'Taking an economic toll'

Hong Kong police cleared more barricades on Tuesday, September 14, from pro-democracy protest zones that have obstructed traffic in key business districts for more than two weeks. Police said they would push on to dismantle more barriers in what they described as the "high-risk" area of Mong Kok, one of the three sites occupied by demonstrators and the scene of violent clashes between protesters and government loyalists.

Retail sales in Hong Kong have taken a hit after disruptions caused by the pro-democracy protests. And with little common ground between the students, who are demanding full universal suffrage in time for the 2017 Chief Executive elections, and the Hong Kong government, the protests could drag on for a while yet.

In a DW interview, Gareth Leather, Asia economist at the UK-based economic research consultancy Capital Economics, says that, at least in the near term, retail sales and tourism have become the most vulnerable sectors, which together account for around 30 percent of the territory's GDP. If the protests intensify and drag on for much longer than people expect, then they could act as a deterrent on foreign investment, Leather adds.

DW: What areas of the Hong Kong economy are being affected by the ongoing protests?

Gareth Leather: The key sectors that look most vulnerable, at least in the near term, are retail sales and tourism, which combined account for around 30 percent of the territory's GDP. Tourist growth is down a bit, as the protests have put people off from travelling to Hong Kong. Meanwhile, shoppers have found it difficult to gain access to the protest area around Mong Kok, which is a favorite shopping area for mainland tourists.

Are there any indications that the city's important financial sector is being affected?

Financial sector workers have certainly been inconvenienced by having key roads shut down. But otherwise the impact on the financial sector so far has been pretty small. I think if the protests intensify and drag on for much longer than people expect, then they could act as a deterrent on foreign investment. In which case, it is possible that Hong Kong gradually loses its special status as the gateway to China. If that happens, the financial sector would certainly be affected.

What effect may the protests have on the overall economic outlook of the territory should they continue at the current pace?

So far, it has mainly been the retail sector which has been affected. Sales of some items, such as jewellery, were apparently down by 50 percent year-on-year in the first five days of October, a traditionally busy period for Hong Kong retailers as it coincides with a big national holiday in China.

The longer the protests last, the bigger the impact on retailers will be. Given the importance of retail sales to Hong Kong, around 30 percent of GDP, the impact is likely to be fairly significant.

Besides the protests, what other aspects may impact growth in Hong Kong in the coming months?

The protests come at a time when Hong Kong's economy has been struggling a bit. A corruption crackdown in China was already weighing heavily on the retail sector. There are also likely to be other headwinds to growth, notably rising interest rates in the US, which will have a direct impact on Hong Kong because of the territory's dollar peg arrangement.

At a minimum, higher rates will cause consumption and investment to weaken. In a worst case scenario, it could cause a slump in Hong Kong property prices, which would have much bigger repercussions for the entire economy.

What potential long-term economic and business impact could the protests have on the Chinese economy as a whole?

It really depends on how long the protests last. If they die out quickly, probably none at all. But if they continue and Hong Kong's special status as a gateway to China becomes threatened, then probably much bigger.

Nearly two-thirds of all foreign direct investment into the mainland comes via Hong Kong and the territory is a key source of financing for mainland companies, who currently raise more money on Hong Kong's stock exchange than on either of the major domestic exchanges. Of course, not all of this investment originates in Hong Kong, but the city's role in facilitating this investment should not be downplayed.

International financial centers such as Singapore, London or New York would likely pick up some of the business lost by Hong Kong. That said, the advantages that Hong Kong holds in terms of geographical proximity to the mainland, as well as cultural and language affinity, will be difficult for any of these to replicate.

Hong Kong has also played a key role in facilitating financial reform in the mainland. The Shanghai-Hong Kong Stock Connect scheme, which is due to come into force this month and will allow foreign investors to buy stocks listed in the mainland, is seen as a further step in the opening up of China's equity markets. If it were to lose its special status as the gateway into China, it could set back financial reform in the mainland.

Gareth Leather is Asia Economist at Capital Economics, a UK-based economic research consultancy.