Political challenges do not seem to bode well for the economy. In Q3 of 2019, Hong Kong officially recorded a second consecutive quarter of negative year-on-year economic growth at -2.9%, bringing the semi-autonomous city into a technical recession. Forecasts for the rest of the year remain grim due to a sharp decline in revenue in the sectors of tourism, hospitality and retail, spurring the Hong Kong government to announce a HK$19.1 billion emergency stimulus package early on in the quarter in hopes of revitalizing public consumption and business confidence.

Historically, Hong Kong has been one of Asia’s top destinations for foreign direct investment and China’s primary channel for such inflows. Currently, Hong Kong accounts for two-thirds of China’s FDI, and has recorded year-on-year growth of +2.9% for the first 3 quarters of 2019, according to official data from the Ministry of Commerce. However, it is difficult to ascertain the severity of the impact of recent unrest given the lack of month-by-month data, and the fact that the FDI component of investment tends to be a lagging indicator of economic outlook. In fact, according to an estimate by Goldman Sachs analysts, up to $4 billion in dollar deposits outflowed in the past months from Hong Kong to Singapore, the “alternative financial carrier of the region”, while local-dollar deposits dipped -1.6% in August before recovering by +0.6% in September. Changes to deposits are more telling indicators of short-term sentiment, as the liquidity of deposits are often higher than that of large-scale, long-term investments requiring substantial periods of market research, planning, and implementation.

In the meantime, Hong Kong’s stock market index, the Hang Seng Index seems to be slowly recovering despite dropping just over 16% from its pre-protest peak in early April to its lowest point this year in mid-August, showing that perhaps, on the whole, investors are still somewhat confident in the government’s ability to shore up short-term economic weakness. Several recent IPOs – among them Budweiser and ESR Cayman – which had been previously delayed by protest, have also served to prop up previously severe year-to-date IPOs proceeds (compared to 2018) and improve investor confidence in the local market’s resilience.

Admittedly, there are other important diplomatic and political factors such as hitherto unstable US-China trade war talks, and shifting long-term policies and international relations priorities on the part of Beijing; but the escalation of recent events in Hong Kong, a lack of dialogue between the parties involved, and increasing diplomatic tensions have certainly not helped matters.

Perhaps more importantly, Hong Kong’s special status, built from its legal institutions, makes it an attractive location for both Chinese and international businesses. Hong Kong’s adherence to its rule of law system, according to the Peterson Institute for International Economics, underpins the numerous advantages Hong Kong possesses over potential alternative hubs in the mainland such as Shanghai and Shenzhen. A confidence in the rule and enforcement of the Basic Law form the basis of local effective market and regulatory frameworks, which, along with the free flow of capital allow foreign firms to safely enter and navigate the high-potential Chinese market, and allow Chinese firms to setup an “anchor point for global expansion”. However, due to recent clashes between government and increasingly disillusioned and radicalized protestors, and with no resolution in sight for Hong Kong’s worsening social and political climate, according to polls cited by the WSJ, nearly a quarter of US firms in Hong Kong “were considering moving capital or assets out of the city.”

In the long run, according to Sheng Liugang, associate professor at CUHK, there are signs that investments from the US, EU, and other international sources may look to fall over time and be replaced by investments from the mainland, as Hong Kong’s role as a “connector” between China and the rest of the world weakens.