HK’s tourism and retail sectors, in particular, have been caught up in a tumultuous year. Economists, however, are holding out hope if the social unrest can end soon. Pamela Lin reports.

Shops are closed for business as protesters gather in Causeway Bay on Aug 5, 2019. (PHOTO / CHINA DAILY)

‘A heavy downpour, with a leaking roof,” is how Nicholas Kwan Ka-ming, who heads the research team at the Hong Trade Development Council, alludes to Hong Kong’s economy for 2019, using a popular Chinese idiom. 

Perhaps, he couldn’t have found a more felicitous metaphor to describe what’s probably in store for a city wracked by more than seven months of unprecedented social unrest, and buffeted by world economic and geopolitical woes.

The external headwinds, notably the protracted trade frictions between the world’s two largest economies and the global slowdown, mirror the “heavy downpour” that has drenched Hong Kong for the past two years, with no respite in sight.

The waves of anti-government protests, triggered by the now-shelved extradition amendment bill that have taken a heavy toll on the local economy, compounded the misery as the “leaking roof”.

What can we possibly expect as Hong Kong gears up to usher in the Year of the Rat in about two weeks?

Kwan sees the city’s overall economy continuing to be subdued in the context of the global economic rout, with this year’s worldwide growth momentum weaker than last year’s despite the relaxation of protectionism. 

The value of Hong Kong exports would shrink by 2 percent next year, according to the latest HKTDC survey, showing that the softening of global demand has overtaken US-China trade tensions as the primary concern of local exporters. 

Peace and order critical 

On a brighter note, if the violent protests abate and peace and order return, there could be a silver lining with consumer and investment confidence beginning to recover. 

Hong Kong’s priority for the new year, Kwan reckons, is to fix the “roof”. Only by mending the social rifts and strife can Hong Kong emerge stronger in dealing with the external woes which are less controllable.

Other prominent local economists have expounded different scenarios.

Samuel Tse Ka-hei, an economist at Group Research DBS Bank Hong Kong, held out prospects of the city seeing a rebound in the second half of this year after having hit the nadir in 2019.

“If the economic situation gets back to normal in 2020, we could see a technical rebound in economic figures,” Tse explained. Singapore-based banking giant DBS has projected a 1.5-percent growth rate for the SAR this year, although lower than the 10-year average of 2.8 percent.

Terence Chong Tai-leung, executive director of The Chinese University of Hong Kong’s Lau Chor Tak Institute of Global Economics and Finance, said he expected the negative impact the social unrest has had on the local economy to continue in the beginning of this year, while the gross domestic product figures for the first quarter may remain in negative territory. 

In his view, Hong Kong’s economic performance this year would fluctuate.

As the community gradually digests the negative influence the social ills have had on the economy in the early part of this year, the second half may see normality although much would still depend on whether peace and order can be restored, Chong told China Daily.

The world’s focal point in the Year of the Rat would still be the lingering trade spat between China and the US. Although the market has regained some footing as the trade negotiations made progress with an interim trade deal having been agreed upon and ready to be signed, the issue remains the primary concern for world markets this year.

Accounting for more than 21 percent of Hong Kong’s GDP, the trading and logistics sectors involve some 718,600 employees, taking up 18.6 percent of the workforce in 2018, according to government statistics. As an entrepot for the Chinese mainland and a transshipment port in the Asia-Pacific region, Hong Kong has inevitably suffered a blow. 

Kwan recalled that a great number of trading companies in Hong Kong have lamented they couldn’t take it further after the US again raised tariffs on Chinese goods in the second half of last year. 

Most of the products re-exported from Hong Kong to the US and other countries and regions in the world were manufactured or assembled in Japan, South Korea or on the Chinese mainland.

“So, if one link is affected, other links will be affected, as well as the global supply chain,” said Kwan.

However, one comfort is that Hong Kong’s trading characteristics have shown strong flexibility, he said. Hong Kong outperformed Japan, South Korea and Singapore in export performance last year. Instead of targeting the US market, local exporters have set their sights on developing countries, the Association of Southeast Asian Nations and South American markets. In the first seven months of 2019, the SAR’s exports to ASEAN markets climbed 4.6 percent year-on-year, while those to the US fell 10.9 percent.

In August last year, DBS Bank was the first lender to downgrade Hong Kong’s economic growth to zero percent from 2.5 percent as the US-China trade row escalated. “Back then, the prolonged trade tensions and the local social unrest were mainly responsible for our trimming the economic growth rate,” said Tse.

The other negative factors included weak investment sentiment, the depreciation of the yuan and sliding retail sales. 

Challenges to tackle

Undoubtedly, it had been a tough year for the Hong Kong economy in 2019, with the world slowdown piling pressure on the city atop the wrenching protests.

In the third quarter of last year, Hong Kong officially slipped into a recession as the local economy contracted by 2.9 percent from a year earlier — the first year-on-year contraction in a decade.

Financial Secretary Paul Chan Mo-po warned that the economic performance in the fourth quarter of last year would inevitably mean negative growth. The government revised its real GDP growth forecast for 2019 downward to -1.2 percent.

Tourism — one of the local economy’s pillars — was hard hit in 2019 amid a weaker Chinese yuan and the growing unrest. Exports of travel services dropped 32.2 percent in the third quarter. The Hong Kong Tourism Board estimated that visitor arrivals would drop 14 percent in 2019, compared with the previous year — the first annual retreat since 2016.

Retail sales in the violence-plagued city have fallen for 10 consecutive months since February last year due to subdued local demand and the turmoil. Shop closures and staff layoffs were a common sight in the second half. The unemployment rate in the consumption and tourism-related sectors rose from 3.9 percent in June to 5 percent in October.

Kwan stressed that consumer confidence needs to be rebuilt. If peace and order return, consumers would be more willing to spend during weekends and holidays.

Chong noted that the tourism industry can be resilient as long as the unrest abates and normalcy is restored. 

“Hong Kong was struggling with both local and external uncertainties in 2019. As a result, investment sentiment was extremely weak,” explained Tse. He noted particularly sluggish investment sentiment in the machinery sector, which means businesses are quite pessimistic about the local economic climate.

Looking at Hong Kong’s GDP components, the gross domestic fixed capital formation, which includes public and private investment, fell 16.3 percent in the third quarter of 2019 — the biggest drop among all the GDP components.

Kwan explained that private investment, which has to do with business activities and private construction works, has been affected by negative social sentiment and poor local land supply. In public investment, he said most public construction works were already in the final stages, while new public projects have yet to start, as reflected in the GDP figures.

Another worrying factor for Hong Kong is the city’s graying population.

Chong said the demographic change is one of the factors aggravating the local economy. The management problems in an ageing population and a shrinking workforce have not been fully addressed, he said. 

According to the Census and Statistics Department, the elderly population (above 65 years of age) will climb from 17.9 percent to 31.9 percent between 2018 and 2038. In other words, nearly one in every three persons will be in the elderly group by 2038.

Chong noted the labor force participation rate is still low and the SAR government can come up with solutions to free up the women labor force.

Kwan believed that such a problem can be partially solved through population movement as Hong Kong is a rather open and tolerant city. Nonetheless, such mobility has been low in recent years as protectionism of certain industries has increased.

He warned that difficulties and challenges are here to stay in 2020.

The SAR government must tackle the issues from within, and it’s important to stabilize society and win back confidence in all aspects, from business activities to people’s livelihood, he said.

Externally, the market should be well prepared to endure prolonged US-China trade tensions, as well as global trade changes.

Contact the writer at pamelalin@chinadailyhk.com