The Hong Kong Special Administrative Region marks the 26th anniversary of its establishment with a promising economy in the post-pandemic era. But it needs structural reforms to secure long-term growth. Oswald Chan reports from Hong Kong.
In the 26 years since Hong Kong returned to the motherland, the city’s economy has constantly developed, becoming one of the world’s richest regions with GDP per capita reaching $49,146 in 2022, according to CEIC Data.
The 2019 social unrest and the COVID-19 pandemic shifted the special administrative region’s economy away from its growth trajectory for a while. But with stability restored and with the lifting of all stringent anti-COVID curbs and the full resumption of travel between Hong Kong and the Chinese mainland, Hong Kong’s economic prospects in the post-pandemic era seem to be brilliant. The growing cross-boundary flow of people is expected to trigger consumption and tourism services.
The local economy, however, faces short-term headwinds. Supply-chain disruptions remain, while tepid growth in the world’s major economies, higher interest rates, and less fiscal support limit the pace of recovery.
For this year, Hong Kong sees its economic growth hovering between 3.5 and 5.5 percent. Global institutions like Oxford Economics, Moody’s Analytics, the University of Hong Kong, Hang Seng Bank and Singapore-based United Overseas Bank, expect the growth rate to be between 2.2 and 4 percent
Hong Kong’s long-term economic growth prospects are also hindered by a rapidly aging population. The International Monetary Fund suggests that the SAR start structural reforms, such as enlarging the labor force, upgrading labor skills, and lifting the innovation and technology sector, to boost long-term growth.
Hong Kong’s economy shrank 3.5 percent in 2022 as COVID-19 sparked an outflow of talent, as well as a slowdown in consumption, tourism and exports. Supply-chain dislocations put a damper on local exports.
For this year, the city sees its economic growth hovering between 3.5 and 5.5 percent. Global institutions like Oxford Economics, Moody’s Analytics, the University of Hong Kong, Hang Seng Bank and Singapore-based United Overseas Bank, expect the growth rate to be between 2.2 and 4 percent.
The IMF projects Hong Kong’s economy growing at 3.5 percent this year and 3.1 percent in 2024. “With the Chinese mainland opening up, mobility on the mainland is rising, and supply disruptions are waning. You can expect a pickup in goods exports, consumption and tourism services,” said IMF Asia and Pacific Department Director Krishna Srinivasan.
In an interview with China Daily, Srinivasan sees the SAR’s economy affected by continued China-United States trade tensions and a slowdown in the world economy. But, he noted that the macroeconomic backdrop of trade integration in Asia, as well as Hong Kong’s integration with the Guangdong-Hong Kong-Macao Greater Bay Area will be the growth engines in the future.
First, Asia’s interregional trade is at a high rate of 50 percent. “Being in the middle of the dynamic region of Asia, Hong Kong still has opportunities in the region which should be exploited, such as through nonexclusive trade agreements to attain greater integration with the region. These will be useful for Hong Kong,” said Srinivasan.
Krishna Srinivasan, director of IMF Asia and Pacific department, shares his thoughts and insights on regional growth prospects, focusing on the economy of Hong Kong. (CALVIN NG / CHINA DAILY)
Second, integration between Hong Kong and the mainland, especially in the Greater Bay Area, has brought huge opportunities to the innovation and technology as well as financial services sectors. “If Hong Kong can also become the technological gateway to the mainland, this will make Hong Kong much more competitive and grow faster,” he said.
In an interview with China Daily, IMF Asia and Pacific Department Director Krishna Srinivasan sees the SAR’s economy affected by continued China-United States trade tensions and a slowdown in the world economy. But, he noted that the macroeconomic backdrop of trade integration in Asia, as well as Hong Kong’s integration with the Guangdong-Hong Kong-Macao Greater Bay Area will be the growth engines in the future
In Srinivasan’s view, integration also offers opportunities for Hong Kong to augment its role as an international financial center. “Almost 60 percent of foreign investments in and out of the mainland are through Hong Kong. And 80 percent of mainland enterprises (that) seek financing (are doing so) through Hong Kong. With deeper integration, Hong Kong’s role is to provide foreign investors a good play in the mainland market,” he said.
Srinivasan described Hong Kong as a preeminent financial hub. “Even at the height of the pandemic, capital inflow was not affected to a great extent. There was still free movement of capital. The city has never lost its status as a key financial center.”
Hong Kong experienced economic contractions in 2019, 2020 and 2022 (there was a 6.4-percent rebound in 2021) caused by twin blows from the city’s social unrest and the onset of COVID-19.
The SAR government launched several rounds of fiscal stimulus measures to shore up the beleaguered economy. As a result, it expects to incur a budget deficit of HK$54.4 billion ($6.97 billion) for the 2023-24 financial year after recording a budget deficit of nearly HK$140 billion in the previous financial year.
With a ballooning budget deficit, Hong Kong’s current fiscal reserves have slumped from about 23 months of government expenditure in 2019-20 to about 13 months, which is very close to the level in 2003-2004 when the city was hit by the severe acute respiratory syndrome (SARS) outbreak.
Fears over the sustainability and suitability of Hong Kong’s dollar peg flared up again recently as the Hong Kong Monetary Authority again resorted to foreign exchange intervention to defend the Hong Kong dollar. There are concerns that successive budget deficits could become a new normal for Hong Kong.
The IMF sees Hong Kong as having solid macroeconomic and institutional frameworks and buffers. This was proven during the pandemic as the SAR government could rely on its fiscal buffers to back up the economy by boosting growth and providing jobs to safeguard the people’s welfare.
Srinivasan said Hong Kong should provide targeted fiscal measures to shore up its public finances. “Going forward, the administration should claw back some of the fiscal support and provide targeted support so that it can embark on fiscal consolidation to help rebuild those buffers. That is the advice we can offer to Hong Kong,” he said.
Pedestrians use a crossing in Central, Hong Kong, on Feb 28, 2023. (ANDY CHONG / CHINA DAILY)
“The linked exchange rate system has worked very well for Hong Kong because it is transparent which is supported by good institutional frameworks, as well as huge reserves and fiscal buffers,” said Srinivasan, as he urged the SAR to protect and strengthen those institutional frameworks and build up fiscal buffers.
Hong Kong has typically extremely good macro prudential measures, such as loan-to-income, loan-to-value, and debt service-to-income scales. These measures are able to safeguard the soundness of the financial sector despite any correction in the housing market. In terms of systemic risk, the home-price fall factor is mitigated by Hong Kong’s strong policy measures.
Krishna Srinivasan, IMF Asia and Pacific Department Director
Another concern for Hong Kong’s financial industry is whether the overvalued property sector will have any detrimental impact on the banking sector if local home prices continue to slide.
With the combination of US interest-rate hikes, years of anti-pandemic curbs that restricted the flow of people, and the pace of Hong Kong people emigrating, Hong Kong property prices fell by nearly 16 percent in 2022, ending a 13-year rally and posting the largest annual losses since 1998. By May, the home price level was still 11.83 percent lower than that of the all-time peak in September 2021.
“Hong Kong’s housing market is still slightly overvalued, with further space for a correction. If there is a further correction in the property sector, it would likely affect consumption because many people have invested in the property sector,” said Srinivasan.
He believes the impact of any fall in home prices on the local financial sector would be limited. “Hong Kong has typically extremely good macro prudential measures, such as loan-to-income, loan-to-value, and debt service-to-income scales. These measures are able to safeguard the soundness of the financial sector despite any correction in the housing market. In terms of systemic risk, the home-price fall factor is mitigated by Hong Kong’s strong policy measures.”
Although Hong Kong is poised to record an economic rebound in the next two years, the IMF warns that the bigger picture should be considered — an aging population would crimp long-term growth prospects.
The IMF has reduced its medium-term forecast for Hong Kong to 3 percent, partly reflecting the effect of the city’s aging population.
Structural economic reforms are needed if Hong Kong is to maintain a strong and robust economy, Srinivasan warned. “Hong Kong has an aging population problem. Hence, it has to find ways to raise its labor force, improve labor skills, and beef up the innovation and technology sector.”
A pedestrian walks under a raft of China's national flags and flags of the Hong Kong Special Administrative Region on a street in Hong Kong, China on June 27, 2023. (ANDY CHONG / CHINA DAILY)
He said that if the SAR is to make itself the region’s innovation and technology hub, it needs a good labor force with domestic and overseas professionals. “Hong Kong has the reputation of being innovative and being on the frontier. If the city can promote innovation and digitalization, as well as technological development, it can provide a source of growth going forward. I think the innovation and technology sector can become a driving force for the city’s economic development.”
Hong Kong has the reputation of being innovative and being on the frontier. If the city can promote innovation and digitalization, as well as technological development, it can provide a source of growth going forward. I think the innovation and technology sector can become a driving force for the city’s economic development.
Krishna Srinivasan, IMF Asia and Pacific Department Director
On the mainland, Srinivasan also regards structural economic reforms as necessary to improve long-term growth prospects. The mainland economy is expected to grow at 5.2 percent this year and 4.5 percent in 2024. The mainland’s economy grew 3 percent last year after having expanded 8.4 percent in 2021.
“Fiscal reform on the mainland can improve the social protection system that leads to high savings which feed into investment-led growth. When social protection is reformed, consumption picks up, and the economy is rebalanced,” said Srinivasan.
Labor market reforms, such as raising the retirement age and women’s participation in the labor force, can help offset the impact of a population decline, said Srinivasan. He noted that State-owned enterprise reform can address the issue of competitive neutrality in productivity between State-owned enterprises and the private sector on the mainland. “If the mainland undertakes these reforms, its long-term economic growth rate will go up from 3.4 percent to 4.5 percent — a one-percentage point increase.”
Overall, the IMF predicts Asia’s economy will expand by 4.6 percent this year and 4.4 percent next year. But Srinivasan warned that heightened inflation in the region will pose a risk for regional economies down the road when inflation expectations get unanchored. The debt level has also risen sharply in the region.
The IMF director said he would like to see the region’s public sector slowly retract the fiscal stimuli it introduced during the pandemic so that fiscal buffers can be restored, while the private sector should draw up medium-term fiscal frameworks to provide a good anchor to restore credibility in the financial market.
“Asian nations also have to adopt strong structural labor and land reforms, improve the business environment, and open up their economies. If they can do that, the long-term prospects will be pretty good.”
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