Martial law is the latest risk worrying investors

As investors map out potential risks from Hong Kong’s summer of unrest, one tool at the government’s disposal is attracting increased attention: a colonial-era statute that gives authorities broad powers similar to martial law.

Speculation that Hong Kong Chief Executive Carrie Lam may invoke the city’s Emergency Regulations Ordinance has swirled since she said last week that all options are on the table.

The law, introduced by the British in 1922 for use in case of emergency or public danger, gives Hong Kong’s leader the power to make “any regulations whatsoever which he may consider desirable in the public interest.” Chinese officials said on Tuesday that it could be implemented if necessary.

Market analysts in Hong Kong still view that as a low-probability event, but they haven’t ruled it out as some anti-government protesters turn increasingly violent. While invoking the law would be a less extreme measure than calling in Chinese troops to quell the unrest, the knee-jerk impact on markets would likely be negative. Share prices and the Hong Kong dollar, which is pegged to the U.S. currency, would come under pressure as international investors rushed to reduce their exposure, analysts said.

The scale and duration of the exodus, and the damage to Hong Kong’s status as a global financial hub, would depend on how the law is used. Its provisions include arrests, property seizures, deportation, control of the ports and the power to restrict means of communication. In an extreme scenario, the government could even cut off access to the Internet.

“If the emergency law is triggered, the economic damage will definitely be significant,” said Nader Naeimi, who oversees about $800 million as head of dynamic markets at AMP Capital Investors Ltd. Naeimi sold his Hong Kong stock holdings in May, saying that tail risks in the city are too high.

“The possibility has increased, but I wouldn’t take it as a base-line case. The fear surrounding this is that once it’s declared, people potentially won’t know what will actually happen. That uncertainty by itself will create fear in the financial markets. It’s very likely we’d see some kind of a stock-market selloff,” said Tommy Wu, a senior economist at Oxford Economics Hong Kong.

“We’d probably see Hong Kong’s dollar hitting the weak side of the trading band a lot more often. In terms of the peg stability, I still don’t think that’s an issue because there’s enough foreign reserves.”

“I don’t think the government is going to do it when there’s so much concern in the society,” complemented Steven Leung, executive director of UOB Kay Hian (Hong Kong).

“There’s still a lot of things the government can do, so there’s no urgency for them to launch this law in the near future,” added Leung. “If they do it, there may be some very short-term panic in the financial markets and also in society. […] It’s difficult to predict what will happen in political issues. It’s better to raise cash positions, try to stay away from risky assets.” MDT/Bloomberg