Hong Kong economy resilient in face of protests

Hong Kong's pro-democracy street protests have taken a limited toll on the broader economy, which is under pressure from slowing Chinese growth and lower spending by tourists.

The purchasing managers' index released by HSBC on Wednesday showed that private sector activity in Hong Kong dropped for a fourth straight month in November, though the headline figure rose to 48.8 from 47.7 in October. A number below 50 indicates contraction.

While some respondents to the survey said the protests had resulted in "subdued market conditions", other factors - such as weak demand from China - also played an important role. New business from the mainland dropped at the sharpest pace since the financial crisis, the survey showed.

Earlier data suggested that Hong Kong's economy was suffering because of the student-led protest movement. But more recent figures show that the impact has so far been relatively mild.

The PMI reading came a day after retail sales figures showed a second straight month of growth. Overall retail sales rose 1.4 per cent in October - the most recent month for which data are available - thanks largely to the launch of the iPhone 6.

Monthly sales of watches and jewellery, the biggest segment of total retail sales, fell 11.6 per cent year on year, continuing a downward trend that began at the start of the year after Beijing launched a sweeping campaign to tackle corruption. Macau gaming revenues have also fallen sharply over the same period.

Street demonstrations have had a direct impact on certain parts of the city, blocking traffic in busy shopping districts popular with tourists. Some retailers have reported weak sales as a result, with a number of stores being forced to close.

But Raymond Yeung, economist at ANZ, believes many analysts were "overly pessimistic" early on about the impact the protests would have on the retail market in Hong Kong.

"I just don't find sufficient evidence that it affects people's sentiment. The protests only affect a small area," said Mr Yeung. The anti-graft drive has been the more important factor in explaining Hong Kong's weak retail environment, he added. Total sales fell 0.2 per cent in the first 10 months of the year.

Tourist figures released this week also showed that visitors from the mainland jumped 18.3 per cent in October, defying fears that the protests would cause a downturn in arrivals.

October is likely to prove the most damaging month for retailers as a result of the protests, which have since been pared back in some areas by the police. Leaders of Occupy Central - one of the main campaign groups - have withdrawn, and called on other protesters to retreat.

But while headline sales figures have picked up, some analysts pointed out that margins have dropped - an indication that retailers are choosing to discount stock to lift sales amid sluggish demand.

Adrienne Lui, economist at Citigroup, warns that the effects of the protests may still linger into the new year.

"It would be fair to expect that the overall fragile political mood and daily life inconveniences will continue to dampen the amount of shopping by locals in the near term, even as we head into the festive season", Ms Lui wrote in a report.

The Hong Kong economy faces a number of pressures in the coming months, including slower growth in China, weak demand from Europe and the prospect of higher borrowing costs if interest rates rise in the US.

The Hong Kong government recently cut its growth forecast for this year to 2.2 per cent, from an earlier estimate of 2-3 per cent.

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