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Hong Kong’s airport’s closure and its meaning

Economic Report

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  • Monday August 12 saw a dramatic occupation of Hong Kong International Airport
  • After closing down the airport, the protestors left peacefully - but economic and reputational damage are still clear
  • China has dubbed the protests as “terrorism”: armed police are on the border in Shenzhen
  • Leading US politicians have backed the protestors, which will exacerbate US-China tensions
  • Hong Kong--as financial gateway to China--is caught in the US-China trade and foreign exchange war
  • Hong Kong airport could yet be the runway to a serious escalation in US-China tensions in many sphere and to a much weaker Chinese currency (CNY)

Arrivals… then no departures

Monday 12 August saw a dramatic escalation in the ongoing demonstrations taking place in Hong Kong. Following public fury over allegations of police violence the preceding weekend, tens of thousands of young, black-clad protestors flooded into Hong Kong’s International Airport (HKIA). Hundreds had already been peacefully demonstrating for days inside the airport in designated areas, but the sheer volume of new arrivals saw the airport forced to close for safety reasons. No flights could leave or arrive, seeing hundreds of flights cancelled, leaving thousands of travellers stranded, and tons of cargo left in warehouses.

In short, one of the world’s largest and busiest airports was effectively put out of operation due to a political protest. (See Figures 1 and 2 below for the scale of HKIA’s commercial activities).

Figure 1: Come fly with me – a lot…
Figure 1: Come fly with me – a lot…Source: Macrobond
Figure 2: …but air-freight was already slowing
Figure 2: …but air-freight was already slowingSource: Macrobond

The protests that have wracked Hong Kong in 2019 have already seen road closures, public-transport closures, and business closures. However, the fact that HKIA is also now a potential target takes this all to a much higher and much more worrying level. Fortunately, the majority of the protestors--concerned over the prospect of a violent dispersal-- opted to leave HKIA peacefully of their own volition on Monday evening. However, much damage has potentially already been done. That this could have happened in Hong Kong, long famed globally for its pro-business, efficient economy and rule of law, was obviously a shock. That is far more significant than the direct short-term impact of a one-day airport shut-down, which Hong Kong’s typhoon-heavy climate means regularly occur from time to time.

Same-same…but different

That the protestors left the airport peacefully was by far the best of the many possible scenarios that could have played out. There were immediate concerns that we might be about to witness a fusion of Hong Kong’s 2014 Occupy protests and the take-over of Bangkok’s Suvanarbhumi airport in 2008.

For those who do not recall the latter episode, on 26 November 2008 an influential anti-government protest group illegally occupied the departure lounge and air-traffic control tower of Suvanarbhumi airport, a key global tourist hub, forcing the complete closure of operations. Given the airport was protected from both rain and sun, had working toilets and drinking water, and that food--and even entertainment!--was made available, the protestors stayed put. Moreover, the army refused to disperse the crowd unless the elected government resigned, which is what the protestors were also demanding.

Ultimately, Suvanarbhumi remained occupied until 2 December, and protestors only left the facility after Thailand’s constitutional court had dissolved the three parties that made up the government, effectively giving the protestors what they wanted anyway. Overall, Thailand’s main airport was unable to operate until 5 December, a continuous closure of 10 working days. The impact on Thailand’s economy was immediately obvious in terms of both tourism, exports, and GDP (Figure 3), especially into what proved a global recession. There was also major reputational damage to the country: if the airport occupation had continued much longer, or had subsequently showed any sign of being repeated, it was argued that global airlines might have opted to drop Bangkok as a stop-over location on some long-haul flights.

Figure 3: Just what Thailand didn’t need pre-global recession
Figure 3: Just what Thailand didn’t need pre-global recessionSource: Macrobond
Figure 4: Just what Hong Kong didn’t need pre-global recession
Figure 4: Just what Hong Kong didn’t need pre-global recessionSource: Macrobond

Clearly, at least some of these issues are echoed in Hong Kong today. Business travellers inconvenienced by HKIA’s closure will be looking at Singapore Changi’s smooth operations; tourists may avoid Hong Kong for the moment; business surveys suggest there was already deep concern, which will now get worse; and the economy officially contracted -0.3% q/q in Q2, suggesting that a technical recession is likely once Q3’s data are out (Figure 4). This is, of course, assuming that there is no repeat occupation of HKIA ahead, even temporary. Yet there is no guarantee that in Hong Kong’s febrile political atmosphere, where polarisation is deepening and a recent survey of protestors suggests appetite for more radical action, that we won’t see the airport targeted again at some point. Alternatively, security will have to increase, making it slower to get through and hence less productive and profitable.

However, in Hong Kong’s case the concerns are not only that the authorities might not act – but that they would…and which authorities. If the police were to have moved in yesterday and used tear gas to try to clear the crowd, there could have been casualties given how crowded the airport was, and how difficult access to exits would have been. People could easily have been trampled in a panic. Moreover, there was a real worry that this kind of protest would force Beijing’s hand and see it call in either PLA or militarized police forces from across the border to restore order. Notably, that threat still remains.

China has now dubbed the protests as showing signs of “terrorism”, a key word that that has been used to justify its actions in Xinjiang, for example. Moreover, the editor of China’s English- language Global Times also tweeted on 13 August: “Videos of China's armed police being assembling in Shenzhen, a city bordering Hong Kong, are circulated online today. I think it is a clear warning to rioters in Hong Kong. Possibility of Beijing intervening in Hong Kong's situation is rising.” Protestors have been warned: but they have been warned before and opted to escalate.

Just plain different

By contrast, there have been bipartisan statements in support of the protestors, and warnings to Beijing to act carefully, from:

  1. Leading US Republican Ted Cruz (see his comments and legislative proposal below);
  2. Senate Leader Mitch McConnell, who has called any violent response from China “unacceptable”;
  3. Democratic Party presidential nominee Elizabeth Warren, who tweeted “The people of Hong Kong are making clear that they will not tolerate repression, and their movement affirms: The power is with the people. They deserve our support and the support of the world.”; and
  4. Nancy Pelosi, Speaker of the House of Representatives, has tweeted “The people of Hong Kong are trying to preserve the promise of One Country – Two Systems. If we don’t speak out for human rights in China because of commercial interests, we lose moral authority to speak out elsewhere.”

The White House has remained more circumspect so far, while adding that this is an internal affair, but violence is not acceptable, and democracy is preferable. Clearly the president will be under pressure on Hong Kong from much of Washington D.C. Moreover, the EU parliament, the UK government, and Canada’s Prime Minister have also made their concerns clear to China and insisted on both avoiding violence and maintaining the fundamental integrity of Hong Kong’s “One Country - Two Systems” (1C2S).

Ted Cruz, August 12, 2019

"The Chinese Communist Party is deepening its campaign to deprive Hong Kong of its freedom and autonomy. The people of Hong Kong have responded with ten weeks of protests, which have been met with more threats and deepening repression. America's relationship with Hong Kong is premised on its autonomy from China, and if the Communist Party refuses to ensure that autonomy then the United States should and will re-evaluate that relationship. I will continue to push the Hong Kong Policy Re-evaluation Act, which would begin that process, and will work with my colleagues to pass it, until authorities withdraw the extradition bill from future consideration and take steps to ensure that Hong Kong's special status is protected." Ted Cruz, August 12, 2019 

Terminal?

These political tensions over Hong Kong feed directly into the broader US-China trade stand-off - and the direction of CNY. As many have noted, although nobody involved would have chosen this, Hong Kong now finds itself in the unhappy position of being on the front line of US-China tensions. It is not easy to see how this situation will change for the better. (For example, see our most recent report on why we do not see a resolution to the trade war.)

The special administrative region’s political role as an outpost of Western liberalism--if not full representative democracy--sits uneasily within China’s authoritarian political model: protestors believe 1C2S being undermined by Beijing is the root cause of much of current problems. Moreover, while Hong Kong is now a tiny share of China’s GDP compared to decades ago its key financial role as a conduit for foreign capital (e.g., USD) into China also makes it of special interest to both sides. China is seeing downwards pressure on CNY, a dollar liquidity squeeze, speculation over the actual level of its USD reserves, and the prospect of falling exports to the US and other due to trade war and shifting supply chains - all of which are linked. As such, Hong Kong remains vitally important as a source of inward FX flows.

Of course, Beijing has no desire to kill a goose that lays so many golden eggs. However, it cannot allow the protestors to show that it is not in control: how can that paradox be resolved? The risk is that Beijing eventually choses stability over the Hong Kong economy…and its ability to access USD. That implies a much weaker CNY ahead. The US recognises the same dynamic, is monitoring the situation in Hong Kong (see section 5731 here) – and has the power to effectively ‘neuter’ it. It can do this via recognising it as China and not a separate entity; by imposing tariffs or sanctions; via restrictions on capital inflows from the US to it; or even its use of USD, in extremis.

Of course, the US has no desire to destroy a bastion of Western liberalism and trade and finance excellence within China. However, it cannot allow Beijing to undermine Hong Kong’s political freedoms; neither will it be happy that Western capital flows into China through Hong Kong in the event that no trade deal is done. The risk is that the US eventually choses to punish China via the Hong Kong economy…and its ability to access USD. That also implies a much weaker CNY ahead.

As such, one can see the protest escalation to the airport merely accelerates what was already a worrying underlying dynamic on many fronts, including the Chinese currency.

Take off?

In short, the recent HKIA occupation has already hit Hong Kong’s economy and its global reputation hard; any repeat would be exponentially more damaging. Yet if such action were to trigger a crackdown from Beijing the potential risks would be far larger than just to Hong Kong’s GDP or its reputation. Global financial markets would be roiled with stocks falling, FX volatility surging as the CNY slumps, likely taking emerging-market FX down with it, and bond yields tumbling further towards/into negative territory. While we can all hope for a safe landing, Hong Kong and its airport could yet prove the runway to a serious escalation in US-China tensions in the political, geopolitical, economic, and financial spheres. Time to fasten your seatbelts - and to hope this time is (same-same but) different.

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Author(s)
Michael Every
RaboResearch Global Economics & Markets Rabobank KEO
+852 2103 2612
Björn Giesbergen
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 3047 8523

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