AAGIY AIA Group Ltd (PK)

By Steven Russolillo 

HONG KONG-- Since antigovernment protests erupted in June, hotels in Hong Kong have become ghost towns. Restaurants, normally heaving with tourists and locals, are struggling to attract diners. Nearly a quarter of American businesses polled said they were considering moving capital or assets out of the city.

And the city is now officially in a recession.

Hong Kong's economy shrank 3.2% in the July-to-September quarter from the period just before, according to data released Thursday. Compared with the year-earlier quarter, the city's gross domestic product fell 2.9%, its first year-over-year contraction in a decade.

If anything, the figures undersell the speed and severity of the downturn for shopkeepers, restaurant owners and others with consumer-facing businesses.

For some entrepreneurs in Hong Kong, business is as tough as they can remember. And this is after nearly a quarter-century that saw two financial crises, a transfer of sovereignty to China from the U.K., the deadly SARS epidemic and an earlier wave of protests in 2014.

The gloom risks becoming self-reinforcing: 46% of respondents to a recent American Chamber of Commerce poll said they were pessimistic about Hong Kong's long-term prospects. Nearly a quarter were considering moving capital, assets or operations out of Hong Kong, in many cases to Singapore.

"I haven't been this stressed ever in the restaurant business," said Que Vinh Dang, a chef who has spent 22 years in the industry. Mr. Dang said sales at his nearly year-old Vietnamese restaurant, Nhau, have almost halved since the protests started. The 43-year-old said conditions were more challenging than during SARS, the global financial crisis or 2014's Umbrella Movement protests.

Dozens of small-business owners have made appeals on social media for people to visit their stores and buy their products and services, but they have largely refrained from criticizing the protest moment or blaming it for their predicaments. One risk is businesses perceived to have taken sides against the protesters-- like the city's subway system and a local operator of restaurant chains--have been vandalized. In addition, public opinion polls are continuing to reflect high levels of public dissatisfaction with the government and police.

Mr. Dang said he sympathized with the demonstrators but thought some of their demands were implausible. "I'm trying to look at the whole situation in a very open way," he said.

Tour company Hong Kong DolphinWatch has been in operation since 1995. It was forced to cancel most of its weekday trips to view the city's pink dolphins this summer because of the protests. Bookings on Sundays, its busiest day, have fallen substantially due to a drop in tourists and as residents worried they wouldn't be able to return home safely afterward.

"For the first time ever, I googled how to close a company," said Bennie To, a manager at the company. After undertaking a social-media campaign to help generate sales, she said the business recovered to break-even levels as of September. But she remains concerned about what lies ahead. That's because while local community support provided a temporary boost, she said it would take a while for tourists to get comfortable enough to visit Hong Kong again.

"We really hope that this social unrest would stop and let Hong Kong and everyone in it recover and move forward," Ms. To said.

The second straight quarter of contraction means Hong Kong is now in recession--hit not only by social unrest but also the U.S.-China trade war and weaker global growth. In a recent blog post, Hong Kong Financial Secretary Paul Chan said the economic contraction could last a full year.

A steep drop in tourism, predominantly from mainland China, has been accompanied by tumbling retail sales. Hotels have slashed prices to woo bookings. Mr. Chan wrote in his post that hotel occupancy had crashed to 66% in August from above 90% previously.

London-listed InterContinental Hotels Group PLC operates the Crowne Plaza, Holiday Inn and InterContinental hotels, among others. It told investors recently that in Hong Kong, its revenue per available room--a standard industry measure--fell by more than 50% in September. At the Hong Kong operations of rival Hilton Worldwide Holdings Inc., revenue per room was down 40% in the third quarter.

Hong Kong retail sales as measured by value fell 23% in August from a year earlier, the worst monthly decline on record, according to government statistics. Sales of jewelry, watches, clocks and other valuable gifts fell by a record 47%, while sales at department stores dropped 30%.

Many buyers of luxury items come from mainland China, which accounts for the largest segment of inbound tourists to Hong Kong. But many have stopped visiting as the unrest has intensified.

Tourist arrivals in Hong Kong dropped nearly 40% in August from a year earlier. That marked the worst decline since May 2003, when Hong Kong was grappling with SARS.

More recently, Hong Kong's leader, Carrie Lam, said arrivals in early October's "Golden Week"--a popular time to travel especially for mainland Chinese--had fallen by more than half from a year earlier.

The protests were sparked by a legislative measure that would have allowed the extradition of criminal suspects to mainland China for trial. But they have since morphed into a broader movement in opposition to the government, police conduct and China's increasing encroachment on the semiautonomous city.

Since June, conferences and events have been canceled, lines have dwindled outside restaurants popular with tourists and the airport has shut down at times. Some shoppers have gotten caught up in clashes and stores in busy shopping districts have often been forced to close their doors.

JustGreen, a chain of organic convenience stores, closed for good in September after 11 years selling organic groceries, gluten-free pretzels and nondairy frozen pizza.

Protests were a factor in the decision, a spokesman said, and sales were hardest hit in areas that had demonstrations or transport disruptions. "There was just a lot less volume," he said. "You just weren't seeing people show up."

Meanwhile, Anthony Rendall--a yacht broker--said a slowdown had forced him to expand abroad to places like the Philippines and Thailand. "My business has come to a grinding halt with no recovery in sight," he said.

For 12 years Chan Fung has been selling flashlights, LED lights and watch straps at an outdoor market stall in Jordan, a busy neighborhood in the urban jungle of Kowloon that is usually bustling with locals and tourists alike. He said sales have plunged 40% in the last couple of months and the decline occurred very quickly, within a matter of weeks. The market is now often deserted on weekends because people are worried about getting caught up in the protests, the 42-year-old said.

Other sectors are suffering, too. In finance, the city's banks aren't expected to be as profitable as they were in years past. HSBC Holdings PLC and Standard Chartered PLC said Thursday they would cut their savings rate for Hong Kong dollar deposits to 0.001%--or virtually zero--and cut slightly their prime lending rates in the city to help businesses. And this week, pan-Asian life insurer AIA Group Ltd. reported a steep decline in business from mainland Chinese visitors. While in Hong Kong, Chinese visitors have been known to buy investment-linked insurance policies that are denominated in U.S. dollars.

There is some evidence of money moving to other locales. Analysts at Goldman Sachs estimated as much as $3 billion to $4 billion had shifted to Singapore from the city's Hong Kong-dollar denominated deposit accounts, as of August.

The Hong Kong Monetary Authority, the city's de facto central bank, said local-currency deposits fell 1.6% in August from a month earlier, the largest drop in more than a year. However, it called this a normal fluctuation given a lack of fundraising--including via initial public offerings--and said there was a slight increase in deposits in the first three weeks of September.

Data from the Monetary Authority of Singapore, meanwhile, showed that foreign currency deposits at banks there climbed to a record high of 14.9 billion Singapore dollars ($10.9 billion) in September, roughly double their level in May before the Hong Kong protests began.

Imports and exports, another cornerstone of Hong Kong's economy, have shrunk year-over-year every month so far in 2019.

The government has announced measures to support the economy. This month, the monetary authority made it easier for banks to lend to small businesses by cutting capital requirements.

Mrs. Lam, the city's leader, has also promised billions of dollars in social-welfare initiatives, including pledging to build more low-cost homes and giving easier access to mortgages for first-time home buyers.

Some business owners are hoping the worst is over. Girish Jhunjhnuwala, CEO of Ovolo Hotels Group, said occupancy rates at the chain's four Hong Kong hotels dropped to as low as 40% in August, forcing them to cut prices by a fifth.

More recently, Ovolo was able to raise rates as occupancy levels have improved to between 65% and 75%, thanks to business travelers returning to the city. But they are still a far cry from the roughly 95% occupancy levels the hotels used to enjoy.

With the end of the protests nowhere in sight, "this is just something that we are going to have to live with," said Mr. Jhunjhnuwala.

Lucy Craymer contributed to this article.

Write to Steven Russolillo at steven.russolillo@wsj.com

(END) Dow Jones Newswires

October 31, 2019 05:31 ET (09:31 GMT)

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