As the stand-off between Hong Kong's government and pro-democracy protesters stretched into its third week, analysts warn the civil disobedience movement could cast a 'long shadow' over the city's economic future.
"The short-term damage to the economy is already visible, with retail sales and tourism badly hit. [But] the social discontent and its aftermath are also likely to cast a long shadow over the city's long-term economic potential," Wei Yao, economist at Societe Generale (Euronext Paris: GLE-FR) wrote in a note this week.
Around 40 percent of the territory's financial business rides on its "privileged status" as the gateway for international capital seeking to enter or exit China, which could be at risk if the city loses Beijing's favor, she warned.
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Hong Kong, China's biggest yuan hub, has been the test ground for nearly all new liberalization policies introduced by Beijing including the renminbi qualified foreign institution investors program (R-QFII) - which allows financial institutions to use offshore yuan to invest in the mainland's securities - and the upcoming Shanghai-Hong Kong stock connect that will allow the cross-border trading of stocks between the two cities.
"The reform experience accumulated in the past few years is probably giving mainland policymakers more confidence to diversify the liberalization approach. The cooperation with other international financial hubs is likely to speed up, and Shanghai's free-trade zone experiment will probably regain its momentum" Yao said.
Shanghai's free-trade zone, a 29 square kilometer zone on the outskirts of China's commercial capital, is viewed as a test pad for economic and financial reforms such as currency liberalization, market-determined interest rates and free trade, although progress has been gradual.
Under a scenario of "fast reform" in the mainland, Hong Kong's income per capita would be 7-12 percent higher by 2030 than a "no reform" scenario, with most of the boost coming from financial channels, Yao said, citing IMF calculations. "However, if the mainland opts for less reliance on Hong Kong as a liberalization test ground, this projection will be at risk," she said.
Will HK get cold shoulder treatment?
Louis Kuijs, chief China economist at RBS (London Stock Exchange: RBS-GB) is less concerned that that Hong Kong's protests will lead to a change in strategy by Beijing with regard to financial liberalization.