The Economist - USA (2020-02-08)

TheEconomistFebruary 8th 2020 63

1

“I

wanted travellers to arrive and

know exactly which city they were in,”

wrote Andrew Bromberg, an architect, to

explain his design for West Kowloon sta-

tion, where high-speed trains arrive in

Hong Kong from mainland China. The plat-

forms are deep underground, but passen-

gers can enjoy the city’s skyline through

4,000 glass panes suspended from the sta-

tion’s tilted roof. The more adventurous

can go up to the rooftop for a better view.

But not anymore. The station and its

rooftop are cordoned off. Four of the 21 peo-

ple in Hong Kong that have been infected

with the Wuhan coronavirus arrived in the

city by high-speed rail. The station has now

been closed, alongside ten of the other 13

entry points from the mainland.

These closures may or may not slow the

spread of the disease. But they will certain-

ly hamper an economy already debilitated

by months of fierce anti-government prot-

ests. Figures released on February 3rd

showed that gdpshrank by 2.9% year-on-

year in the last quarter of 2019, when the

protests reached a peak. Worse may be to

come. Analysts at ubs, a bank, expect a fall

of over 6% in the first quarter of this year

compared with the same period last year.

In other economies rocked by the virus,

such as mainland China, Thailand and Sin-

gapore, the central bank has let the curren-

cy depreciate, easing financial conditions.

But Hong Kong is different. Its currency has

been tied to the American dollar since 1983

and confined to a narrow trading band of

hk$7.75–7.85 to the dollar since 2005. If it

falls to the weak side, the Hong Kong Mone-

tary Authority (hkma)is obliged to sell as

many American dollars as people want to

buy for hk$7.85. That has stopped the cur-

rency falling further (see chart).

But will it always do so? Even before the

protests erupted or the virus mutated,

some observers began to wonder if the peg

would endure. According to Hong Kong’s

mini-constitution, its autonomy and even

the existence of its own currency is guaran-

teed only until 2047, which is within the

duration of a 30-year mortgage. Hong

Kong, many fear, is destined to become just

another Chinese city—and they do not

have their own currencies. Even if it re-

mains semi-detached politically, its econ-

omy is increasingly attached to China’s.

Why should its financial conditions re-

main tethered to America’s?

In the forward-looking world of finan-

cial markets, that question leads naturally

to another: if Hong Kong’s currency regime

is destined to change some day, how hard

would Hong Kong fight for it today, if the

markets tested its will? Such a test is not too

hard to envisage. In December, property

prices fell by 1.7%, compared with the pre-

vious month, and are now almost 5% below

their peak. If those falls gained momen-

tum, speculative capital might quit the

market and the city. A collapse in property

prices would also test the banking system.

Its assets are worth 845% of Hong Kong’s

gdp(although only 30% of its total loans

are spent on Hong Kong property develop-

Hong Kong’s economy

A train of troubles

HONG KONG

A giant financial centre, with a currency peg, faces social unrest, a trade war and

now the coronavirus. Just how stable is Hong Kong’s economy?

Well contained

Hong Kong dollar per $, inverted scale

Source:Bloomberg *HongKongMonetaryAuthority

7.90

7.80

7.85

7.70

7.75

2010 2018161412

HKMA* range

Finance & economics

64 China’seconomyandcoronavirus

65 Contagioneffectsincharts

65 TradersandAmerica’s jobs report

66 ICEbidsforeBay

66 SmallfinanceinIndia

67 Buttonwood:QEornotQE?

68 Free exchange: Fixing gender

inequality

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