With big corporations in Hong Kong clouded by uncertainties in tax policies, small and medium-sized enterprises are struggling to stay afloat.
The government is facing calls to create an environment that’s conducive to business transformation.
Amid the COVID-19 crisis, the city’s gross domestic product fell by 9 percent year-on-year in the second quarter of 2020, following a record 9.1 percent decline in the preceding quarter. The local job market continued to worsen with the unemployment rate surging to 6.4 percent for the three-month period ending September — the highest in 16 years.
Together with the three rounds of the Anti-epidemic Fund and the relief measures unveiled in the 2020-21 Budget, the government has forked out more than HK$310 billion (US$39.74 billion), equivalent to about 11 percent of Hong Kong’s GDP, to shore up the battered economy.
Within the Anti-epidemic Fund, the Employment Support Scheme of HK$81 billion is aimed at providing financial subsidies to employers in two tranches. Employers receiving the subsidies must use them to pay workers’ wages and keep them employed.
“When SMEs are in a severe business slump, they’ll ax headcounts to survive until business recovers. Therefore, the first two rounds of the ESS have helped to maintain stability in the job market,” said Chinese Manufacturers’ Association of Hong Kong President Dennis Ng Wang-pun.
Federation of Hong Kong Industries President Daniel Yip Chung-yin said the government aid will help SMEs obtain additional capital to realign supply chain networks and make production plans after a drastic drop in business orders in the second quarter of this year.
However, the decoration sector stands to benefit little from the ESS mainly because many workers in the industry generally do not have a Mandatory Provident Fund account as their jobs are mainly subcontracted in nature and are not permanent positions opened by an employer.
“We strongly urge the government to list the decoration business as one of the beneficiaries under the financial assistance programs. The government should also offer direct financial aid to decoration workers,” Hong Kong Decoration and Engineering Association President Yu Kam-hung urged.
The ESS has to date approved wage subsidies for about 125,000 employers under the second tranche, with subsidies amounting to HK$31.8 billion and a total committed headcount of paid employees of about 1.33 million.
More refined measures
But the two largest local business chambers reckon that the government should not launch another large-scale financial assistance program. Instead, it should introduce more refined measures, such as facilitating SMEs to explore new consumer markets and elevating the technology standards of Hong Kong products, to help the business sector.
“The government can liaise with the mainland authorities in helping Hong Kong-based SMEs to establish cross-boundary online sales channels. It should also inject more capital into the Dedicated Fund on Branding, Upgrading and Domestic Sales (BUD Fund) to help SMEs tap more consumer markets in the ASEAN countries and the Guangdong-Hong Kong-Macao Greater Bay Area region,” said Yip.
“Moreover, the government can link up cooperation among manufacturers, universities, design schools and the Vocational Training Council to train more technology experts. When the design quality of Hong Kong-made products improves, it will be particularly useful for Hong Kong SMEs to venture into the consumer market of 5G products, medical products and consumer electronic appliances,” he added.
OCBC Wing Hang Bank sees the Hong Kong economy plunging 6 to 7 percent this year as the size of the new relief fund may not be big enough to fill the gap from the expiring ESS which ends in November.
According to the local banking arm of the Singaporean lender, about 10,000 fewer employers applied for the second tranche of the ESS as some may plan to close down or cut jobs given the dire economic situation.
“We expect more SMEs in the hardest-hit sectors to go bust as the relief measures expire gradually. As such, the overall jobless rate will likely go up further in the coming months. Before an effective vaccine is widely available, the outlook for the business and labor markets and the economy will likely remain sluggish,” OCBC Wing Hang Bank Economist Carie Li Ruofan warned.
“So far, government intervention to prevent a liquidity crunch for corporates, including tax deferrals, state loans and guarantees, wage subsidies and debt moratoriums, have helped to limit the immediate translation of the COVID-19 shock into official insolvencies in many countries. But, if this policy relief is withdrawn too fast, we expect the increase in insolvencies to climb by 5 to 10 basis points,” said Maxime Lemerle, head of sector and insolvency research at global trade credit insurer Euler Hermes.
Ng said SMEs will still adopt a very cautious and pessimistic business outlook for the rest of this year. COVID-19’s disruptive impact on global businesses is expected to linger for the following six months. While Hong Kong still manages to control the spread of the pandemic, most overseas economies are struggling. This will further dent the outlook of the city’s tourism, exhibition, retail and luxury goods sector when Hong Kong relies so heavily on the overseas market.
The study by Euler Helmer showed that Hong Kong’s corporate insolvencies in 2021 could see a 23 percent increase over 2019 — the third-highest in Asia-Pacific after the Chinese mainland’s 40 percent and Singapore’s 39 percent.
