HONG KONG: Hong Kong was one of the last jurisdictions in the world to reopen after COVID-19 at the beginning of 2023. The ensuing economic recovery was short-lived and softer than expected. A mix of both cyclical and structural factors, including international monetary policy and geopolitical tensions, may mean the city never recovers its pre-pandemic shine.
Private consumption in Hong Kong continued to grow through the year but imports and exports remained weak. Capital investment and tourism have also been lacklustre. Around nine months after the reopening, visitor arrivals were only 65 per cent of their 2018 level. Hong Kong’s asset markets are in similarly difficult positions.
Residential property prices moved up briefly at the beginning of the year but quickly lost steam and declined in the second half, with a year-to-date fall of roughly 5 per cent. The Hang Seng Index dropped over 15 per cent in 2023 and appears decoupled from the world economy, even as the S&P 500 in the United States rose by almost 25 per cent the same year.
Hong Kong stocks hit a four-year low in the first half of 2023, with trade averaging just US$14 billion. Funds raised from initial public offerings cratered to a 20-year low in the same period, raising concerns that Hong Kong has lost its lustre as an international financial centre.
It is against this backdrop that the government cut its latest annual GDP forecast from over 4.5 per cent to only 3.2 per cent.
CYCLICAL AND STRUCTURAL FACTORS
Hong Kong’s disappointing post-pandemic economic performance was the result of both cyclical and structural factors. On the cyclical side, rising local interest rates following rate hikes by the US Federal Reserve made residential properties an unattractive investment. The strong local currency means that tourists find Hong Kong expensive, while local residents prefer shopping across the border.
On the structural side, Hong Kong is a casualty of geopolitical tensions between the United States and China. Trade sanctions and technology controls have driven down trade shares between the two economies and more goods are now rerouted around Hong Kong through third countries such as Vietnam and Mexico.
Geopolitical tension may have broader impacts beyond trade. Hong Kong long prospered as a gateway to and from mainland China. Financial services, trading and logistics, tourism and professional services have fuelled Hong Kong as an East-meets-West centre. Any decoupling from this arrangement may be an existential threat to the city.
A key structural factor is the large disparity in wages and prices between Hong Kong and neighbouring Shenzhen. Hong Kong citizens can now enjoy roughly similar services just a short drive away for a fraction of the price.
Despite governmental efforts to reinvigorate local businesses, such as the Night Vibes Hong Kong campaign, Hong Kong residents will continue to take advantage of cheaper services and goods nearby as their economy more closely integrates with the region.
Source: CNA
