The economics behind the protests in Hong Kong

Western media is suddenly full of people taking note of a modest decline in Hong Kong's Hang Seng stock market index — with links drawn, naturally enough, to the ongoing clashes between protestors and police in the city-state's downtown. But it's worth noting that Hong Kong's stock market has actually been declining for a few weeks now.

(Yahoo Finance)

The larger context here is that while civil unrest could of course hurt the Hong Kong economy, it's also likely that an ailing economy is contributing to unrest in Hong Kong. The Hong Kong economy shrank last quarter, and there's been no particular sign of a turnaround this corner. The country, in other words, may be slipping into recession.

(Trading Economics)

Economic weakness in Hong Kong in part reflects a broader slowdown in the Chinese economy, which seems to be no longer capable of sustaining ultra-fast growth rates. But Hong Kong has a particular problem because of an ongoing decline in luxury goods sales that appears to be linked to a Chinese government crackdown on corruption and conspicuous consumption. The reason this crackdown is especially important for Hong Kong is that taxes in mainland China make fancy clothing and other luxury items much more expensive in China than abroad. So affluent Chinese consumers like to go on shopping binges when they travel.

Hong Kong is pretty much the closest you can be to mainland China without being subject to mainland China's luxury taxes. Consequently, the island is crawling with upscale malls with large mainland client bases. Lately, those customers have been staying away, and it's dragging Hong Kong's economy down.

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