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Hong Kong & Risks in Asia

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Cathay Pacific Airways Ltd. suffered a 12% drop in passengers due to the Hong Kong protests. Airfare prices are dropping in an attempt to win back visitors. Consequently, Cathay Pacific Airways is looking to sell a U.S. dollar bonds as there are rising fears that the Hong Kong peg may break with the protests. The potential bond offering is expected to be unrated. The deal size and coupon haven’t been made public. This is continuing to put pressure on dollar hoarding in Asia.

There are other issues at the core of the Hong Kong protests. As reported in South China Morning Post, graffiti was sprayed across a concrete barrier at a road in Kowloon’s Wong Tai Sin residential district that declared: “7K for a house like a cell and you really think we out here scared of jail?” They also reported that at an underpass in Central, a message scrawled on the wall read: “12K for 120 sq ft and you think that’s OK?”

Hong Kong’s protests began in June 2019 against proposals to allow extradition to mainland China. The extradition bill that triggered the first protest was introduced in April. It would have allowed for criminal suspects to be extradited to mainland China under certain circumstances. The opponents argued that they could be subjected to unfair trials and violent treatment in China. Therefore, this would undermine the city’s judicial independence and endanger dissidents. They argued that this violated the “one country, two systems” deal.

City leader Carrie Lam agreed to suspend the bill, but demonstrations have continued. They have now developed to include demands for full democracy and an inquiry into police actions. The clashes between police and activists have been becoming increasingly violent, with police using tear gas and activists storming parliament.

The biggest fears from a financial perspective is that (1) the peg will break, and (2) the financial sector will move quietly to Singapore. This is a very serious issue in Asia for it has been undermining the economy moving into the January low in the Economic Confidence Model.