Asia: Hang Seng falls further as impasse locks the streets

Markets remained fixated on Hong Kong overnight, even though the government had withdrawn riot police from the streets, as thousands continued to protest more peacefully.

The Hang Seng fell a further 1.3%, dragging many other bourses into the red, while Shanghai's composite index flaunted a modest rise into positive territory.

"The crowds are smaller," observed Jim Reid of Deutsche Bank on Tuesday. "But again this has become somewhat of a routine over the last few days, where protesters tend to diminish during the day but return in the evening and stay throughout the night.

"The event has attracted international headlines and attention from the West although China is seemingly taking a firm stance on this."

The foreign ministry spokeswoman Hua Chunying said that Beijing "vehemently objected to illegal actions that undermine the rule of law and social security" and responded to statements from the UK and US with the view that any international intervention in China's matters was "unacceptable". (Although both Britain and the United States offered themselves as guarantors of the transition agreement in 1997 that China would fulfil its promise to maintain “one country, two systems” until 2047.)

China has described the demonstrations as illegal and urged the Hong Kong government to bring them under control. As it stands, neither side seems to be close to backing down.

While riot police have been withdrawn, protest leaders, supported by veteran activists from Taiwan, have vowed to accelerate their protests if Hong Kong leader Leung Chun-ying doesn’t comply with their demands before Wednesday, which sees China’s National Day celebrations. Furthermore, as authorities are determined to go ahead with the celebrations, police will likely be brought in to clear the streets.

A heavy-handed crackdown by authorities might irreparably damage the city’s reputation as a global financial centre, warned Mark Williams, chief Asia economist at Capital Economics.

If it fails to dissipate, the unrest could also overshadow the 27 October launch of the Shanghai-Hong Kong Stock Connect Scheme (SHKSCS), which will enable investors from either city to buy shares in the other.

But ratings agency Standard & Poors put out a note that said, unless the situation deteriorates severely, the protests have minimal implications on Hong Kong’s AAA/Stable rating in the near term.

S&P said the enclave's economic performance could be modestly affected but the impact on its banking system is "manageable". Clearly this is still a ‘live’ situation so developments in HK and how it will ultimately be managed by the authorities will be closely watched.

The final September HSBC Chinese manufacturing PMI index came in at 50.2, versus an initial reading of 50.5 a week ago.