More than six months of domestic turmoil have tested Hong Kong's economy, tipping the city into a technical recession and hampering its role as a thriving international commerce centre. But with an economy that showed remarkable resilience in the face of regional downturns in 1997 and 2008, Hong Kong could bounce back this year if the socioeconomic ills at the heart of the unrest, and sporadic episodes of violence, stop.
"Ending violence and restoring calm are pivotal to the recovery of the economy," Hong Kong's government has said.
The crisis was triggered when the government introduced a controversial extradition bill that many feared would give Beijing a legal avenue for political persecution. Nearly two million people took to the streets last June, eventually forcing the administration to scrap legal amendments that would have permitted transfer of criminal suspects to mainland China.
But the bill also stoked deeper resentment over a lack of universal suffrage in Hong Kong. Added to the mix is pent-up frustration at stagnating living standards, expensive housing, income disparity, outdated education and a lack of competitiveness.
Protest groups continue to battle with police in the streets, disrupting businesses and transport and threatening to impact the financial sector, the beating heart of the city's economy. As recently as Christmas Eve, a subway station entrance was set on fire and two dozen people were hurt in clashes in popular shopping districts.
The increasingly fractured protest movement, which is taking on more violent manifestations, is taking its toll on the city. Tourists, whose dollars are a mainstay of the economy, have cancelled bookings; visitor numbers were down 56 per cent year on year in November, government statistics show, and retail sales slumped 23.6 per cent that month.
US-China trade tensions have also hurt Hong Kong, whose economic health depends on external trade and financial services, as well as Asia. Many pundits foresee a general downtrend in the region this year in light of the contentious relationship between Washington and Beijing, as well as manufacturing shifts, financial uncertainty and China's economic slowdown.
Chinese economic growth cooled to a near 30-year low of 6 per cent in the third quarter of 2019 and banks predict that it will slow further, to 5.6 per cent this year.
Singapore, a bellwether for regional and global economic trends, managed to avoid a recession last year and is cautiously optimistic about its growth prospects in 2020. But the economy's 0.7 per cent expansion was markedly slower than the 3.1 per cent growth it enjoyed in 2018.
South Korea was on track for one of its worst two-year growth periods in more than half a century in 2019, though its finance ministry sees a rebound in 2020, with growth projected at 2.4 per cent.
In Hong Kong, the government expected the economy to shrink 1.3 per cent last year. ING, the Dutch bank, forecast that the Hong Kong economy would shrink by 5.8 per cent in 2020, "assuming that the violent protests last the whole year". Clearly, violence and economic contraction go hand in hand.
Yet, international organisations are more upbeat. The International Monetary Fund postulated that Hong Kong's gross domestic product would grow 0.2 per cent in 2020, led by private consumption, "but the pace of recovery over the medium term is expected to be slower than in previous recoveries as increased trade barriers and disruptions to global supply chains would be a drag on trade-related activities".
The city has weathered tough times in the past, thanks to its strong regulatory environment, sound fiscal policies and international make-up.
Hong Kong's heavily leveraged foreign exchange reserves prevented the collapse of its currency during the 1997 financial crisis that decimated other Asian currencies such as the Thai baht, the Malaysian ringgit and the Indonesian rupiah and caused stock markets to tumble, unemployment to rise and asset prices to deflate.
The city coped better than most of its neighbours because of the "tenacity and credibility" of its US dollar-pegged exchange rate, said Joseph Yam, then chief executive of the Hong Kong Monetary Authority. Indeed, the Hang Seng Index dropped the least of any stock market in the region during the crisis and Hong Kong's banking system remained stable and solvent.
"Because they are governed by free market principles, the markets respond quickly to interest rate changes and other variables, making the economy resilient in absorbing external shocks and capable of adjusting efficiently to validate the linked exchange rate," Yam said back in November 1998.
Hong Kong has four fundamental strengths: healthy foreign currency reserves, prudent fiscal policies, a sound financial system and a flexible and responsive economy. In response to the 1997 crunch, the city improved its risk management and created a more transparent regulatory environment while still encouraging financial innovation to remain competitive.
Expansionary monetary and fiscal policies also underpinned Hong Kong's recovery from the global downturn in 2008.
The onset of that crisis derailed the city's economic upswing, causing the economy to shrink in the fourth quarter of 2008. But Hong Kong recovered after putting into place a range of initiatives, from fast-tracking public infrastructure projects and guaranteeing all bank deposits to introducing a US$12.8 billion loan guarantee programme to help unfreeze credit for the business community.
Hong Kong's response to the hard lessons of 1997 and 2008 underscore that it is well positioned to ride out any economic storm in 2020. But the city - one of the world's most important financial hubs, with banking, fund and wealth management assets worth more than US$6 trillion - needs unity and order to be restored to make a recovery.
Activists and government officials must get round the table to discuss demands reasonably and restore civility, so Hong Kong can continue to be a well-regulated economic powerhouse.
Lin Nguyen is an analyst in Southeast Asian and South Asian regional security, focusing on economic and political developments
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