Here’s What a Hong Kong Crackdown Would Do to Its Markets

Experts are forecasting financial carnage if the Hong Kong protests meet a bloody end.


An Asia-Pacific financial powerhouse, Hong Kong brings easy access to China’s trade and capital flow. But the pro-democracy protests roiling Hong Kong since March 31 raise questions about what will happen if, before China’s 70th birthday on October 1, Beijing dispatches troops for a crackdown.

Despite withdrawing its incendiary extradition bill, Beijing remains ready to declare a state of emergency and warns the end is imminent for protesters who have vowed to fight on.

Tracy Chen, portfolio manager and head of structured credit for Brandywine Global, framed a possible invasion’s impact as “very negative” and said repercussions could be “extremely dire.”

Hong Kong has enjoyed a reputation as a global financial center with a sound legal system, said Chen. Besides, it is a recognized global trade port offering free flow of currency, goods and information, added Chen, an expert on China’s economy and international investment strategies.

The chaos unleashed by an invasion could ruin Hong Kong politically and economically, Chen stressed. “This could symbolize the failure of the ‘One country, two system’ model and jeopardize Hong Kong’s status as a global financial center with an independent legal system,” she said.

“I think this will be as significant as the Tiananmen Square event,” triggering a global stock market selloff and potentially accelerating the next recession, she added, predicting that financial institutions could “shy away” from their Hong Kong investments if such a scenario comes to pass.


Strategist Anders Corr, the publisher of the Journal of Political Risk and founder of Corr Analytics, noted that the turmoil already has affected the local stock market.

“The Hang Seng index has lost about 17 percent over the summer as the protests have mounted, and the Hong Kong government response has been subordinated to Beijing,” said Corr. “An invasion would decrease the quantity of peaceful protesters, but we would see an increase in more violent forms of protest or even attempts by democracy advocates to sabotage the economy.”

Already, he said, the airport and subway systems have been targeted, and sporadic, short-lived general strikes have unfolded.

“The democracy protesters have widely threatened that, ‘If we burn, Hong Kong burns with us,’ and the broad support for the democracy movement — and even some of the militant tactics — means that this is a credible threat,” he added, noting that many in the peaceful, 1.7 million-person march on August 18 wore black in support of the protestors.

In the worst-case scenario, Western corporations and contractors will move to hubs like Singapore and Taipei, he said. Chinese corporations could withdraw to Shenzhen and Shanghai, meanwhile.

If violence is used against protesters, international economic sanctions on China and downward pressure on the Shanghai Composite are likely, he added. Lifting tariffs, then, would be harder politically, even if a Democrat wins the 2020 presidential elections, according to Corr.

The end of Hong Kong’s special status as separate from the mainland would curb Chinese companies’ ability to import “sensitive items” — that reportedly may have military uses — through Hong Kong. Lastly, Corr envisions mounting political pressure on global index providers to reduce weighting to Chinese stocks, which are now being increased by MSCI and the FTSE.

Dr. Graeme Smith, a fellow in the Department of Pacific Affairs at The Australian National University, also foresees calamity if the Chinese government invades.

“It would be disastrous for the Hong Kong economy, were they to do so, for the simple reason that Hong Kong in 2019 is not Beijing in 1989, and Hong Kong depends on the firewall between itself and mainland China,” Smith said. “If the firewall is removed — either by the extradition bill or intervention — then the companies that base themselves there will choose to downsize or relocate,” said Smith, who also co-hosts the Little Red Podcast, sponsored by the Australian Center on China in the World.

“This is already happening,” he added. “The number of listings on the Hong Kong stock exchange is down drastically, compared to the previous three months, so the impact is already being felt. But a full-blown invasion or a full-blown intervention would speed things up a lot.”

Professor Juscelino Colares, an international business expert from Case Western Reserve University law school, confirms that military force would violate China’s treaty obligations with the United Kingdom, by eliminating the one-country/two systems approach.

“Second, breach of this treaty would reinforce the prevailing perception that, to China, brute force is a substitute for international commitments,” Colares added, citing China’s non-compliance with the terms of last year’s International Court of Justice decision on its dispute with its South China Sea neighbors.

Third, U.S. reaction — trade — and investment-related sanctions spurred by human rights violation would be certain, he said. The United States has a trade surplus with Hong Kong and is a big investor, he noted.

Colares said major banks, such as HSBC and Chase, might be pressed to leave to comply with sanctions. The costs would be “very high,” he added. “Bank stocks would take a beating first, but trade inflows and outflows would decline in the longer term. One might see a growing emigration of highly talented Chinese residents to other major financial markets.”

Hit by sanctions and a steep decline in foreign direct investment, Hong Kong would be “severely hurt,” he said.