HSBC downgrades Hong Kong on China tensions

Investment outlook cut on the back of falling property prices and souring relations with China over the Occupy Central issue.
The July 1 protest attracted a record crowd.
The July 1 protest attracted a record crowd.

HSBC has downgraded its investment outlook for Hong Kong equities on the back of tensions with China over the Occupy Central issue and the risk of falling property prices.

Although the move -- from neutral to underweight -- is a small one, it is symbolic given the city is the global bank’s historic home.

The bank is Hong Kong's biggest and in 2013 derived more than 40% of its Asia-Pacific pre-tax earnings from the city.

“We … note recent concerns about negative news flow regarding the ‘Occupy Central’ campaign,” HSBC said in its quarterly report.

More details are expected on Tuesday, with HSBC also citing an expected slowdown in mainland Chinese tourist arrivals.

But the move comes at a sensitive time for the city, just a week after as many as 500,000 people mounted a protest for democracy in the city, on July 1, aimed at the Chinese government.

“In the long-run it’s a good thing [the downgrade]. It sends a message to China’s government that its policies are harming Hong Kong’s economy,” Kenneth Leung, a lawmaker representing the accountancy profession in Hong Kong, told FinanceAsia.

HSBC declined to comment further.

The downgrade comes amid a ratcheting up of tensions between a swathe of the population in the city and the Chinese government; primarily over politics but also because the mainland’s perceived murky business climate is increasingly seen seeping into the city.

Beijing, before the protest, issued a white paper, effectively reminding the city that it belonged to China and that certain of its privileges were just that.

Last week the Chinese government went a step further and warned the city that its status as a premier offshore renminbi hub was something that might not last forever.

At a press conference, China’s vice-finance minister Wang Baoan said that, since reunification, the mainland had contributed greatly to Hong Kong’s prosperity, including billions of renminbi in bonds.

“This is a growing cake Hong Kong should cherish but if you do not want to eat, it is Hong Kong's own thing,” he said.

The increasing tension comes as Hong Kong’s property market, which has soared over the past decade, has shown some signs of a possible cooling – another factor behind HSBC’s decision.

However, despite signs of falling prices, there were 5,270 residential transactions in May, according to Knight Frank, which is 10% higher than in the previous month and the highest level of the past 15 months.

Financial hub

Perhaps of more immediate importance is Hong Kong’s status as a global listing hub, which has come under threat in the past two years.

Although 2013 saw something of a resurgence in the second half, there is still a glut of banks chasing a dwindling number of deals.

And, anecdotally, headhunters are seeing a reduction in activity from the city's big banks, suggesting a lack of staff moves and new hires. 

HSBC joins Moody's and Australian bank ANZ in expressing concern for the city’s outlook in the past 10 days.

Moody's restated its negative stance on the city's banking system, citing its exposure to mainland borrowers. ANZ, meanwhile, said it had noticed “the rising risk of political tension in Hong Kong and its possible impact on economic fundamentals”.

“Hong Kong’s long-term economic competitiveness is on the table,” it said in the report.

That said, the big three credit ratings agencies are still positive on the city in different areas.

Standard & Poor’s credit rating for Hong Kong stands at AAA; Moody’s rating on sovereign debt is Aa1; and Fitch’s credit rating for the city is AA+.

But the Occupy Central movement has its sights on causing disruption as soon as next month, planning a sit-in just yards from the Asian headquarters of HSBC, Citi and other banks.

Although harming business in the city is not the goal of the organisers, they told FinanceAsia last week, the disruption will undoubtedly have implications for business.

How the Hong Kong and Chinese governments respond will be key to the city holding on to its status as a premier financial hub.

“I wonder what the big three ratings agencies think. It doesn’t appear either side [Occupy and the Chinese government] will compromise,” Leung told FinanceAsia.

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