Hong Kong Unrest Threatens the City's Economy (And China's Too)

Stratfor Worldview

Six months of civil unrest in Hong Kong have taken a toll on its economy, which has officially entered its first recession in a decade. The city's third-quarter gross domestic product (GDP) contracted by 2.9 percent in the third quarter of 2019. But while its financial sector — the city's economic linchpin — remains robust for the time being, the worst is likely yet to come.  Deep-rooted grievances are fueling the escalating and increasingly violent attempts by protesters to resist Beijing, but their actions are only hardening the central government's resolve to compensate for the unreliability of its most critical financial link to the world.

With a quick and relatively peaceful de-escalation now out of the question, Hong Kong's businesses and investors will have to adjust to the very likely new normal of operating against the backdrop of persisting protests and political impasses. And this reality, combined with Beijing's steadily strengthening hand and its possible intervention in the city, will weigh heavily on Hong Kong's status as Asia's leading financial hub for the foreseeable future.

Bracing for a Bumpier Ride

What started as street demonstrations protesting a pending extradition law have since unraveled into regular acts of rebellion featuring traffic disruptions, vandalism, violent street clashes and attacks. Security crackdowns have been unable to contain the radicalized protests, which show no signs of diminishing. In recent months, the protest movement's more peaceful components have become largely marginalized, with more extreme cells now taking center stage. The absence of arrestors within the movement, combined with the leaderless nature of the protests, means a de-escalation mechanism is virtually nonexistent — short of the protests calming on their own, or being squelched by more heavy-handed security responses.

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