Under the same Umbrella

Why Hong Kong protests will not have a lasting economic impact  |  Hong Kong’s so-called Umbrella Revolution will worry markets and strategists around the world while it continues; it may even deter a few tourists. There is a potential risk that once a largely younger generation has started to express its counter-establishment feelings, more protests might follow. All of this creates a degree of uncertainty and, in turn, potential for market volatility and reduced trade.

Delta Economics does not see the Umbrella revolution as having a lasting impact on trade or Hong Kong’s role as a financial centre. There has been a downward correction in the Hang Seng since July, although this is more likely to be because of wider economic conditions in Asia than specifically the protests in Hong Kong (Figure 1).



Figure 1  |  Value of Hong Kong’s exports (USDm 2001-2015) vs. Hang Seng Index,
Last Price Monthly, June 2001-September 2014
Source  |  DeltaMetrics 2014, Bloomberg


The correlation between the Hang Seng Index and Hong Kong’s exports is 0.823. This is very high and given a forecast decline in monthly trade export values up to 2015, suggests that the correction that we are currently seeing may have some way to go. However, as can be seen quite clearly from the chart these corrections are cyclical. Delta Economics expects exports in November 2014 will be 1.3% below their 2013 values. By January and February 2015 they will be similar to their levels 12 months earlier – unimpressive growth, but growth nevertheless.
The reason why the protests will have little impact on trade is the very reason why there are protests in the first place: the Umbrella Revolution’s purpose is to point out to the world generally, but China in particular, that it has the right to democracy as a counterpart to the free market and free trade system that it has built. It is not questioning the symbiotic economic and trade relationship with China, merely saying that the logical political consequence of a free market economy is the existence of a democracy.

Hong Kong’s exports to the United States, its second-largest export partner, are just 12% of the US$294bn it is expected to export to China in 2014; while exports to China will grow modestly in 2014, at just under 5%, they are forecast to fall to the US by nearly 3%. This point is reinforced by the fact that it is not just Hong Kong’s exports that are highly correlated (0.817) with the Hang Seng Index (Figure 2), but Hong Kong’s total trade with China as well (0.813).



Figure 2  |  Value of China’s exports to the world and value of Hong Kong’s trade with China (USDm),
June 2001-September 2015 vs. Hong Kong Index, Last Price Monthly, June 2001-September 2014
Source  |  DeltaMetrics 2014, Bloomberg

The Hang Seng moves proportionately with both China’s exports and bilateral trade between China and Hong Kong. Although the correlation is marginally weaker for Hong Kong’s trade with China than it is for either Hong Kong’s or China’s total exports to the world, it is still apparent that the Hong Kong Index appears more dependent on the trade relations between the two countries in the longer term than it does on political relations.

Hong Kong’s export trade is only mildly and negatively correlated with the Hong Kong dollar at -0.525. The Hong Kong Dollar is pegged to the US Dollar and is traded within upper and lower limits (Figure 3). However, a depreciation in the value of the Hong Kong Dollar at present appears to be aligned not just with the protests, but also with broader downward trends in trade (Figure 3).




Figure 3  |  Value of Hong Kong’s exports (USDm), June 2001-September 2015,
vs. USD-HKD Last Price Monthly, June 2001-September 2014
Source  |  DeltaMetrics, 2014, Bloomberg


The correlation between China’s exports and the value of the Hong Kong dollar is 1 per cent stronger, which underscores the fact that the dependency between the two countries works both ways. There is very little correlation between the value of the Shanghai Composite index and either Hong Kong or China’s trade (less than 0.34 in both cases) suggesting that the Shanghai Composite is more of a speculative market that the Hang Seng. However, the correlation between both China and Hong Kong’s exports and the value of the Yuan is extremely high at 0.885 and 0.941 respectively suggesting that China’s currency manipulation may have positive spillover effects for Hong Kong’s trade as well as China’s (Figure 4).



Figure 4  |  Value of Hong Kong and China’s exports (USDbn), June 2001-September 2015 vs. USD-CNY spot,
Last Price Monthly, June 2001-September 2014
Source  |  DeltaMetrics 2014, Bloomberg


Thus far the revolutionary impact of the protests has been limited. Indeed, there are signs that the numbers of protestors are dwindling. However, they have been successful in raising global awareness of the issue of democracy in Hong Kong and there is no guarantee that these protests will be an isolated event.

The protests highlighted the issue of how important Hong Kong is to Chinese and world finance. Markets were unsettled by events and investor confidence was knocked, however briefly. However, it is unlikely that there will be a lasting impact on long-term confidence, a weakening in the rule of law, or even a threat to the free-market and trade traditions of Hong Kong. After all, in the end the two countries are, economically at least, under the same umbrella.