HONG KONG -- Growing tensions in Hong Kong over efforts by activists to broaden the territory's democratic freedoms are rattling financial markets.
The pro-democracy camp has hinted at holding an "Occupy Central with Love and Peace" protest in July aimed at blockading Hong Kong's central business district.
This prompted Garry Evans, global head of equity strategy at HSBC, to warn of the potential negative impact of the protests on financial markets in the U.K. financial giant's Global Equity Insights Quarterly report, released July 7.
Downgrading his outlook on the Hong Kong equity market from "neutral" to "underweight," Evans cited "concerns about negative news flow." He specifically mentioned Occupy Central, noting the campaign for greater democracy "could sour relations with China and may hurt the (Hong Kong) economy."
HSBC's Asia Equity Insights Quarterly, which came out several hours later, backtracked from the earlier report, downplaying the downside risks associated with the pro-democracy movement.
Herald van der Linde, head of HSBC's equity research for the Asia-Pacific, was also pessimistic about the prospects for Hong Kong stocks, but mentioned instead the "risk of weak residential real estate prices, a slowdown in mainland tourist arrivals, the market's link to U.S. interest rates, with the Fed likely to raise rates next year, and weak earnings momentum" as his reasons for the downgrade. The follow-up report did mention Occupy Central, but only at the end.
Major Chinese- and English-language newspapers reported on the discrepancy in front-page articles.
Some market watchers say HSBC may have watered down its initial assessment of the impact of the democracy movement to avoid alarming investors, and because its customers dislike its excessive caution.
The organizers of Occupy Central are aiming to pressure Beijing to allow genuine universal suffrage in the 2017 election for the chief executive, including the right to select candidates freely. They are waiting to find out exactly how Beijing allows the election to unfold before they decide whether or not to hold peaceful mass sit-ins in the financial district. In the absence of a firm timetable, watchers say that warnings about the financial cost of Occupy Central may be premature, but the reports underscore the attention the pro-democracy movement is drawing from financial institutions.
Upping the stakes
The debate over the group's aims and tactics heated up following a large pro-democracy demonstration on July 1. Hong Kong police arrested more than 500 people, including protest leaders.
In response, Emily Lau Wai-hing, chairwoman of the Democratic Party, released a statement saying, "Occupy Central could happen earlier than we expected," adding that the protest "could happen this month or next."
Chinese officials are not amused. Liu Xiaoming, China's ambassador to the U.K., harshly criticized democracy supporters in an op-ed piece published in the Financial Times, calling them "vainglorious in their anti-central government position."
Lawrence Ma Yung-yi, chief executive of Lee Heng Diamond Group, was reported as telling employees in an e-mail not to take part in the Occupy Central movement. Chief Secretary Carrie Lam Cheng Yuet-ngor, the No. 2 in the Hong Kong government expressed strong concern at a July 10 meeting with officials of the public servants' union, the first such gathering since 2011.
The Hong Kong Banking Employees Association also waded into the discussion, reporting on July 9 the results of a survey showing that about 60% of bank employees believe Occupy Central sit-ins will affect their operations. But the survey's credibility was quickly called into question because it was based on responses from fewer than 160 people in an association of more than 6,000 members.
In the financial industry as a whole, the prevailing view appears to be one of guarded optimism. "To say the Occupy Central protest would bring devastating consequences to the city is far-fetched," said Kevin Lai, an economist at Daiwa Capital Markets in Hong Kong.
It is possible the protest may "affect investors' sentiment in the short run, but (it) would be limited," according to Kenny Wen, a wealth management strategist at Sun Hung Kai Financial.
In fact, the Hong Kong stock market has reached a high for the year on July 2, the day after the massive pro-democracy demonstration. The Hong Kong Monetary Authority has been selling Hong Kong dollars in the foreign exchange market intermittingly in July, as the currency has hit the upper limit of its peg against the U.S. dollar.
Hong Kong Chief Executive Leung Chun-ying announced that he has submitted his report on electoral reform to Beijing on July 15. So far, there is no sign financial markets have factored in the potentially damaging consequences of an Occupy Central protest. Time will tell whether this nonchalance is justified.
Kenji Kawase, Nikkei deputy editor in Bangkok, contributed to the story.