Protests Take a Toll on Hong Kong's Economy

By Steven Russolillo and Joanne Chiu

Protests are denting Hong Kong's economic growth, business sentiment and financial markets.

A worsening spiral of violence and demonstrations marks the former British colony's worst social and political crisis since it returned to Chinese rule in 1997. The controversial prospect of extraditions to mainland China, and the resulting unrest, have clouded Hong Kong's status as a global financial center.

On Tuesday, Hong Kong Chief Executive Carrie Lam said there is "no room for optimism" on economic growth this year, citing uncertainties related to the protests and the U.S.-China trade dispute.

The next day the government estimated that inflation-adjusted second-quarter gross domestic product was up a modest 0.6% from a year earlier, as "local economic sentiment deteriorated visibly in the face of increasing downside risks facing the global economy and other headwinds."

The pressure has weighed on property and retail stocks, helping put the benchmark Hang Seng Index on track to be one of the worst July performers among its global peers.

Finance-industry workers were preparing to participate in a flash-mob protest on Thursday, making the same key demands as many other recent protests, including permanent withdrawal of the extradition bill and an independent investigation into police conduct. A digital flier for the event circulating on social media was headlined "freedom snooze, market lose."

Retailers and tour agents have been hit by tensions in normally bustling commercial and residential districts. Last week, a lawmaker who represents the city's tourism sector said some tourist agencies had inquiries about possible cancellations of corporate or study trips to Hong Kong in August. He said the growth rate for tourism arrivals had slowed to 8.5% after the demonstrations began in June, down from 15% in the first five months of the year.

"There is a lot of uncertainty in Hong Kong," said Mariana Kou, head of Hong Kong consumer research at CLSA, a brokerage. "It's a tough time for local retailers as we're seeing more widespread and frequent demonstrations and clashes in the city."

The share price of major retail landlord Wharf Real Estate Investment Co., owner of the Times Square and Harbour City malls, has fallen 9.7% this month to its lowest level since January.

Chow Tai Fook Jewellery Group Ltd., the world's second-largest jeweler after Tiffany & Co., dropped 12% in July after surging the prior month. It said sales at stores in Hong Kong and Macau that had been open at least a year fell sharply in the three months to June. Smaller rival Luk Fook Holdings (International) Ltd. dropped 3.3% this month.

Mainland Chinese visitors to Hong Kong are among jewelers' biggest customers.

Shares of MTR Corp., a property company that operates Hong Kong's train system, has dropped more than 7% over the past two weeks. The shares hit a record closing high on July 18; later that day the company released a profit warning. Protesters disrupted train services on Tuesday, slowing some lines and forcing others to suspend service.

Smaller companies appear most vulnerable. Ms. Kou said she expects sales figures for the retail and tourism sectors to deteriorate further through the summer. She said the disruptions drove double-digit percentage sales declines for some retailers during the past weekends, based on CLSA's channel checks, in which it collects information from third-parties such as distributors and customers.

A sentiment index of small and midsize companies in Hong Kong fell to a three-year low, according to a survey by Standard Chartered PLC.

Foreign companies are also suffering. In a survey published this week, the American Chamber of Commerce in Hong Kong said it found more international businesses pessimistic about short-term prospects for the city. Respondents, spanning sectors including financial services, logistics and technology, said escalating violence and political deadlock were fueling perceptions Hong Kong is becoming a riskier place to do business.

Also this week, Fitch Ratings warned that "unrest and apparent rising distrust in government" risks damaging business confidence and eroding the city's governance. It has a stable AA+ rating on Hong Kong, three notches higher than its rating on mainland China, but said some of the assumptions that underpin that rating are being tested, including those about the effectiveness of the territory's governance and its rule of law.

Even after a rough July, though, the Hang Seng is up roughly 8% for the year. And much of the decline this month is due to drops in major mainland stocks, such as China Unicom, Country Garden and China Construction Bank.

David Webb, an activist investor in Hong Kong, said that the city's stock market isn't necessarily the best reflection of the Hong Kong economy, since roughly two-thirds of the Hang Seng Index are companies that operate mostly in mainland China.

"The bigger issue is obviously whether the situation will get worse," he said. "With weekly if not daily protests, which have become increasingly violent as protesters test the will of the authorities, there isn't any obvious end in sight."

Joyu Wang contributed to this article.

Write to Steven Russolillo at steven.russolillo@wsj.com and Joanne Chiu at joanne.chiu@wsj.com

(END) Dow Jones Newswires

July 31, 2019 07:21 ET (11:21 GMT)

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