5 Main Dangers In Hong Kong’s Future Improvement – Evaluation

By Kung Chan and Xia Ri

Lately, with the impression of a sequence of occasions such because the U.S.-China commerce warfare, the COVID-19 pandemic, and the implementation of the Nationwide Safety Legislation, the scenario in Hong Kong has undergone unprecedented adjustments.

As a regional worldwide monetary heart and a free commerce port, future growth of the island is going through a unique trajectory from that of the previous. Its globalized options are more likely to fade, and its capacity to draw worldwide capital might also lower. Native capital in Hong Kong will proceed to shift, exhibiting a transparent pattern towards “mainlandization”. After years of monitoring analysis, ANBOUND’s founder Kung Chan believes that Hong Kong’s financial system could encounter some profound issues and dangers, primarily in 5 features:

Firstly, there’s the problem of the Hong Kong greenback’s standing and monetary stability. In 1983, amidst a pointy depreciation of the native foreign money, the Hong Kong greenback (HKD) was pegged to the USD, establishing a linked change fee system. By optimization in 1998 and 2005, the system has been structured to commerce inside a slender vary of seven.75 to 7.85. Similar to this method, Hong Kong has constructed up substantial official international change reserves, a sturdy and dependable banking system, a prudent fiscal philosophy, and a versatile financial construction. Nonetheless, in July 2020, Bloomberg reported that the U.S. was contemplating making use of stress on China relating to current developments in Hong Kong. One choice mentioned was banning Hong Kong’s banks from accessing USD, excluding it from the SWIFT worldwide cost system, making it troublesome for international buyers to change HKD, and stopping the move of USD into Hong Kong. In such a state of affairs, the long-standing linked change fee between the HKD and the USD could possibly be decoupled. Though the proposal is finally not handed and therefore not carried out, it serves as a big warning for Hong Kong, as an analogous scenario might come up sooner or later. If the HKD had been to be decoupled from the USD, sustaining its stability would require important assets and capital funding. In any other case, it could face extreme fluctuations that would jeopardize the long-term stability of the Hong Kong monetary market.

Secondly, the island is going through the problem of worldwide standing and social safety stability. Over the previous decade, Hong Kong’s financial system has skilled a noticeable downturn amid the impression of the 2008 monetary disaster, social unrest, and the COVID-19 pandemic. Information reveals that after reaching a excessive year-on-year progress of 6.8% in 2010, Hong Kong entered an period of sluggish progress of below 3% that lasted for eight years. In 2019, it skilled destructive progress for the primary time, with a contraction of -1.68%. Since 2020, its financial system has been struggling as a result of pandemic’s results. Based on the Census and Statistics Division (C&SD)’s preliminary estimates, Hong Kong’s GDP declined by 3.5% in actual phrases for the whole 12 months of 2022 in comparison with 2021. Its financial prosperity is more likely to proceed to say no, and financial revenues could face challenges, finally resulting in a big lower in worldwide standing and posing a menace to the general stability of the social safety system.

Thirdly, capital standing and property worth are one other problem of concern. The Hong Kong Inventory Alternate (HKEX) and the Hong Kong Securities and Futures Alternate (SFC) are on the forefront in Asia, constantly attracting investments from around the globe. Nonetheless, because the legislative actions triggered by Article 23 of the Fundamental Legislation, a big quantity of capital and establishments have been withdrawn from the island. Based on knowledge from C&SD, in November 2022, there have been 8,978 abroad corporations in Hong Kong, a lower of 71 in comparison with the earlier 12 months, with 46 of them being regional headquarters. The variety of corporations arrange in Hong Kong by international locations such because the U.S. and the UK has been declining. The U.S. has been steadily lowering its presence since 2018, with a cumulative discount of 93 corporations this 12 months. On the similar time, the UK has decreased by 4 corporations to 134, and France has decreased by 9 corporations to 80. With the outflow of capital from Hong Kong, the once-thriving actual property market has additionally contracted, resulting in a decline in property values. Property providers teams like CBRE and Knight Frank estimate that Hong Kong’s property costs will proceed to say no by at the very least 10% in 2023. As capital flows out and the true property market contracts, Hong Kong’s capital market will seemingly proceed to weaken, affecting each capital standing and property values.

Fourthly, there are issues in regard to the matter of the island’s Particular Administrative Area (SAR) standing and Hong Kong passport. Hong Kong enjoys the standing of an impartial free port and has gained widespread recognition worldwide. Consequently, its passport holds important worth, encouraging migrants to reside, work, and stay there. All items imported and exported within the Hong Kong area are topic to zero tariffs, with no value-added tax or consumption tax. Any earnings from transactions throughout the tariff space are exempt from taxation, making it a world duty-free haven. Moreover, Hong Kong’s company and private earnings taxes are noticeably decrease than these in most developed international locations. Company tax for corporations primarily based on the island ranges from 8.25% to 16.5%. In 2020, accounting agency PwC and the World Financial institution ranked Hong Kong because the nation with the friendliest tax system. Furthermore, possessing a Hong Kong passport not solely permits entry to visa-free or visa-on-arrival entry in lots of international locations but in addition offers comparatively complete social safety and welfare advantages. For instance, kids can take pleasure in 15 years of free obligatory schooling, and Hong Kong’s public hospitals supply free outpatient and inpatient providers to residents. Moreover, people can obtain unemployment advantages, retirement pensions, and aged dwelling allowances. Nonetheless, with the strengthening of Mainland China’s insurance policies towards Hong Kong, its SAR standing has been affected, exhibiting a pattern towards larger integration between the island and the mainland. This has, to a sure extent, influenced the standing of an impartial free port and weakened the worth of the Hong Kong passport.

Lastly, there’s the problem of commerce standing and employment of residents. As one of many world’s three main free ports, Hong Kong has lengthy loved an unparalleled commerce standing, which has been extremely valued by developed international locations prior to now. Nonetheless, within the present context of anti-globalization and the decoupling between the U.S. and China, Hong Kong’s commerce standing could face potential declines sooner or later. C&SD reveals that in April 2023, the general export quantity and import quantity of Hong Kong items decreased by 16.7% and 15.5%, respectively, year-on-year. From January to April, the general export quantity and import quantity decreased by 19.8% and 15.6%, respectively, year-on-year. In April, the general export commerce quantity was HKD 338.3 billion, a year-on-year lower of 13%, and the import commerce quantity was HKD 374.9 billion, a year-on-year lower of 11.9%. This marks the tenth consecutive month of year-on-year decline in its import and export commerce quantity. The potential decline in commerce standing will even considerably impression residents’ employment, earnings, and general financial prosperity. Statistics from C&SD point out that the seasonally adjusted unemployment fee from March to Could 2023 stays at 3.0%, the identical as that from February to April 2023. The mixed unemployment fee for industries associated to consumption and tourism remained unchanged at 4.2%. Particularly, the unemployment charges for the retail commerce and catering providers remained the identical at 3.8% and 4.8%, respectively, whereas the unemployment fee for lodging providers fell to three.5%. Unemployment additionally declined in some industries, notably building, wholesale, and human healthcare.

Remaining evaluation conclusion:

Lately, Hong Kong has proven a noticeable pattern of “mainlandization” in its fashionable historic cycle. As a result of rising uncertainties, the island’s future growth could face 5 important underlying dangers, together with the problems associated to the standing of its foreign money and monetary stability, its worldwide place and social safety sustainability, the standing of capital and property values, the particular administrative area standing and Hong Kong passport, in addition to the commerce standing and residents’ employment. Therefore, it’s essential for related authorities to concentrate on such dangers and take proactive measures.

Kung Chan and Xia Ri are researchers at ANBOUND