Finance & economics The Economist February 8th 2020 67

Also in this section 68 China’s economy and coronavirus 69 Contagion effects in charts 69 Traders and America’s jobs report 70 ICE bids for eBay 70 Small finance in India 71 Buttonwood: QE or not QE? 72 Free exchange: Fixing gender inequality

Hong Kong’s economy omy is increasingly attached to China’s. Why should its financial conditions re- A train of troubles 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 HONG KONG would Hong Kong fight for it today, if the A giant financial centre, with a currency peg, faces social unrest, a trade war and markets tested its will? Such a test is not too now the coronavirus. Just how stable is Hong Kong’s economy? hard to envisage. In December, property wanted travellers to arrive and of over 6% in the first quarter of this year prices fell by 1.7%, compared with the pre- “Iknow exactly which city they were in,” compared with the same period last year. vious month, and are now almost 5% below wrote Andrew Bromberg, an architect, to In other economies rocked by the virus, their peak. If those falls gained momen- explain his design for West Kowloon sta- such as mainland China, Thailand and Sin- tum, speculative capital might quit the tion, where high-speed trains arrive in gapore, the central bank has let the curren- market and the city. A collapse in property Hong Kong from mainland China. The plat- cy depreciate, easing financial conditions. prices would also test the banking system. forms are deep underground, but passen- But Hong Kong is different. Its currency has Its assets are worth 845% of Hong Kong’s gers can enjoy the city’s skyline through been tied to the American dollar since 1983 gdp (although only 30% of its total loans 4,000 glass panes suspended from the sta- and confined to a narrow trading band of are spent on Hong Kong property develop-1 tion’s tilted roof. The more adventurous hk$7.75–7.85 to the dollar since 2005. If it can go up to the rooftop for a better view. falls to the weak side, the Hong Kong Mone- But not anymore. The station and its tary Authority (hkma) is obliged to sell as Well contained rooftop are cordoned off. Four of the 21peo- many American dollars as people want to Hong Kong dollar per $, inverted scale hk ple in Hong Kong that have been infected buy for $7.85. That has stopped the cur- 7.70 with the Wuhan coronavirus arrived in the rency falling further (see chart). city by high-speed rail. The station has now But will it always do so? Even before the been closed, alongside ten of the other 13 protests erupted or the virus mutated, 7.75 entry points from the mainland. some observers began to wonder if the peg These closures may or may not slow the would endure. According to Hong Kong’s 7.80 spread of the disease. But they will certain- mini-constitution, its autonomy and even ly hamper an economy already debilitated the existence of its own currency is guaran- HKMA* range by months of fierce anti-government prot- teed only until 2047, which is within the 7.85 ests. Figures released on February 3rd duration of a 30-year mortgage. Hong gdp showed that shrank by 2.9% year-on- Kong, many fear, is destined to become just 7.90 year in the last quarter of 2019, when the another Chinese city—and they do not 2010 12 14 16 18 20 protests reached a peak. Worse may be to have their own currencies. Even if it re- Source: Bloomberg *Hong Kong Monetary Authority come. Analysts at ubs, a bank, expect a fall mains semi-detached politically, its econ- 68 Finance & economics The Economist February 8th 2020

2 ment or home purchases). And many of the China’s economy deposits on the other side of its balance- sheet are held by non-residents, who might Viral injections prove flighty in a crisis. According to its defenders, Hong Kong’s currency peg is “virtually impregnable”. The hkma’s foreign-exchange reserves amount to $440bn, twice as much as the money supply, narrowly defined to include SHANGHAI Companies warn of an economic crisis as China battles an epidemic banknotes and the banks’ claims on the monetary authority. The banks would run arely have plans in China fallen apart that be an economic crisis?” he asked. out of Hong Kong dollars before it ran out Rso swiftly and so publicly. On January Analysts have rushed to lower their eco- of American ones. 12th the leaders of Hubei declared that the nomic forecasts. The consensus had been Why then is it only “virtually” impreg- province’s gdp would grow by 7.5% this that gdp would expand about by 6% year- nable? For one thing, there are broader de- year. They made no mention of a new virus on-year in the first quarter. Now several ex- finitions of money supply. A war chest of fast spreading through its towns and cities. pect a 4% pace, the slowest since China be- $440bn may be large compared with But less than two weeks later it could not be gan publishing quarterly figures in 1992. banks’ deposits at the hkma. But it is small ignored. They placed the province under Usually, the further into the future you compared with customers’ deposits with quarantine, hemming in over 50m people peer, the greater the uncertainty. But as banks (hk$6.9trn, equivalent to $880bn). If and rendering this year’s flashy growth tar- past epidemics have shown, China’s offi- every depositor wanted to convert their get almost certainly unreachable. cials can be fairly confident that growth holdings into American dollars, there The lurch from confidence to anxiety will rebound to its pre-virus trajectory next would not be enough to go around. has echoed throughout China. In the year. It is the next couple of months that are Such conversions would also have months before the coronavirus outbreak, the black hole. Three unknowns cloud the broader economic implications. Every the stockmarket had rallied and businesses outlook: how long it takes to contain the vi- Hong Kong dollar sold to the monetary au- had been upbeat, not least because China rus; when the government relaxes its thority disappears. All else equal, it then and America had struck a trade deal. But heavy-handed restrictions on daily life; becomes dearer for the banks to borrow the optimism has crumbled as officials have and how long after that people resume the diminishing number of Hong Kong dollars begun to fight the epidemic. whirl of activity that normally makes the that remain. These high interest rates The Chinese stockmarket has fallen by Chinese economy so vibrant. make holding the currency more lucrative 10% since January 20th. Factories and of- This near-term uncertainty presents a and short-selling it more costly. But insofar fices were supposed to reopen in recent challenge for economic policy. Even if as households and firms still need to bor- days after the new-year holiday. Most prov- growth plummets, a big stimulus package row in Hong Kong dollars, these high inter- inces have ordered them to stay shut until might be dangerous medicine. Given the est rates also hurt the economy. How much at least February 10th. Farmers have lag in spending, the boost from projects an- pain would Hong Kong be willing to take? warned that their chickens might starve nounced today could kick in just as the The peg’s downfall may be imaginable. because roadblocks have snarled their feed economy gathers steam of its own, leading But is it probable? One place to look is the supplies. Few people dare venture out, hit- to overheating. Instead, measures to help options market, where investors can hedge ting restaurants and hotels especially hard. people and firms through the rough patch against the risk of the currency moving In an interview that attracted much atten- are more sensible. These can be pared back outside the band. For about 40% of the per- tion before being censored, the founder of when the recovery eventually arrives. Get- iod from June 2005 to July 2018, option Xibei, a restaurant chain, said that if the ting them right, though, is not easy. prices implied that the odds of the peg lockdown persisted for a few months, vast Officials are combining temporary cash breaking were above 10%, suggests a recent numbers could lose their jobs. “Wouldn’t support with market interventions and study by Samuel Drapeau, Tan Wang and forbearance. On February 3rd the central Tao Wang of Shanghai Jiao Tong University. bank injected 1.2trn yuan ($172bn) into the But for most of that time markets were bet- financial system by purchasing treasury ting on the currency strengthening past bonds from banks that promise to buy hk$7.75 to the dollar, not weakening past them back within 14 days. Banks will prob- hk$7.85. ably suffer from rising loan defaults in the Bearish bets became more popular last coming weeks; this gives them more cash year during the worst of the protests. But to work with in the near term. The central the speculation was not as fierce as it had bank can extend the support if needed. been in 2016, after China clumsily devalued Officials are also meddling in the stock- the yuan. Capital outflows picked up in the market (or, as they would say, managing it). third quarter of last year, diminishing Regulators have told brokers to bar clients Hong Kong’s foreign-exchange reserves. from short selling, so as to limit downward But reserves have stabilised since, helped pressure, according to Reuters. State media by a truce in the trade war between America have also played cheerleader, saying that and China. Hong-Kong dollar deposits are big state-owned insurance companies lower than they were six months ago, but were primed to scoop up undervalued still higher than they were a year ago. stocks. Share prices still dropped by 8% on Any signs of sustained capital outflows February 3rd. But that was largely a are, then, “embryonic”, says Alicia Garcia catch-up with the Hong Kong market, Herrero of Natixis, a bank. If capital is leav- which had been open the previous week. ing, its speed of departure is reminiscent of Trading has since stabilised, suggesting one of Hong Kong’s quaint trams, not one that the tactics are working. of its bullet trains. 7 Awaiting a cure Finally, officials have been orchestrat-1 Reproduced with permission of copyright owner. Further reproduction prohibited without permission.