Things went from bad to worse in Hong Kong on Saturday when activists summarily ignored an official ban to stage a 13th week of protests in the city.
The march followed the arrest of several prominent protest leaders and comes on the heels of reports that embattled chief executive Carrie Lam’s proposal to appease the demonstrators was rejected by Beijing.
Saturday’s “proceedings” sound like no fun at all. Police fired blue-dyed water cannons at protesters (apparently if you stain them blue, you can find them later) who responded by throwing fire bombs at authorities and setting barricades ablaze. A fire near the junction of Hennessy Road and Anton Street in Wan Chai burned particularly bright according to local press.
Saturday’s violence comes on the fifth anniversary of China’s move to limit democratic reforms in the city.
Some protesters waived American flags and asked Donald Trump to “liberate” them. “We would like Mr. President Trump to liberate Hong Kong”, a 30-year-old named Chris told Bloomberg.
That is sure to irritate Beijing and will doubtlessly serve as fodder for all manner of “commentaries” in state media. Washington’s purported “meddling” will likely come up at daily briefings next week too. Chinese officials have variously accused the US of having its “black hand” in the protests.
As ever, we would note that from a macroeconomic perspective, this comes at a particularly inopportune time. Between the violence and the impact of the Sino-US trade war, Hong Kong’s economy is in trouble.
Exports contracted for a ninth consecutive month in July and although the number (-5.7%) wasn’t as bad as feared, June’s decrease (-9%) was the largest in years. Imports, meanwhile, fell 8.7% last month and it’s entirely likely that the fraught domestic picture (e.g., things are on fire and there are running street battles on the weekends) won’t help.
In other words, Hong Kong’s economy is laboring under an acute domestic crisis and an increasingly dire external outlook, which explains why the government projected growth may flatline this year, despite a stimulus push.
If you ask BofA, a recession of some stripe is now basically a foregone conclusion.
“We expect growth to weaken materially in 3Q-4Q19 on the back of local instability and escalated US-China trade tension [and] even if business returns to normal level in the upcoming months, we are concerned that tourist arrivals and business confidence will likely remain weak for a prolonged period”, the bank wrote, in a Thursday note calling a brief recession “unavoidable”. Here’s a table that summarizes their various scenarios:
As you can see, the bear case is particularly dour, even as bear cases go and includes a deflationary quagmire. “While many expect instability in HK to be just a storm in a teacup that will run its own course very soon, risks are that it could coincide with a significant downturn in global demand against rising uncertainty from elevated trade tension”, BofA cautions, describing the bear case and adding that “the combination of asset deflation and CPI deflation [would] potentially test growth resilience and policy response in years to come”. The bank expects more stimulus on top of what was announced earlier this month.
Ultimately, the problem is that Hong Kong is so exposed on multiple fronts that a descent into anarchy (and you’ll pardon the hyperbole considering what unfolded on Saturday) could risk a kind of nightmare spiral, including capital outflows as the city loses its luster as a financial hub and the FX system comes under pressure.
BofA emphasizes all of that.
“If either the local social disorder escalates into general chaos, or a global recession emerges in the near future partly due to trade conflicts, we would see further risks to our bear-case scenario”, the bank sighs, adding that “due to its high openness, reliance on tourism, and dependence on the Chinese economy, the Hong Kong economy is particularly exposed to external demand weakness”.