Pro-democracy protests put Hong Kong in the spotlight recently, but political risk is just the tip of the iceberg, Capital Economics says.
"Even if the protests die down, the ongoing corruption crackdown in China and the prospect of higher interest rates in the U.S. means the next year is likely to be far from plain sailing for Hong Kong," Gareth Leather, Asia economist at Capital Economics, wrote in a note published Monday.
Pro-democracy protests entered their third week on Monday and mark Hong Kong's worst period of unrest since the 1960s. Tensions heightened in the early hours of Wednesday, when hundreds of Hong Kong police used pepper spray on protesters to clear a major road that had been barricaded with concrete slabs.
Protesters seek full democracy; residents are currently allowed to vote, but the choice of candidates is strictly controlled by Beijing.
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The disruption to everyday life in Hong Kong is taking its toll on the economy. Retail sales - which make up 25 percent of the territory's $250 billion economy - were down sharply in the first five days of October, according to a Hong Kong Retail Management Association survey. Jewelry, fashion items and catering sales were down around 50 percent on year.
Even if protests eventually peter out, Hong Kong faces a difficult period ahead, Leather said.
"With the corruption crackdown in China showing no sign of losing steam, the retail sector is likely to remain fairly weak even if the political situation in Hong Kong returns to normal soon," he said.
China's anti-graft crackdown has hit sales of luxury goods across China, as officials have stamped down on the time-old practice of gifting government officials with expensive items.
Hong Kong's economy contracted 0.1 percent on-quarter in the second quarter of this year as shoppers cut back on spending, particularly on watches and jewelry. Year-on-year, the economy expanded 1.8 percent, its slowest pace in nearly two years.