• The sector, first hit in 2018 when Beijing’s capital controls led to a decline in leasing demand, is struggling under the impact of a trade war and Covid-19
  • Despite the political tensions, most investors still see Hong Kong as a vital offshore funding platform for Chinese companies

In an interview with the Financial Times last week, Kentaro Okuda, the new chief executive of Nomura, Japan’s largest investment bank, said the situation in Hong Kong was “not the same as it used to be”, forcing the bank to “seriously” examine the scale of its 1,000-strong operations in the city.Beijing’s decision last month to impose a new national security law on the territory has further compromised the city’s political and judicial independence, prompting United States President Donald Trump to announce plans to withdraw Hong Kong’s special trade privileges. For the city’s hard-hit property industry, the increased uncertainty about the territory’s standing as a global financial hub could not have come at a worse time.

Hong Kong was Asia’s second most illiquid commercial property investment market in the first quarter of this year, according to data from real estate consultant RCA. Foreign investors, who accounted for nearly 30 per cent of transaction volumes between 2015 and 2019, have deserted the market, with local buyers responsible for all the deals in the first quarter.

In the occupier market, the net absorption of office space last quarter fell to its lowest level since 2002, according to data from CBRE. In the retail sector, high street rents plunged more than 10 per cent on a quarter-on-quarter basis, cementing Hong Kong’s position as the worst-performing retail sector among the world’s leading property markets.

However, there is little evidence that concerns about Hong Kong’s future as Asia’s financial capital have played a key role in the rapid deterioration in the fundamentals of the real estate market. While the credibility of the “one country, two systems” framework has been undermined, the property industry has faced a succession of external and domestic shocks that make it difficult to disentangle the causes of the downturn in both the occupier and investment markets.

Over the past two years, Hong Kong has been hit by the sharp slowdown in China’s economy, a full-blown trade war, mass anti-government protests, the city’s first recession in a decade and the Covid-19 pandemic as well as the ensuing collapse in the global economy. What is more, as the first region to be struck by the pathogen, Asia bore the brunt of the virus-induced drop in global commercial property deals last quarter, with transaction volumes falling 26 per cent year-on-year, according to data from JLL.`

How hard can Donald Trump hit Hong Kong over the national security law? Not very

We have often read over the past two weeks how the US plans to revoke Hong Kong’s privileged trade status to punish China for imposing a national security law on the special administrative region.This is in line with the US habit of using trade measures of one kind or another as punishment or protest against economies inciting its displeasure. But this threat raises a simple question: what are the trade “privileges” that will be revoked, and what will the impact be of this?

US President Donald Trump called on his administration to begin the process of revoking Hong Kong’s special treatment as a separate customs and travel territory from the rest of China, as has been set out in the US’ 1992 Hong Kong Policy Act. Trump also said the US would “sanction [Chinese] and Hong Kong officials directly or indirectly involved in eroding Hong Kong’s autonomy”.Secretary of State Mike Pompeo had earlier said this was necessary because Hong Kong’s high degree of autonomy had been undermined.

Although Beijing has yet to provide details of its proposed law and how it might be implemented, and Trump has provided neither detail nor a timetable for his measures against Hong Kong, let’s try to work out what exactly is being threatened.

Eamon Barrett at Fortune made a masterful effort last week. Sanctions might fall into four areas: tariffs, refusal to accept the Hong Kong dollar, restricted access to sensitive technology, and sanctions against Hong Kong and mainland officials.

But in all of these areas, the measures have a distinctly pyrrhic feel. On the face of it, trade leverage would seem the most meaningful. After all, Hong Kong exports to the US amounted to about US$45 billion last year, so 25 per cent tariffs similar to those imposed on Chinese exports during the past two years of trade war could be substantial.

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