Hongkongers keep the faith, but with the anti-sanctions law looming, for how much longer?

Headlines about Hong Kong's "alarming" annual population decline of 89,200 people caught my eye last week as the news bounced its way around the globe. I couldn't see how such a low number was "alarming".

Idea balloons went up from a Hong Kong government spokesman that perhaps these were people going off to study or work, and perhaps the decline was due to a lack of immigration because of border closures, a declining birth rate, and Hong Kong's elderly passing faster. The methodology by which the figure was produced was not explained clearly beyond taking into account the 13,900 new residents that came in from mainland China minus the net total from births and deaths of a negative 11,800.

I sat down and examined departure and arrival statistics for Hong Kong airport from the handy data they have made available since 1997, subtracting departures from arrivals. And from July 2020 to June 2021, a net 161,000 people left. I am eyeing that 89,200 figure with a pinch of salt.

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As anyone in Hong Kong's logistics business can tell you, it is getting nearly impossible to book an economical slot out for household possessions or pets, with highly volatile pricing, erratic service and endless consumer complaints - to me hallmarks of an unprepared and overly busy business.

As for "leaving parties", there seems to be an abundance of them, while social media is abuzz with information on how to relocate overseas from Hong Kong, open bank accounts without proof of residence in Britain, and find good jobs.

There is other evidence of departures. For example, Mandatory Provident Fund withdrawals by Hongkongers ahead of a permanent departure from the city are increasing sharply: 30-35 per cent higher compared with similar periods last year, with the year to March 2021 being the highest since 2014 when records were first released.

Hong Kong is not new to waves of emigration when times are tough, with the last big wave between 2011 and 2013, prompted by a downturn in the Hong Kong economy as the knock-on from the European debt crisis combined with the high cost of living and job losses - my own included. The contraction of staff in the finance industry was very noticeable, leading to about 10 families departing for every family arriving, according to a logistics company clearing the house of my former boss. The effect of that movement of people was a sell-off in mid- to high-end property and compression of rents. Yet when the dust had settled in 2016, the census showed that the population of 'expats' - foreign nationals - remaining was about 9.4 per cent of the total, or about 680,000. So they still made up a decent portion of the population.

Over the past three years, protests and street violence, the shifting political climate, and separation from families overseas because of Covid-19 has given both expats and locals reasons to consider leaving Hong Kong. Here is my take on five of them, not in any particular order of importance:

National security law - widely discussed in the press, mostly criticised, and foreign businesses are particularly concerned. This worry will undoubtedly roll on for a while yet, as people are worried about laws that are still being formulated, leaving the future opaque. This is not dissimilar to 1997 when the People's Liberation Army were thought to turn up on the streets with cattle-prods. Of course they didn't, but people left anyway.

Protests - despite the relative calm on the streets of Hong Kong now, the finding of a bomb factory in Tsim Sha Tsui suggests the pot is still boiling even though the government has slammed a lid on it. Anyone who lived or worked in London during "the troubles" with Northern Ireland knows how nasty things can get when protests are driven underground.

Use it or lose it - the opportunity to convert an unrecognised BN(O) passport into something useful is prompting people to leave. The word coming back from family and friends who have emigrated is that Britain is not as grim as the warnings suggested - once you get used to the weather. And the cost of living is about a third of that in Hong Kong. About 34,300 Hongkongers applied for the BN(O) route to the UK in the first quarter of 2021, and the data for the second quarter will be released next week. I'm expecting that the momentum is building.

The expats - the annual Internations survey of expats in 66 countries and territories in November 2020 showed that expats thought Hong Kong was the second worst place to live in Asia, beaten only by Seoul. The government's subsequent squeeze on press freedom, school curriculums and civil society - with more to come - does not sit well with those who are still around. And most of them can still vote with their feet.

Geopolitics - the flexing of muscles between the United States and China puts Hong Kong right in the middle of a fight. The longer it continues, the worse it gets and the more uncomfortable it becomes. You can blame either side for starting it, but I doubt anyone would protest that the current environment is unhealthy and we do not know what will change the situation.

Let's assume that the first four points I listed amount to something like the sentiment in the run-up to 1997, when uncertainty clouded the future. From 1988 to 1997, about 1 per cent of Hong Kong's population left per year, up to 500,000, or 8 per cent in total. Some went "just in case", others for good, demonstrating that Hongkongers can be extremely mobile when motivated. If 8 per cent are going to leave again, that would now equate to some 580,000 people.

Now comes the bigger worry. What if my fifth point continues, and a further degeneration of the relationship between the East and the West repeatedly gives Hong Kong a bloody nose? China's new anti-sanctions law which was passed in June presents a new problem to Hong Kong's battered finance industry, and with the Hang Seng being the worst-performing index in the developed world so far this year, it could not come at a worse time.

The threat of the anti-sanctions law on one hand and US sanctions on the other puts businesses in an impossible dilemma. In a nutshell, by choosing to deal or not to deal with a sanctioned entity or person, a bank for example would risk feeling either the wrath of the US government or the heat of the Chinese government. It's a clever chess move by the Chinese to tackle US sanctions, but unfortunately it leads to an unacceptable stalemate for business - and indeed anything that touches finance, trade, property, and the legal profession could slowly grind to a halt. Folks might well start to question what the point is in staying put? This even includes the lawyers trying to interpret and advise. The knock-on effect would be severe pressure on all sectors of Hong Kong's economy.

Finance Secretary Paul Chan, who tells us everything is tickety-boo with Hong Kong's economic growth this year, at 6.5 per cent, has also said that constitutionally Hong Kong would be obliged to enact such laws, but that the city's status as a financial centre would be taken into account by the National People's Congress Standing Committee when applying them. At best this suggests ambiguous interpretations of the law and coupled with the NPC possibly dithering on its implementation, clouds everything in a thick fog of uncertainty for business entities it touches and Hong Kong's legal system. I'll take that 6.5 per cent GDP growth with an even bigger pinch of salt.

Now, the US has one more card up its sleeve to make things really uncomfortable; it can threaten to close down any bank in Hong Kong by withdrawing access to US dollar clearing, all of which goes through New York. Of course, that isn't good. We use US dollars every day through the Hong Kong dollar and its peg. To make matters worse, with the exception of small change, Hong Kong dollar bank notes are not backed by the government but rather HSBC, Standard Chartered and the Bank of China which print them.

Doesn't it suddenly become an attractive proposition to hop on flight and take your chances elsewhere? And for the young, bright and well-educated the chances are very good. You can only "keep the faith" for so long. So perhaps that figure of 89,200 moving out so far is indeed alarming, as it could be only a hint of what is to come.

Neil Newman is a thematic portfolio strategist focused on pan-Asian equity markets

This article originally appeared on the South China Morning Post (SCMP).

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