Country risks for investors operating in Hong Kong

04 July 2019

Country risks for investors operating in Hong Kong Protests in Hong Kong are likely to continue in the coming months. However, a decision to shelve proposed amendments to extradition laws is likely to reduce the scale and intensity of demonstrations. The short-term economic impact of protests should be limited, although a prolonged period of civil unrest could place pressure on the currency peg.

Security Environment

In June 2019, Hong Kong experienced a number of large and disruptive protests. Participants opposed proposed amendments to extradition legislation, which would allow individuals suspected of certain crimes to be extradited to mainland China. Concerns were raised that the changes would undermine Hong Kong’s judicial independence from China and be used as a means of suppressing dissent.

Protests on 12 June turned violent when police deployed tear gas and rubber bullets against protesters who had attempted to enter government buildings. 21 police officers and 72 civilians were injured. On 15 June, Hong Kong’s Chief Executive Carrie Lam announced that the legislative process for the amendments would be shelved indefinitely.

However, the bill has not been withdrawn from consideration, meaning that it could still be pursued in the future. As a result, demonstrations continued, with protesters demanding the bill’s complete withdrawal, Lam’s resignation and a police apology for the use of force. Protests, which on 16 June attracted 2 million people, have caused significant business disruption in parts of Hong Kong.

On 1st July 2019, protestors broke into Hong Kong’s legislative building on the anniversary of the territory’s handover from the United Kingdom to China. Protestors smashed a glass door, breached the legislative chamber and vandalised the interior, marking a flashpoint moment in the protest movement.

Country risks for investors operating in Hong KongFurther protests are likely in the coming weeks, as there is still significant discontent with Lam and the police. However, they are likely to be smaller in scale, as the shelving of the bill is likely to placate more moderate protesters.

The authorities have also taken a softer approach since 15 June, and this will reduce the risk of further violence. On 21 June, an overnight siege of the police headquarters by thousands of people was met with a restrained response and ultimately disbanded peacefully.

However, protests are still likely to cause business interruption, and will escalate in severity if an attempt is made to reintroduce the extradition bill.

Trading Environment

Pricing Outlook Hong KongProtesters have also sought to impact Hong Kong’s economy, with a reported 1,229 businesses responding to a social media campaign to suspend operations in support of the protests. However, the short term impact of the protests is likely to be small.

The 2014 Occupy Hong Kong movement, which lasted for over 70 days, was subsequently found to have had a limited impact on Hong Kong’s retail or tourism sectors. As a result, even if protests persist over the coming month, the impact on the growth outlook is likely to be minimal, with real GDP growth forecasted at 2.0% in 2019.

Hong Kong’s economy will continue to benefit from robust property price growth and economic activity in mainland China.

However, downside economic risks stem from global trade protectionism, with the territory experiencing a downturn in export and import values in recent quarters.

Persistent unrest could put pressure on the Hong Kong dollar’s peg to the US dollar. A period of capital flight as a result of protests would increase pressure on the peg, which has already been strained by Hong Kong’s increasing ties to the Chinese, rather than US, economic cycle.

However, the Hong Kong Monetary Authority retains USD 438 billion in official reserves, giving it ample resources to defend the currency peg in the coming months. Currency risks are therefore not expected to rise significantly in the medium-term outlook.

Investment Environment

If implemented, the extradition bill may also dampen investor confidence in Hong Kong. Hong Kong has long benefitted from the ‘One Country, Two Systems’ approach, with it’s distinct legal and regulatory environment supporting a robust operating environment for investors.

If the bill is reintroduced and passed, organisations operating in Hong Kong may face politicised extradition requests from China.

At particular risk would be organisations considered to be critical of the Chinese government or pursuing commercial interests at odds with Chinese national policy. Firms in the media, banking, finance or charity spaces are most likely to be subject to such requests if extradition legislation is amended.

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

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5 Key Takeaways

  • On 12 June 2019, protests over the proposed extradition bill turned violent, injuring 21 police officers and 72 civilians
  • The short-term economic impact of protests should be limited, although a prolonged period of civil unrest could place pressure on the currency peg
  • A reported 1,229 businesses responded to a social media campaign to suspend operations in support of the protests
  • If the bill is reintroduced and passed, organisations operating in Hong Kong may face politicised extradition requests from China
  • Hong Kong’s economy will continue to benefit from robust property price growth and economic activity in mainland China.

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Gulf of Oman, Bangladesh, Kenya and Madagascar all of which have been the subject of recent enquiries from our client base.

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  • Eleanor SmithEleanor Smith

    Eleanor Smith is a Senior Political Risk Analyst within Marsh JLT Specialty’s Credit Specialties team. At Marsh JLT Specialty, Eleanor analyses developments in political risks, and advises clients on their effect in a range of sectors. Eleanor is also responsible for delivery of World Risk Review, JLT’s country risk ratings platform, to clients and prospects.

    Eleanor has a first-class degree in History with Spanish from UCL, and a Masters in International Public Policy from the same institution. With experience in a range of sectors, including diplomatic missions and not-for-profit, Eleanor can help clients understand their risk exposure.

    If you would like to talk about any of the issues raised in this article, please contact Eleanor Smith, Senior Political Risk Analyst on
    +44 (0)121 626 7837.

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