Bay Area companies have lots to lose in Hong Kong protests

Bay Area companies with long-standing trade and investment ties to Hong Kong are closely watching the city’s increasingly tense pro-democracy demonstrations.

Especially those at ground zero of the protests, like Wells Fargo’s Hong Kong branch, and Apple, Gap and Levi-Strauss stores, which have mostly stayed open despite drops in foot traffic.

“Mass transit has been a bit more challenging, but it’s been business as usual for Wells Fargo’s more than 800 team members in Hong Kong,” said a spokesman this week.

How long that will last is unclear. Things got ugly Friday night when scuffles broke out between protesters, who for more than a week have rallied for more autonomy from Beijing in choosing their elected leaders, and angry opponents.

“We are monitoring the situation very closely, and will continue to make assessments on what is best for our employees and for our customers,” said a Gap spokeswoman. Wells Fargo and Levi-Strauss said much the same thing, with a Levi-Strauss spokeswoman adding the company “sincerely hopes that the issue will be resolved peacefully as soon as possible.”

So, presumably, are other members of the Bay Area business community with links to China’s “special administrative region.”

Hong Kong is the Bay Area’s sixth biggest export destination. The Port of Oakland shipped $701 million of merchandise to Hong Kong last year, including enough food, noted a port official, to feed Hong Kong’s entire 7 million population. The Bay Area is a major tourist destination for Hong Kong residents. Billionaire Hong Kong real estate investors, who kept their money in their pockets during the recession, are coming back to San Francisco. And Silicon Valley, led by Sequoia Capital, is starting to invest in Hong Kong’s small, but growing startup scene.

Most importantly, Hong Kong is a gateway to a much bigger market: the mainland and beyond.

Electric car showcase

“Hong Kong could potentially be the place to showcase the success of electric vehicles to the rest of Asia,” said Veronica Wu, vice president of Tesla Motors’ Chinese operations, announcing a planned expansion of its Hong Kong operations earlier this month. The Hong Kong market, she said, is “unique and interesting.”

Not as interesting as the mainland, where Tesla already has showrooms in major cities including Beijing, Shanghai, Shenzen and Chengdu, and is planning to open in many more, because in CEO Elon Musk’s words earlier this year, China “could be as big as the U.S. market, maybe bigger.”

Likewise, Hong Kong doesn’t play as big a role in the Bay Area as it once did.

Although San Francisco was once the port of call for Hong Kong immigrants — a large percentage of the approximately 600,000 Hong Kong born-Americans and immigrants in the United States remain in the region today — Bay Area companies have almost four times as many offices in the mainland than in Hong Kong, according to a 2014 Bay Area Council Economic Institute report. Statewide, the mainland far outranks Hong Kong in terms of exports, imports and tourists. San Francisco has become one of the hottest real estate markets in the United States, in large part due to the huge amount of money pouring in from mainland China investors.

(As of Monday, that spigot opens even wider when China’s Ministry of Commerce lifts the barrier on how much Chinese firms can invest overseas without getting government approval.)

And this is where Hong Kong remains vital, as Asia’s financial hub through which the billions of dollars originating in the mainland — whose financial system is not yet ready for prime time — still flows. For example, China’s biggest commercial developer, Dalian Wanda, which owns the AMC theater chain among other U.S. properties, uses a Hong Kong subsidiary to raise funds and last week filed for an initial public offering on Hong Kong’s stock exchange rather than Shanghai’s.

“Financial markets are maturing rapidly in China, but not to a sufficient extent yet,” said Skip Whitney, who heads the China Services unit of San Francisco commercial Realtor Kidder Matthews. “Hong Kong is still the financial gateway. It’s too valuable to China.”

Rule of law is key

Hong Kong, on the other hand, has the seal of international approval for the transparency of its system and the rule of law surrounding it. The International Monetary Fund added its imprimatur in April in an assessment of the stability of Hong Kong’s $2 trillion financial sector, saying it is “highly capitalized, profitable, and liquid. The securities markets are deep, liquid, and efficient.” High-fives went to the quality of oversight of the financial system.

That’s what makes Hong Kong such a draw — and has left U.S. businesses expressing confidence in Hong Kong despite the unrest.

But fears remain that leaders in Beijing or Hong Kong will attempt to quell the protests with harsher tactics.

“It will be a very different story if there’s a true crackdown. There’s a lot to lose on everybody’s part,” said Sean Randolph, CEO of the Bay Area Council Economic Institute

But what if the worst happens — “chaos,” “unimagined consquences,” as the Chinese Communist Party publication People’s Daily has warned?

That would include what the IMF calls “scheduled and unscheduled net cash outflows” — in other words, a run on the banks. Hong Kong’s system could survive that up to a month, it says, by which time presumably other nations will have rushed in with a rescue package.

A bigger risk, in the IMF’s view: “The increasing integration of (Hong Kong) with the mainland, including through trade and banks’ exposure to nonbank corporates.” The exposure is massive, so much so that should China’s banks go down it “would entirely wipe out capital in Hong Kong’s banking system.”

Presumably, all this is being taken into account as the parties to the current dispute weigh their options and consequences.

“We should all be watching it, It’s in everyone’s interest that Hong Kong remains a success,” said Randolph.

Andrew S. Ross is a San Francisco Chronicle staff writer. E-mail: Blog: /bottomline Twitter: @andrewsross

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