Economy

The never-ending pain

Covid has desecrated this great trading entrepôt

Hong Kong’s economic fortunes have become closely tied to China’s with a dual policy of zero-covid since early 2020. The Hong Kong government’s strict quarantine regulations, restrictive measures, and the almost total closure of Hong Kong International Airport (HKIA) have, as the Financial Times has said ‘hammered’ and ‘paralyzed’ the economy.

The city has effectively been cut off from China and from the rest of the world for two and a half years now.

In late September the onerous quarantine measures were reduced somewhat after intense lobbying by local and foreign business interests stressing that Hong Kong’s regional hub role was being destroyed permanently by the inability to travel freely. However, the reduction, but not abolition of measures, coupled with a pledge to reinstate them if necessary has done little to lift severely sagging business confidence. The socalled “Zero+3” measures of reduced quarantine may encourage Hong Kong residents to move about more freely, leave and return, but are not expected to do much to encourage visitors from outside the SAR. It is also the case that Hong Kong’s historic unique selling point – proximity to the Chinese mainland – is still moot with the border closed and random zero covid lockdowns still being enforced in the PRC.

For some time the city’s leaders tried to talk up the economy. But it is now too evident that it is in a parlous state. In August government economists cut their growth forecast for 2022 to minus 0.5% after gross domestic product contracted 3.9% and 1.4%, respectively in the first and second quarters of the year. Exports are particularly hard hit as the entrepôt economy has ground to a virtual halt – August’s exports numbers were a whopping 14.3% down over August 2021, according to the customs agency. At a recent press conference financial secretary Paul Chan offered no real prospect of any uptick in exports in the near term.

It has to be said that along with zerocovid, interest rate hikes in the US have damaged Hong Kong exports too. The Hong Kong dollar remains pegged to the US dollar and the greenback has surged against every Asian currency this year (and the UK pound and euro) — including crucially a 24% rise versus Japan’s yen and a 5% gain against the Singapore dollar. However, there is little Hong Kong can do with the Monetary Authority (HKMA) remaining committed to the dollar peg, which has been in place since 1983. HKMA, the de facto central bank for Hong Kong, may wave some stamp duties on currency trading and, in early October, spent HK$2.355bn to stop the Hong Kong dollar weakening to a point where the peg might collapse. However, this sort of intervention is not sustainable.

“The city’s benchmark stock index is at a decade low ”

Other problems remain to be dealt with. The key property market is in the doldrums with few transactions being recorded and property developers talking of ‘fire sales’ on newbuild prices. By the end of September private home prices had plummeted to the lowest level since February 2019 while resale prices dipped by 10%, according to government data. As the chief executive of the HKMA, Eddie Yue, has predicted higher lending rates there appears to be no prospect of a rapid bounce back in the property market soon.

Consumer sentiment and interest rate hikes hit hard. Retail sales are weak – a 0.1% decline in August over a year earlier (where the government had optimistically estimated a 2.7% growth) while the sector is suffering from the double whammy of the absence of mainland Chinese and international tourists. In 2019 78% of the city’s visitors came from mainland China, so if the border remains closed the vast majority of tourist arrivals are still shut out. Government issuance of consumption vouchers distributed to the public to boost spending (in HK$2,000 and HK$3,000 allotments that must be used by the end of February 2023) may push up sales a little in the short term but will have no medium or long term effect on sales or confidence. A number of famous restaurants have closed while some hotels admit that only checking-in those undergoing quarantine has saved them.

HKIA remains virtually deserted compared to 2019 – it’s now handling just 3.4% of passengers that it did before covid, and just 30% of flights. The city’s flagship carrier Cathay Pacific is in financial trouble. By the summer of 2022 120,000 residents of the 7.2m city had left in the previous six months (the highest population drop in 60 years) which, when added to departures in 2021 and 2020, add up to a serious dent in the city’s population and workforce. As well as those leaving due to political considerations there is also the much commented upon exodus of corporate and financial services

“Business groups have called for a clearer roadmap out of covid ”

workers to Singapore, now effectively the primary regional hub.

Looking to the future it is hard to see a rapid bounce back for Hong Kong. Business groups have called for a clearer “roadmap” out of covid so that they can plan for the future. If this is not forthcoming many businesses admit they will move ahead without Hong Kong. Arguably, by some key metrics, Singapore has already overtaken Hong Kong as Asia’s financial centre and the lack of a plan for the so-called “last mile” removal of restrictions (in line with other global financial centres) from the government could accentuate this to Hong Kong’s detriment. The financial community’s displeasure with how things have been handled is perhaps best reflected in the fact that the city’s benchmark stock index is at a decade low.

Many in Hong Kong are hoping for a lifting of all quarantine regulations soon and perhaps a resumption of full crossborder business and trade. But lockdowns and adherence to zero-covid remain in Shanghai and many key cities across China and show no signs of ending. It may yet prove to be a tough remainder to 2022 and perhaps more of the same in 2023 for the troubled city.