Commentary / World

Viral outbreak underscores value of Hong Kong's 'one country, two systems' policy

by Lin Nguyen

Contributing Writer

The COVID-19 epidemic now sweeping across Asia may damage the global economy more than the 2003 outbreak of severe acute respiratory syndrome (SARS), data analysis firm IHS Markit warns. While strong economies like Hong Kong will not be immune to the virus, the “one country, two systems” policy under which the city functions will help shield it from the worst of the crisis.

SARS, which claimed almost 800 lives globally, shaved as much as 1 percent off China’s growth in 2003 and cost the world economy $40 billion. COVID-19, which has killed hundreds and sickened thousands in China, could reduce the country’s real gross domestic product growth by 1.1 percentage points — and that slowdown may hit the world economy hard, IHS Markit says. The virus has already spread to other major population centers in Asia, such as India.

“China’s impact on the world economy is much larger now than during the SARS outbreak, meaning the slowdown in Chinese growth may be a significant drag on global growth,” says IHS Markit. “China’s economy was the sixth-largest in the world in 2002, accounting for 4.2 percent of world GDP; it is now the second-largest economy in the world, accounting for 16.3 percent. Similarly, China is now the second-largest importer in the world, accounting for 10.4 percent of the world’s goods imports, compared with 4 percent of the world’s imports in 2002.”

Pictet Wealth Management scaled back its 2020 growth projection for China by 0.3 percentage point, citing disruptions to economic activity due to measures to halt the spread of COVID-19. Goldman Sachs estimates a hit on the global economy of up to 0.2 percentage point so long as the rate of infections slows significantly this month and next. Standard Chartered called the outbreak a “black swan” event and lowered its forecasts for Chinese and global growth.

More than 60 countries have imposed entry restrictions on Chinese nationals. Chinese tourists spent $277 billion worldwide in 2018, and curtailing this lucrative travel market could erase up to 3 percentage points of GDP from the most exposed economies. Hong Kong, already hit with a downturn amid anti-government protests and the trade spat between Washington and Beijing, may see lower GDP growth from reduced Chinese tourism and trade.

The coronavirus “will definitely cause a double blow to the economy (and) will greatly increase the risk of continued economic contraction this year,” Hong Kong Financial Secretary Paul Chan wrote Feb. 2. The next day, the Hong Kong government said the city’s economic outlook this year was “subject to high uncertainties,” including the global economy, trade and the protests.

Yet as the world’s gateway to China — and China’s gateway to the world — Hong Kong is in a unique position to outperform its neighbors and remain a stable center for global commerce. Under the one country, two systems arrangement, it maintains separate governing and economic systems and is guaranteed liberties such as freedom of expression and an independent judiciary.

These freedoms give Hong Kong a special status internationally, enabling Asia’s financial capital to negotiate trade and investments independently from Beijing. They also mean that foreign investors have more confidence in Hong Kong’s legal and governance system and continue to rely on the city as a vital platform for expansion into Asia.

On the other hand, China uses Hong Kong’s currency, equity and debt markets to attract foreign funds, while international companies use the city as a launchpad to expand into the mainland. Most foreign direct investment in China continues to be channeled through Hong Kong.

Having a free market and an international economy, yet being joined closely to booming China, Hong Kong has been able to share in China’s success while protecting itself well from regional and even global slumps. Drifting away from one country, two systems could upset Hong Kong’s delicate balance of international and Chinese makeup and cost the city this vital hedging mechanism.

Hong Kong, one of the most important financial centers and commercial ports, is the world’s 10th-largest exporter and ninth-largest importer, and the Hong Kong dollar is the eighth most-traded currency. The territory has the highest population of ultrarich — people worth at least $30 million — of any city in the world and is ranked third in the Global Financial Centre Index, behind only New York City and London.

But the city has been put to the test over the past year — as it was during the regional downturns in 1997 and 2008. On top of the current slowdown and COVID-19, the city is grappling with a credit rating downgrade by Moody’s last month that pushed its stock market down. The agency reiterated that increased activism and lack of political resolutions weighed against the city’s otherwise strong business environment.

Hong Kong has held up well amid past regional downturns, leveraging its international standing to protect itself. Its finance center can operate in its own microcosm and its markets can respond quickly to economic and financial swings, enabling the city to withstand external shocks. In 1997 the city protected its currency amid a regional currency sell-off through leveraging its vast foreign reserves. In 2008, Hong Kong introduced loans to unfreeze business credit and fast-tracked infrastructure projects to stimulate its economy.

Indeed, although Chinese stocks slid the most in four years on Feb. 3 when the market reopened after the Lunar New Year holiday, the Hang Seng Composite Index actually rose 0.17 percent. The chief executive of investment adviser U.S. Global Investors said Feb. 8 that Hong Kong stocks “look remarkably attractive and undervalued relative to the U.S. market. Whereas the S&P 500 is trading above a historically high 22 times earnings, Hong Kong-listed stocks are on sale at around 12 times earnings.”

On the back of Chinese stimulus plans to help combat the economic effects of coronavirus, Asia bounced back in early February from the heavy selling of late January. Hong Kong was one of the best performers, buoyed by Wall Street’s confidence as well as China’s decision to cut interest rates — underscoring how the city benefits from the double exposure forged out of its one country, two systems arrangement.

Lin Nguyen is an analyst in Southeast Asian and South Asian regional security, focusing on economic and political developments.

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