Hong Kong has provided one of the globe's most compelling split-screens. On one, violent weekend demonstrations against Chinese control of the city's destiny; on the other, traders and tycoons conducting business as usual. This week, the two fused as protesters disrupted central Hong Kong during weekday business hours.
Hong Kong police warn the city is on the brink of total collapse. The past few days, after all, have seen an elderly man set ablaze, police shooting a young protester at point-blank range, a truck driver beaten by demonstrators and the protests' first fatality, when a student fell from a third-storey car park.
This explains why Hong Kong's stock market chart, with its wild spikes and falls, makes it look like the city is having a heart attack. This week's gyrations alone leave little doubt the city is fighting for its economic life.
The Hang Seng Index has fallen 12% from its April highs as five months of protests result in recession and existential concerns about the city's future. The signs we see now point to much greater economic troubles to come.
The latest source of drama concerns currency traders betting on tightening liquidity, which means the supply of cash in the financial system is running a bit scarce. On Monday, a key barometer of demand for cash surged to its highest levels since early 2016.
This suggests concerns about a cash crunch going forward. Part of this may be related to money being put aside for Alibaba's $15 billion share sale later this month. The most likely driver, though, is investors putting it aside -- effectively taking it out of circulation -- amid political uncertainty.
All this drives the value of the Hong Kong dollar up against the city's U.S. dollar peg, forcing the Hong Kong Monetary Authority to add liquidity. The last thing Hong Kong needs tight now is a firming exchange rate that dents exports.
The big worry is capital flight if Hong Kong tycoons and rich mainlanders send walls of money elsewhere. Hong Kong is incentivizing private banks and family offices with tax cuts and other tweaks to placate the city's $1.5 trillion wealth management sector.
It would be challenge enough if Hong Kong were only dealing with tensions over the role of President Xi Jinping's China. Exports declined for 11 consecutive months as of September as U.S. President Donald Trump's trade war continued to erode demand and confidence. Investment activity in Hong Kong began falling long before protesters took to the streets -- down four straight quarters now.
Yet the evermore violent nature of demonstrations is hitting all four pillars of Hong Kong growth.
As of the end of 2017, financial services, logistics, tourism and trading generated more than 57% of gross domestic product and roughly half of all jobs. Political turmoil is hobbling all these growth engines. Tourism arrivals are falling the most since the 2003 Severe Acute Respiratory Syndrome outbreak.
Now, the worst downturn since the 2008-09 global financial crisis threatens the all-important property sector. Last month, Chief Executive Carrie Lam doled out the equivalent of $255 million of fiscal stimulus. The government took the extraordinary step of urging landlords to reduce rents for struggling businesses.
Values may drop anyway, if a report from the Urban Land Institute and PricewaterhouseCoopers is any guide. In 2019, Hong Kong was ranked Asia's 14th hottest real estate market; it is bottom of the list at 22nd for 2020. Singapore is number one as it siphons demand from geopolitical flashpoints like Hong Kong.
If and how Hong Kong can revive itself remains an open question. Economist Iris Pang of Dutch bank ING say it is "quite likely" growth will stay in the red next year. Kelvin Lau of Standard Chartered Bank worries CEOs are "deferring long-term business decisions" on investment, hiring and compensation.
Nor can Hong Kong expect China to bail it out this time. In 2003 and 2009, Beijing allowed more mainlanders to fill Hong Kong hotels, shopping malls and airport lounges. Now, Xi has enough to worry about at home as the trade war trims mainland growth to the slowest since 1992.
Trade-war fallout also threatens Hong Kong's middleman role. Trump's tariffs have multinational companies relocating supply chains outside the greater China region, diminishing Hong Kong's relevance as a trading hub.
Besides, Xi might not be in a very magnanimous mood as Hong Kong violence and vandalism increase. He could easily sacrifice the wildly unpopular Lam to tamp things down. Instead, he invited her to Shanghai last week for a show of support.
How Alibaba thinks this month is a wise time to raise up to $15 billion in Hong Kong is anyone's guess. But then that could be precisely why: a show of support to boost Hong Kong's spirits as anti-government clashes intensify.
Intensify they will. Protesters now view force as a necessary evil. It was not until they stormed the legislature, overwhelmed shopping centers and disrupted the subway system that Lam scrapped a bill greenlighting extraditions to China.
The risk now, of course, is that protests play into Xi's hands. He might use the chaos as a pretext to curb Hong Kong's democratic freedoms. However things play out, investors should brace for even more heart-stopping volatility in the year ahead.
William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."
