Analysts said the sharp decline was likely to be a sign of capital outflows from the city along with a drop in exports, although a clearer picture would only be known when a breakdown of the quarterly data, including stock and bond flows as well as for trade and foreign direct investments, is released later in the year. Hong Kong is expected to announce its second quarter balance of payments in mid-September and third quarter figures in mid-December.

“Past experiences suggest portfolio investment is a likely candidate through which outflows occurred,” said Frances Cheung, Asia head of macro strategy at Westpac Banking Corporation. “Negative net merchandise exports should have been another contributor.”

Last month, the HKMA rejected rumours that it had loaned US$400 billion of its foreign currency reserve to mainland China through currency swaps and has not received repayment. HKMA stressed that the foreign currency reserve is monitored by Hong Kong’s Audit Commission as well as other independent auditors.

The HKMA also introduced new measures to allow the city’s lenders borrow from the monetary authority should they face an unexpected liquidity crunch, apparently in an effort to prevent the banking system from facing an unexpected shock at a time of unprecedented social unrest in the city.

Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, said that stresses in Hong Kong’s rapidly deteriorating capital flow situation were underscored by the interest of Hong Kong residents to purchase real estate abroad as opposed to buying property at home.

Secondary transactions in the city’s property sector were particularly hard hit, with analysts projecting about 40,000 deals in 2019, the lowest since records began in 1996.

“Using big data, we find that confidence in Hong Kong’s real estate plummeted in August even as sentiment for overseas properties has ballooned,” added Herrero, cautioning that there had so far been no massive capital flight out of Hong Kong.

To make matters worse, international investors are taking money out of the city’s stock market, offsetting inflows from mainland investors through the Stock Connect programme that links the city’s stock exchange with mainland equities markets, Herrero said. The benchmark Hang Seng Index has slid about 12 per cent from its peak in April to current levels around 26,600.

The city’s lack of capital controls may imply volatile money flows in the period ahead, especially in the wake of a series of poor economic data for the city’s key growth drivers, including retail sales, tourist arrivals and trade, analysts said.

Last week, Fitch Ratings also dropped a bombshell by downgrading the city’s credit rating one notch from AA+ to AA and the city’s rating outlook from stable to negative. It was the city’s the first downgrade by Fitch since 1995.

The ongoing anti-government protests and the Hong Kong government’s response have inflicted long-lasting damage to international perceptions of the quality and effectiveness of Hong Kong’s governance system and rule of law, and called into question the stability and dynamism of its business environment, Fitch said.

Nikolaj Schmidt, chief international economist at T. Rowe Price, said international investors were now questioning if China, a centrally planned economy, would continue to uphold Hong Kong’s open economy and Western-style laws that underpin the city’s status as a major global financial centre and gateway to the mainland.

“Right now we have an institutional infrastructure in Hong Kong. Is it going to remain as a jurisdiction where foreign investors feel comfortable about the rule of law rather than the rule by law?” Schmidt said. “Are Chinese authorities going to still feel safe having Hong Kong as a gateway to the mainland or would they prefer Shanghai, which is easier [for them] to control?”

Even if the protests eventually dissipate, as the Occupy Central movement did in 2014, Hong Kong’s capital outflows could continue increasing as the mainland reduces manufacturing imports due to the impact of the trade war with the United States, analysts said.

“Hong Kong’s consumption started slowing even before the unfolding of recent protests,” said Kevin Lai, chief economist for Asia excluding Japan at Daiwa Capital Markets. “Therefore, the pressure on the economy is something that would last at least through next year.”

There has been a contraction in Hong Kong’s business confidence triggered not only by the current local political crisis but mainly because of its exposure to China’s economic slowdown and the trade war, analysts added.

“The slowdown in the mainland has a contagious effect on Hong Kong through channels like trade, tourism and finance,” said Huang Tianlei, research analyst at Peterson Institute for International Economics. “We are already seeing that China’s slowdown in recent years has caused collateral damage to the Hong Kong economy and there is at the moment no sign that the Chinese economy is going to be back on a high-growth track.”

Trinh Nguyen, senior economist for emerging Asia at Natixis, suggested that firms in Hong Kong should try taking advantage of other opportunities so they can avoid the risks from the China slowdown and US tariffs.

“For economies dependent on China, more diversification is needed as the China slowdown story is not just cyclical but structural in nature,” Nguyen said.

Additional reporting by Chad Bray

***HKMA issued the following response to this story on September 11, 2019: “The decline in foreign currency reserve assets in August was mainly due to transfer of funds resulting in a higher amount of foreign currency deposits placed by the Exchange Fund with banks in Hong Kong (resident banks). According to the guidelines of the International Monetary Fund’s Special Data Dissemination Standard, foreign currency deposits in resident banks cannot be included in the calculation of foreign currency reserve assets. As such, it is about technical classification rather than real changes in total amount of foreign currency assets. In fact, the Exchange Fund's total foreign currency assets and liquidity have remained stable.”