Published: 00:29, January 11, 2021 | Updated: 05:38, June 5, 2023
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Short-term measures, long-term planning to navigate turbulence
By Li Chen

It’s time to bid farewell to 2020 and embrace a new year ahead. Hong Kong’s economy has experienced profound challenges and turbulence since 2019, with two consecutive years of negative GDP growth under the multiple shocks of the US-China tensions, local social unrest and COVID-19 pandemic. However, with the acceleration of economic recovery in the Chinese mainland and the rollout of vaccines, Hong Kong’s economy will likely see substantial improvement and resume positive growth in the coming year, especially in the second half of 2021.

There are already signs that the recession may have been bottoming out. On a year-on-year basis, the rate of Hong Kong’s GDP contraction has narrowed down from 9 percent in the second quarter to 3.5 percent in the third quarter of 2020. The contraction of both private consumption expenditure and overall investment expenditure in terms of domestic fixed capital formation has narrowed significantly. Despite the weakness of external demand in advanced economies and the supply chains disruption, Hong Kong’s trade performance has strengthened on the back of the solid growth rebound in the mainland. Hong Kong’s total export has improved to a positive growth of 1.3 percent in the third quarter of 2020, substantially outperforming South Korea, Japan and the global average. In particular, while Hong Kong’s exports to the US and the EU declined around 18 percent and 12 percent respectively over the first 10 months of 2020, the exports to the Chinese mainland grew by 3.4 percent during the same period and underpinned Hong Kong’s export recovery.

Despite the recession, Hong Kong’s financial system has been fairly stable and resilient. The banking sector’s loan quality deteriorated last year but remained sound by historical and international standards. The total market capitalization of Hong Kong’s securities markets reached HK$45.7 trillion ($5.9 trillion) at the end of November 2020, a 28 percent increase from a year earlier. Total funds raised during the first 11 months of 2020 reached HK$596.3 billion, a 42 percent increase in comparison with the same period in 2019. Hong Kong’s status as an international financial center remains solid and the levels of financial market activities will likely further strengthen in 2021.

With the acceleration of economic recovery in the Chinese mainland and the rollout of vaccines, Hong Kong’s economy will likely see substantial improvement and resume positive growth in the coming year, especially in the second half of 2021

Assuming an effective vaccines rollout, the world economy will look brighter in 2021. According to the IMF’s forecasts last October, global economic growth would rebound by 5.2 percent in 2021, and China would outperform with a growth rate of 8.2 percent. Hong Kong was estimated to grow by 3.7 percent in the coming year. As major central banks in advanced economies continue to maintain ultra-loose monetary policies, global liquidity will remain favorable to economic recovery and financial market activities. Hong Kong will benefit directly from bridging the increasing global trade and capital flow towards the mainland.

However, Hong Kong’s growth recovery is still fragile and fraught with risks. The continuous spread of COVID-19 around the world may render intermittent lockdowns a new normal. Hong Kong had four waves of coronavirus infection outbreak in 2020 and the performance of local anti-pandemic measures had not been consistent. There is still substantial uncertainty on the effectiveness and speed of vaccines rollout. The transmission of new coronavirus variants has further complicated the situation. Unless Hong Kong achieves more effective pandemic control, tourism will remain frozen under travel restrictions and retail sales will stay depressed. The rising unemployment and worsening inequality may also increase the risk of social unrest. Hong Kong’s unemployment rate reached 6.4 percent in the third quarter of 2020, the highest level in around 16 years, and it may further deteriorate before it gets better. Moreover, as the US-China rivalry persists, the geopolitical tensions will continue to cast a shadow on market confidence and stability. 

To mitigate risks and navigate potential turbulence in the recovery process, Hong Kong not only has to improve its pandemic control, but also should combine short-term relief measures with long-term strategic planning and public investment to strengthen its competitive advantages. In the current environment, Hong Kong should maintain expansionary fiscal policies and avoid exiting from relief measures too early as the economy gradually recovers. If downside risks materialize, the government can adopt stronger fiscal stimulus. The government has implemented several rounds of relief measures in 2019 and 2020, totaling over HK$340 billion or around 12 percent of Hong Kong’s GDP, which helped to shore up the economy. With fiscal reserve around 30 percent of its GDP, Hong Kong still has ample space for expansionary fiscal policies. While fiscal prudence is important, now is not the time for Hong Kong to be overly concerned about the reduction of its fiscal reserve. The issue is less about the size of fiscal stimulus than how to make the policy support and resource deployment more targeted and efficient. 

Effective public investment in infrastructure and human capital is the cornerstone of modern economic growth. In addition to direct subsidies to households and private enterprises through relief measures such as cash payout and the reduction of taxes and fees, Hong Kong should also strengthen and accelerate its strategic public investment to augment its long-term capacity in housing supply, medical services, transportation, renewable energy, information technology, education and innovation. The ultra-low interest rate environment provides favorable conditions to make strategic public investment and leverage private capital to break through the key structural bottlenecks that constrain Hong Kong’s competitiveness. 

The deepening economic linkages with the Chinese mainland will serve as the anchor of Hong Kong’s growth recovery. The Guangdong-Hong Kong-Macao Greater Bay Area initiative and the mainland’s new “dual circulation” strategy provide great opportunities for Hong Kong. With mature legal institutions to protect property rights, the free flow of capital, and a world-class business environment equipped with a highly educated professional workforce, Hong Kong possesses unique advantages to capitalize on the long-term opportunities offered by China’s national development strategies. The challenge lies in how to more innovatively and effectively plug Hong Kong’s strengths into the networks of the Chinese mainland’s domestic economic circulation and enhance its role as a super-connector bridging the mainland and global markets in the international circulation as the Chinese mainland further opens up.

The author is an assistant professor at the Centre for China Studies and Lau Chor Tak Institute of Global Economics and Finance at the Chinese University of Hong Kong.

The views do not necessarily reflect those of China Daily.