Protests take place everyday in Hong Kong. The city is practically ungovernable. Will the Chinese Liberation Army be deployed, as the authority did in Tiananmen Square in 1989? If it does, a lot is at stake. Hong Kong's property market was valued at US$342.3 billion in 2017, according to MSCI. Hong Kong's stock market has a capitalisation of US$3.8 trillion. Hong Kong's economy is heavily invested by those who are close to power in China. Before they move their money out, Hong Kong will be protected. Unless, of course, someone could politically benefit from a chaotic Hong Kong.
The introduction of the extradition law led Hong Kong into spiral conflicts. The bill has been suspended (not withdrawn though), yet protests have not stopped. There are protests every day. The protesters blame the government of not responding to their demands. The Chief Executive Carrie Lam blames the protesters of promoting independence. There are not even dialogues between the two sides.
Apart from using police force, the government doesn't seem to know how to resolve the conflicts. Unfortunately, plenty of evidence suggest that the police uses excessive force repeatedly and casually. This in turn ignites resentment by the public, which leads to more protests. If the authority doesn't change its tactics, the situation can only deteriorate. Hong Kong is already ungovernable now. Some suggest that deployment of the Chinese Liberation Army in inevitable. If it does, China will pay a price, as it did after what they did in Tiananmen Square in 1989. Beijing probably doesn't want that to complicate the on-going negotiation in the trade war with US.
A lot of assets is at stake in Hong Kong. According to MSCI, KTI (Finland), the estimated property market size of Hong Kong in 2017 was US$342.3 billion, about 30% of the estimated market size of China, which was at US$482.8 billion.
If property prices were to drop by 50%, property owners would lose US$171 billion on book. If prices drop by 90%, they would lose over US$300 billion. This scenario is possible should the US withdraw the US-Hong Kong Policy Act 1992.
The market capitalization was HK$29.9 trillion in 2018, or US$3.8 trillion. Selling a small amount of stocks is easy. But selling a large amount of stocks will wipe out liquidity.
If the stock market falls by 50%, investors would lose US$1.9 trillion on book. If prices drop by 90%, they would lose over US$3.4 trillion. For reference, Hong Kong's GDP in 2017 was HK$2,669 billion, or US$340 billion at today's rate.
A substantial percentage of Hong Kong's money belong to Chinese capitals. Getting out of the property market will be costly, as it will drive the house prices down. Getting out of the stock market will be costly, as it will trigger avalanche in the stock market. Moving such a large amount of money out of Hong Kong will be very costly, as it will significantly affect the Hong Kong dollar exchange rates.
With this Act withdrawn, Hong Kong will be treated as an ordinary city of China. This means Hong Kong will be subject to all the tariff penalties, which is currently at 25% on US$150 billion exports, and from 1st September 2019, 10% on the remaining US$300 billion exports. Hong Kong citizedns will also be subject to more stringent entrance requirements to US. Besides, the US will stop exporting to Hong Kong products which the US may consider sensitive technology. If the US withdraws this Act, Hong Kong will lose its unique position. A substantial proportion of foreign capitals will no doubt leave Hong Kong. The property market won't be the only casualty if the Act is withdrawn. Most businesses will suffer. Hong Kong's economy will collapse.
Many rich people in China use Hong Kong as a gateway to move their money out. Those who are close to decision makers in China will not want the Chinese Liberation Army to take over Hong Kong before they move their capital out. Therefore, they will start selling their properties in Hong Kong as soon as they know that the Army will be deployed. Some may be doing so already. When they sell their properties in quantity, property prices will tumble. When that happens, Hong Kong becomes less valuable to them, and therefore, they are more willing to deploy the Army. This feedback loop will cause price drop to accelerate. House sales volumes and accelerating price drops are therefore good indicators of whether the deployment of Army is imminent.
In the stock market, massive selling will always be watched. Those who have little assets in Hong Kong, but are close to the army will either short sell or sell in the future market before the army is sent in. These are also observable in the Hong Kong finance market.
On the other hand, threatened by the proposed Hong Kong Human Rights and Democracy Act in US, key pro-government politicians in the Hong Kong may start to sell their properties in Hong Kong and move their capital elsewhere. Their acts will signal, and therefore accelerate the collapse of the property market. The proposed legislation will, among other things, "establish punitive measures against government officials in Hong Kong or mainland China who are responsible for suppressing basic freedoms in Hong Kong, especially in connection with the abduction of certain booksellers."
If nothing changes, the conflicts could only accelerate until it reaches a tipping point
when Hong Kong is turned into an ordinary Chinese city.
So everyone in Hong Kong has incentive to resolve the conflict.
However, political survival will always overide economic and social considerations.
Does someone want to create a chaotic Hong Kong? I wonder.
If there is no such a force, why hasn't the current crisis been defused yet?
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The author studies the above topic as a scholar. The discussion above is not politically motivated. Neither is any value judgements intended.
