Hong Kong protests are decimating its economy

Thousands of people took to the streets of Hong Kong Friday evening to form a human chain as a means of peaceful protest amid the recent chaotic outbreaks of violence that have occured as Hong Kongers push back against what they say is overreach from Beijing. 

The protests, which have extended into their 11th week, aren’t just shutting down businesses and key stretches of Hong Kong’s streets, they’re also choking off the lifeblood of its tourism industry: visits from the mainland. China accounts for 76 percent of Hong Kong’s tourists, according to the government.

"Tourist arrivals for the first ten days of August are down more than 30% YoY while hotel occupancy in some cases has declined to 40% against a more normal 70-80% at this time of the year," wrote Hong Kong-based Christopher Wood, global head of equity strategy at Jefferies, in a Thursday note to clients.

"Members of the Hong Kong Retail Management Association have experienced single to double digit declines in YoY sales since the protests began in June, while the latest official data shows that retail sales declined by 6.7% YoY in June," he added.

Investors are taking note. Hong Kong’s retail index has shed 5 percent of its value since the protests broke out on June 9. Retail stocks have been hit especially hard with the jewelry store operator Luk Fook down 16 percent and the department store operator Lifestyle International Holdings off 17percent.

The drop in tourism was at least partially responsible for the Hong Kong government last week slashing its 2019 GDP forecast from 2 to 3 percent to zero to 1 percent.

"Domestically, the recent social incidents have hit the retail trade, restaurants and tourism, adding a further blow to an already-weak economy, and also affected the international image of Hong Kong," the government said in a press release.

China economists Julian Evans-Pritchard and Martin Rasmussen at the London-based Capital Economics took their warning a step further. They say they wouldn’t be surprised if the "q/q contraction in Hong Kong’s GDP deepens from 0.3% in Q2 to close to 1% this quarter, resulting in the first technical recession since 2009." For the year, they see growth of just 0.5 percent.

Evans-Pritchard and Rasmussen say while Chinese military intervention in Hong Kong isn’t their base-case scenario, they aren’t ruling it out completely.

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"In the extreme case of military intervention by the mainland, Hong Kong’s economy would face a deep contraction," they wrote.