gain-hunt­ing. Hang Seng shares are val­ued at 9.7 times re­ported earn­ings, a roughly 44 per­cent dis­count to the MSCI All-Coun­try World In­dex.

As Chi­nese growth slows to 5 per­cent from the de­sired 7 per­cent, Hong Kong could find it­self in the same po­si­tion as Ma­cau. China's other "spe­cial ad­min­is­tra­tive re­gion" has been among the big­gest losers from Xi's anti-cor­rup­tion drive, which led main­land high rollers to lower their pro­files and avoid the city's casi­nos.

Hong Kong, for its part, is find­ing it more dif­fi­cult to at­tract the tens of mil­lions of shop­pers it has be­come re­liant on. Hong Kongers might con­sider this a be-care­ful­what-you-wish-for mo­ment. Last year res­i­dents lashed out at main­land tourists, as summed up by this Dec. 31 South China Morn­ing Post head­line: "Rude awak­en­ing: Chi­nese Tourists Have the Money, But Not the Man­ners." ( China's state- run media re­torted with ar­ti­cles about un­grate­ful Hong Kongers.) As main­lan­ders now flock to tra­di­tion­ally less China-friendly places like Ja­pan and Tai­wan, Hong Kongers may be sec­ondguess­ing their ear­lier ire. An econ­omy should never put all its prover­bial eggs in one bas­ket, as the lead­ers of Hong Kong ar­guably have done. But, for the mo­ment, as China goes, so goes Hong Kong -- and they're both head­ing in the wrong di­rec­tion.

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