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Political unrest in Hong Kong isn't likely to result in capital flight: expert

Taylor Locke

Hong Kong’s government announced a stimulus package worth more than $2 billion in an effort to avert recession. Hong Kong’s tumbling equity markets is stoking fears for the economy, as well as the capital markets.

But so far, much of the instability and unrest is political, Aperture Investors Chairman and CEO Peter Kraus told Yahoo Finance’s On the Move, adding that capital flight has to do with the stability of the Hong Kong dollar, which is pegged to the U.S. dollar (HKD=X). “That’s a special relationship and people believe that that’s stable and not going to change,” he said.

But if that were to change, there “would be a a very significant issue for the capital markets.” However, Kraus thinks “it's a very low probability that occurs.”

Hong Kong maintains a linked exchange rate system that has been in operation since 1983, requiring the USD/HKD rate to remain below 7.85 at all times and above the 7.75 threshold.

Investors want a solution

More than $600 billion of Hong Kong’s stock market value has been erased since early July, according to Bloomberg Economics, as 10 straight weeks of anti-government protests continue. The political unrest threatens the city’s long-term future as a financial hub, connecting the East and West.

“Hong Kong in particular is a center for financial activity,” Kraus explained. “When that's threatened, that causes instability in investors' minds. If it [Hong Kong] actually is pierced, if it actually is changed, that has dynamic effects on the flow of capital and on the ability for various investors to actually trade with that part of the world.”

All in all, Kraus believes investors just want the Hong Kong government to find a solution with the “pro-democratic side.”

“I don't think that investors believe that China is going to walk back from its ability to take over the rest of Hong Kong in another 50 years,” he said. “I don't think that the investing community is looking for that or thinks that's going to happen, but they certainly don't want to see this explode into a new Tiananmen Square. To put at risk this trading relationship, that would, in fact, be dynamic.”

Taylor Locke is a producer for Yahoo Finance. You can follow her on Twitter @itstaylorlocke.

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