False alarm

Hong Kong weathers Occupy's financial disruption

Hong Kong's economy is coping with pro-democracy protests, now heading into their third week. Some retailers and other businesses have suffered and traffic is bad, but the city's financial system is undisturbed. A prolonged standoff between protesters and the government matters less to investors than the slowdown in consumption and spending in mainland China. Warnings that the movement would threaten Hong Kong's financial health look misplaced.

At its peak, the "Occupy Central" movement drew tens of thousands of demonstrators onto the streets of Hong Kong's business and shopping districts, at times clashing with police and opposing groups. That harmed retailers during the important "Golden Week" Chinese national holiday. Some are reporting a double-digit slump in sales. Credit Suisse expects the city's October retail sales to contract, year on year, for the first time since 2002.

Yet, tourism has held up well. Hong Kong recorded 1.3 million arrivals from mainland China between October 1 and October 7, a 5.7 per cent increase from last year's holiday week. Markets are undisturbed, and with the exception of a few closed bank branches, most companies reported business as usual. The city's China-dominated stock index is more or less unchanged since the protests kicked off.

Hong Kong retailers were already struggling with a slowdown in Chinese spending before the protests: Chow Tai Fook, the world's largest jewellery chain by market capitalisation, reported a 43 per cent drop in sales in Hong Kong and Macau in the three months to the end of June. Hong Kong's private consumption growth slowed to four per cent in the second quarter, from seven per cent in the same period of last year.

Now that formal talks between protesters and the government have been called off, a protracted stalemate looks likely. Activists will also have gained confidence about their ability to block Hong Kong's main roads in future. The concern is that the Occupy movement has left open the possibility of even more unrest in the former British colony. Yet, the protests have been overwhelmingly calm and peaceful. Short of a violent escalation, an additional layer of volatility may make little difference to investors already looking at an already-weakening economy.