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Hong Kong – Risks Rise as Beijing Stirs Controversy

Public protests by students and other pro-democracy activists triggered by a controversial extradition bill subsided for the most part in early 2020 as democracy activists adhered to social-distancing rules aimed at containing the spread of COVID-19. However, the pro-Beijing regime headed by Chief Executive Carrie Lam has stoked the flames of discontent by moving forward with the implementation of a long-delayed national security law, which significantly erodes the legal autonomy that is an essential element of the “one country, two systems” model, and a key contributor of Hong Kong’s appeal as a destination for foreign investment.
The pro-democracy parties made significant gains at local elections held in November 2019, and the negative economic fallout from the pandemic and the restrictive rules imposed to contain the spread of the disease creates the potential for a similar result at legislative elections scheduled for September. However, the security law creates a legal basis for cracking down on the more militant anti-government elements ahead of the vote. Along with Beijing’s criticism of recent decisions by Hong Kong’s top court, the implementation of the security law signals the intent of Chinese authorities to exert more overt influence with the special administration region, a risk amplified by the fact that Chief Justice Geoffrey Ma, a staunch defender of an independent judiciary, is due to retire in 2021.
The fallout from the global pandemic will produce a real contraction of the economy in 2020, but the stimulus from emergency fiscal and monetary measures creates the potential for a rebound in the second half of this year and into 2021. However, the size and timing of any rebound is a matter of uncertainty, not least owing to the very real risk that local authorities might tighten or delay the easing of health-related restrictions in the hope of dampening the threat of a revival of widespread disruptive protests.
The UK and some other commonwealth states, including Australia, have overtly sought to woo businesses and skilled professionals currently residing in Hong Kong to relocate, a strategy that has drawn threats from China of unspecified countermeasures. Capital outflows increased last year amid rising political unrest, and anticipating an acceleration of outflows, Beijing has sought to dampen the impact by stepping up the local listing of Chinese firms and increased inflows of financing via mainland exchange links in Shanghai and Shenzhen. The appreciation of the local dollar, which is pegged to the US currency, has prompted Financial Secretary Paul Chan to issue an unequivocal affirmation of commitment to the peg in hopes of dampening speculative pressure on the Hong Kong dollar.
Since 1979, The PRS Group Inc., has been a global leader in quant-based political and country risk ratings and forecasts. This commentary represents a sneak peek from our upcoming political risk reports. For more information please contact us at (315) 431-0511 and, or explore a subscription to PRS Online and/or ICRG Online today to receive political risk updates.


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