How HK's emergency law may further worry investors

The Hong Kong government's new anti-mask law is not only exacerbating the long-running social unrest in the wake of the extradition bill, it is also making investors increasingly anxious about the city's growing political risks.

Announced on Friday (October 4) afternoon, the new law bans people from using masks to hide their identities in public areas. It immediately prompted office staff in Hong Kong Central to come out onto the streets. Protests then broke out all over Hong Kong, shutting the entire mass transit railway (MTR) service for the first time ever.

Clashes continued over the weekend as tens of thousands of demonstrators again marched onto the streets of Hong Kong island and Kowloon to show their anger. Many defiantly wore masks, for which they risked up to a year in jail and a fine of HK$25,000 (and up to 10 years if faced with riot charges) under the new law.

Aside from failing to keep investors who live and work in the city feeling more confident about their personal safety, the bill casts further doubt on Hong Kong's democratic credentials.

To enact the anti-mask law chief executive Carrie Lam invoked the emergency regulations ordinance, which dates back almost 100 years deep into the British colonial era. She did so by citing the escalating violence in Hong Kong, while still insisting that the territory is not in an emergency situation now.

Traditionally the government or lawmakers propose a new law in the form of a bill, which requires three readings for its passage, after which it becomes an ordinance that is enacted by the legislative council. But by using the emergency regulations ordinance the government can circumvent this process, immediately passing its own bills into law without legislature oversight.

That sort of power-grab worries many onlookers. 

“If the government can make laws on its own, then you’ll be heading down a slippery slope because they can next pass laws blocking parts of the internet, or allowing detention without trial, for example, and all laws without any legislative council scrutiny,” David Webb, former director of Hong Kong Exchanges and Clearing, told CNBC on Friday, before the emergency law was invoked.

Kyle Bass, US-based hedge fund manager and chief investment officer of Hayman Capital Management, also said on his Twitter account on Saturday that “failed leader Carrie Lam can now officially confiscate bank accounts and assets without recourse. The HK legal system is essentially gone.”

Some of that financial nervousness even extended to the streets, with social media over the weekend peppered with reports of ATMs going dry as ordinary Hong Kongers queued up to take money out.

DAMAGE

Hong Kong’s finance chief Paul Chan has tried to keep investor confidence by saying that the government is committed to keeping the city free from any foreign exchange controls.

But fears will likely grow because the Hong Kong government can in effect invoke the same law to introduce any measures it deems necessary, without first gaining public consensus and support. Some believe a Pandora's box has been opened and the government will be tempted to wield the ordinance again to get its way. 

That uncertainty is likely to accelerate an outflow of investment. Hong Kong’s attempt to pass an extradition bill back in the spring, which would have allowed the extradition of suspects to China, has already prompted some of the city's wealthy to shift assets out. They have been increasingly concerned that Hong Kong will lose its special 'One Country, Two Systems' status that includes freedom of the press and an independent judiciary, and become just another Chinese city. 

Last week, US investment bank Goldman Sachs estimated that Hong Kong dollar deposits totalling up to $4 billion had flowed to Singapore as of August.

Credit rating agencies Fitch and Moody’s have also turned sour on Hong Kong. Fitch cut Hong Kong’s long-term foreign-currency-issuer default rating to AA from AA+ on September 6. Ten days later, Moody’s changed its rating outlook on Hong Kong to negative.

“Ongoing events have ... inflicted long-lasting damage to international perceptions of the quality and effectiveness of Hong Kong's governance system and rule of law”, Fitch said in an accompanying note.

EXTREME EVENT

The turmoil has also fuelled some debate about whether Hong Kong can maintain its currency's peg to the US dollar. Any sign that the peg could fall would be likely to precipitate an outflow of cash from the city from investors and companies alike. 

While Fitch believes the peg should remain intact given the territory's foreign-reserve holdings of $441 billion, equivalent to roughly twice the monetary base, some analysts have noted that extreme events do sometimes happen.

“Under the extreme scenario the Hong Kong currency’s peg to US dollar will break as tensions escalate,” Xia Le, chief economist for Asia at BBVA, told AsianInvestor. “If a lot of people withdraw money from the banking system due to public fear, Hong Kong’s de facto central bank alone will not be able to prop up the currency.”

That might be why the Hong Kong Monetary Authority was quick to quash rumours that it planned to cap the daily amount of cash withdrawals from banks over the weekend.

Worst of all, growing numbers of protestors increasingly appear to be in favour of pursuing a doom strategy, or what they call “if we burn, you burn with us”. They are prepared to suffer economically, believing that the authorities will suffer more as the general public haven't greatly shared in the territory's economic gains while possessing few political rights.

Part of this doom strategy is calling on the US Congress to pass the Hong Kong Human Rights and Democracy Act, which could change the US’s unique treatment of Hong Kong, including the city's status as a separate customs territory.

It's also noteworthy that the protests continued even after the Hong Kong government formally withdrew the extradition bill in early September as demonstrators continued to insist on all five of their demands, which includes an independent investigation into police brutality and the implementation of universal suffrage.