As the spring sun shines on the streets, business is booming as usual in Hong Kong. The streets linger with the smell of sweet and sour pork, chicken balls and fried rice, while tourists cannot help but notice the abundance of neon lights. As global trade booms, inviting further foreign investment, the economy also stands strong with the Hang Seng Index already up 20% for the year and the GDP growing 0.6% for Q1 of 2019.  

As the Qingming Festival approaches in China, political unrest is at its peak. Although Hong Kong is a global financial and business center that connects China to the world, it is also a former British colony allowing for it to have an independent government body separate from China’s communist party. Proposed Extradition laws in Hong Kong have caused thousands to take to the streets to protest against the bill.  

Li Wei owns a factory in Hong Kong that is well known for producing local replica goods. Entrepreneurship runs in his blood as his father also ran the same shop before retiring. This pass down of knowledge is very important in this family-run business and one may even consider it a productive resource. Li Wei’s father being in business is a very important factor to him as he has many connections in the industry. These connections allow him to get good deals on resources allowing him to maximize profits.

Although ups and downs are a natural part of life, Li’s business is running really well. Li can be considered one of the very few lucky business owners in China as the majority of his capital was passed down to him by his father. His father owned real capital such as the shop, inventory, store equipment and machinery which was all passed down to Li. Furthermore, Li also acquired money capital of $2 million HKD from his father. This real capital helped him increase productivity as he was able to acquire more land, raw materials, and labour. All of the factors of production allowed him to increase sales and grow the factory. China’s fast economic growth increased the demand for his goods allowing him to expand his business internationally.  

Figure 1: This graph demonstrates the monthly revenue for the factory (Wei Productions) in 2018. This graph helps us realize how the supply of the products depends on how many tourists are visiting. A larger revenue is noted for months with more tourists such as June to August as many people are on summer break and decide to visit Hong Kong (Tourism data obtained from the Hong Kong Tourism Board). Through this graph, we could conclude that the monthly revenue from Wei Productions is directly correlated with the tourism industry of Hong Kong because as more tourists arrive in Hong Kong, an increase in demand for the goods will cause an increase in supply. This increase in supply will allow the factory to produce more goods resulting in an increase in monthly revenue.

According to the Government of Hong Kong, in 2018, total visitor arrivals rose by 11.4% over 2017 to 65.15 million. With the tourism industry in Hong Kong booming more than ever, this provides a great environment for enterprise for business such as Wei Productions that rely on the tourism industry. Furthermore, Hong Kong’s business environment is favourable to economic activity due to having free-enterprise and free-trade economy. It also has a nonintervention policy in the private sector boosting business; it could be said that it is the most laissez-faire economy in the world. HK imposing no general tariffs on imported goods also boosts business as it helps the company save money-capital which they could spend elsewhere to increase production. 

As the morning of March 31 approaches, Li was expecting the morning to be like any other, but he was wrong. Li has been long anticipating the delivery of cotton today to produce t-shirts. On the way to get his morning coffee, Li sees many people dressed in all black and preparing signs with smoke bombs in their hands.  Unaware of the protests, Li was very shocked to see thousands of people on the streets. The word got around quickly and Li realizes that the citizens of Hong Kong are displeased with the government’s proposed expedition bill.  

Over the next few months, the protests continue with no signs of improvement. With police abusing power day by day, once peaceful protests had turned into a bloodbath. With multiple protesters getting shot at day by day the situation in Hong Kong was deemed unsafe. 40 foreign countries have issued warnings or alerts against travel to Hong Kong, as clashes between protesters and police become increasingly regular, and government buildings, MTR stations, shops and restaurants with mainland Chinese links are vandalized. This results in the number of tourists coming to Hong Kong to plummet causing the HK tourism industry to struggle. 

Figure 2: This graph demonstrates the sharp decline in tourism in Hong Kong. A decline is noted in both visitors from China and international tourists. In September, the total tourism is down more than 50% compared to January of the same year. This sharp decline is due to the political unrest.

It was not only the tourism industry that was feeling the effects of the strike but also the retail industry. According to the government data, retail sales fell 24.3% from a year ago. Wei productions were feeling the direct effect of this. Times were harder than ever and monthly revenue plummeted as there was less demand for products produced which were directly targeted at foreign tourists. This change in demand was a non-price factor and was caused by the change in population or the number of people willing to buy the set product. 

Figure 3: This graph demonstrates the change in demand before and during the protests for replica goods. Through this graph, it is evident that the demand has been shifted to the left indicating a decrease in demand. The equilibrium point is lower on the supply curve meaning fewer sellers want to supply for a lower price.

As discussed previously, this change in demand is due to the decrease in population caused by a decrease in tourism. As fewer consumers are present to buy the product, the demand will decrease

Wei Productions notice this change in demand first hand. Fewer sellers were wanting to buy their productions and inventory was sitting idle with no shipments being made. The company was running at a loss. With workers sitting idle and no money left in the bank to order more raw materials, the only option was to sell goods. Everybody in the factory was forced to make sales calls to shops in the vicinity. It was quickly observed that many were closed due to the protests and those open were facing a similar situation with sitting inventory. With his worker’s cheques, bills and rent due next week, Li Wei had to make a decision. A decision to fire his workers, take a bank loan or sell his inventory at a clearance price.  

In order to increase the demand for his goods, Li Wei decided to decrease the prices and sell his inventory at a clearance price. Although this is opposing profit maximization, it was necessary to do this in order to stay in business. Li follows the law of demand to make this decision as the law states that the quantity demanded of a good varies inversely with price. Li was right as many more shop owners were willing to buy their products at a clearance price. This was a short term solution to a long term problem. Due to selling his goods at a clearance price, Li could only afford to pay the rent, utility bills and his worker’s salary for the month, he could not afford to buy raw materials to produce more goods.  

Li was not the only one facing this problem, many businesses were going out of business and something had to be done. The truth of it was that Hong Kong was facing a recession. A recession is defined as two consecutive quarters of negative growth. Although at the start of 2019, it was predicted that the GDP would grow between 2% and 3%, but nobody could have possibly predicted the devastating effects the protests would have on the economy.  

Figure 4: This graph demonstrates two consecutive quarters of negative GDP growth. Although a 1.3% growth in GDP was noted in Q1 of 2019, the GDP shrank more than 3.7% in Q2 and Q3 pushing the economy in a recession.