With civil unrest threatening to drag Hong Kong’s economy into recession, businesses and investors are beginning to look for exit strategies. Singapore, a rival Asian commercial hub and financial center, appears to be atop their list.

In her first press conference in more than two weeks, the territory’s embattled Chief Executive Carrie Lam said on August 5 that the city was on the verge of “a very dangerous situation” amid unprecedented scenes of chaos during a citywide strike.

The Beijing-backed leader, who asserted the city’s “stability and prosperity” were now at stake, claimed the protest movement was “trying to topple Hong Kong” and that her government would be “resolute in maintaining law and order…and restoring confidence.”

Recent data indicates that confidence is crumbling with the ongoing unrest and no end to the turmoil in sight.

Private sector business activity in Hong Kong has dropped to its lowest level in a decade according to Purchasing Managers’ Index (PMI) indicators, weighed down by weeks of mass demonstrations and a US-China trade war that has disrupted global supply chains and rattled some of the region’s trade-reliant economies.

A research report published by DBS Bank economist Samuel Tse on August 2 noted that Hong Kong’s economy has been hit by external headwinds that have hampered the city’s growth outlook and decelerated investment to -12.1% in the second quarter of this year, a sharp reversal from 7% in the first quarter and the slowest pace in a decade.

A protester throws a water bottle at police during a general strike in Hong Kong on August 5, 2019. Photo: Anthony Wallace / AFP

Hong Kong could tip into a technical recession, defined as two consecutive quarters of negative quarter-on-quarter growth, in the third quarter, according to the report, which downgraded its gross domestic product (GDP) forecast for Hong Kong from 2.5% to 0% for 2019, and 0.5% from 2% in 2020.

Tse told Asia Times that the 10% tariffs recently imposed by the US on a further $300 billion worth of Chinese goods, scheduled to take effect in September, would have a negative impact on Hong Kong’s economy, spurring stock market consolidation, weakening export demand and putting further downward pressure on retail sales growth.

Retail sales fell 6.7% in June from a year earlier, the fifth straight month of declines, according to government data published last week. Slowing global trade has dampened consumption sentiment, while political unrest in the city has deterred tourists who normally flock to the city’s luxury shopping destinations, economists say.

Stagflation risks could emerge in the second half of 2019, the DBS Bank report said, referring to a period marked by inflation and stagnation caused by slow economic growth and relatively high unemployment – all factors that could amplify discontent among lower-income groups and youth in Hong Kong.

The report’s findings suggest that political uncertainties have not yet led to massive capital outflows, despite reports and anecdotal evidence to the contrary. Those reports said high-net-worth individuals, investors and tycoons had started to offshore assets in places like Singapore, a competitor regional banking hub and low tax jurisdiction.

“I would say investors are taking a ‘wait and see’ approach,” Tse said, explaining that evidence of capital outflows depends on money supply and deposit growth figures that Hong Kong authorities have yet to release beyond June.

Tse added that substantial capital outflows are generally accompanied by massive property sell-offs and local currency transfers to US dollars (USD). “The real estate market [has] remained largely calm. Also, the Hong Kong dollar (HKD) is still well within the 7.75-7.85 range,” he noted in reference to the USD-pegged currency’s trading band.

Thousands of protesters demonstrate in Hong Kong’s Yuen Long district on July 27, 2019, in defiance of police orders. Photo: Anthony Wallace / AFP

“If the situation escalates further, it is possible that the pace of capital flight will speed up,” Tse added. Other investment banking and legal sector observers interviewed by Asia Times attested to rising anxieties among high-net-worth individuals in Hong Kong and China, and their more urgent focus on having contingency plans in place if the situation deteriorates.

“Hong Kong’s economy has been seriously battered by the ongoing civil unrest. Fears of capital flight have been mounting for months, but it started to really bite more recently,” said John Engle, president of Almington Capital Merchant Bankers, a privately held international investment firm.

“The recent threat of [Chinese] military [intervention] has added to the fears and uncertainty. Most multinationals with significant presences in Hong Kong have not taken the drastic action of uprooting their businesses, but an increasing number will be building contingency plans,” he added.

A video posted on the official Weibo social media page of the People’s Liberation Army’s (PLA) Hong Kong garrison last week depicted troops advancing on protesters during a mock exercise. One soldier is seen shouting “All consequences are at your own risk” in Cantonese, messaging that has stirred unease about Beijing’s waning patience with the heated protests.

“A draconian response would almost certainly signal a fundamental shift in the relationship between the island and the mainland government. If that does happen, businesses will flee in droves,” said Engle. “The longer the unrest continues, with flight disruptions and worker strikes, the more damage will be done to Hong Kong’s economy.”

Hong Kong riot police stand in formation seen between the helmets of two journalists at the scene, July 28, 2019. Photo: Nile Bowie

David Lesperance, an international tax and immigration consultant who advises wealthy clients on relocation and citizenship issues, claims high-net-worth individuals are “very worried” and are taking actions because they have “a lot to lose with regards to not only their wealth, but their families’ personal well-being and safety.”

Among his clients are wealthy Hong Kong and Chinese citizens, some of whom are Hong Kong residents, with substantial holdings in real estate, telecom and basic manufacturing sectors, Lesperance told Asia Times.

“Pessimists [and] realists, that’s who my clients are. The most recent pessimists are scrambling,” he said.

The now-shelved but not formally withdrawn extradition bill mulled by Lam’s administration, which would have allowed for suspects in the territory to be tried in mainland Chinese courts, sent jitters through the business community and prompted tycoons to begin moving their personal wealth offshore, according to various reports.

Lesperance said his wealthy clients also fear extralegal abductions, pointing to the precedent sent by the disappearance of Chinese-Canadian billionaire businessman Xiao Jianhua, who went missing while staying at the luxury Four Seasons Hotel in Hong Kong in late January 2017 and was later taken to the mainland by Chinese security agents.

Hong Kong police say Xiao crossed the border into China on January 27 of that year through a checkpoint and has not been seen in public since. Some regard the episode as a credible breach of Hong Kong’s legal autonomy. The territory’s security bureau denies that “non-Hong Kong law enforcement officers” were involved in action against the businessman.

“The reality is that if the Chinese government is going to go after somebody, they’ll go after someone prominent. They won’t go after the middle class, they’ll go after someone who will make headlines. So, there’s a lot of movement of liquid wealth and concern for bringing family members out of Hong Kong to somewhere safe,” Lesperance said.

A view of Singapore’s cityscape from one of its trademark ‘Merlion’ statues. Photo: YouTube

Singapore is the “top destination” for those seeking to relocate, he said. “A lot of families in Hong Kong have decades and even generations of banking, business, legal and accounting relations in Singapore. They see that if the rule of law regime they are used to in Hong Kong is going, it will still be there in Singapore.”

The Southeast Asian city-state “will almost certainly be a beneficiary of capital flight and business relocation from Hong Kong,” Engle said. “The country offers an attractive mix of economic stability, rule of law, low taxes, and geographic proximity to major Asian markets that will likely seem increasingly enticing to multinational firms in Hong Kong.”

Prolonged turmoil in Hong Kong could jeopardize regional financial stability, according to K Shanmugam, Singapore’s minister of law. He said in a recent interview that the wider implications of long-term instability would outweigh any short-term gain for Singapore from investors worried about protests and extradition risks moving their funds to the city-state.

That stance mirrors the position of the Monetary Authority of Singapore (MAS), which recently cautioned the city-state’s wealth managers against aggressively marketing their services to Hong Kong clients, a signal that authorities in Singapore are wary of local asset management firms being seen as capitalizing on the ongoing political turmoil.

Reports indicate that individuals with assets in the $10 to $20 million range, rather than the super-rich, make up the majority of those pivoting away from Hong Kong in search of alternative destinations for their money amid worries over the long-term implications of the political crisis in the Chinese-ruled city.

“I fear Hong Kong is going to lose its previous prosperity enjoyed as the place in-between. The feeling I’m getting is one of sad recognition that the situation is going to come to a very nasty end, one way or another,” Lesperance said.