HH Hong Kong’s Choice Between Hope And Despair

Today, Hong Kong faces great economic uncertainty and unprecedented market volatility.

Recently, Hong Kong’s financial secretary John Tsang Chun-wah warned that the city’s economy is facing its “worst time in 20 years.” In the past half a decade, growth has more than halved close to 2.5 percent. With Brexit chills, analysts expect a contraction.

However, the writing has been on the wall since the global financial crisis. Yet, critical decisions have been delayed.

Growth engines fading

Hong Kong’s old growth drivers remain necessary but are no longer enough. In the past, export-led growth fueled Asia’s tigers, including Hong Kong. Today, advanced West can no longer absorb Asian imports, and China's growth is decelerating.

Last spring, concerns about Hong Kong's economy led some ratings agencies to downgrade their outlook to negative, after same action on China. But while the mainland can still rely on catch-up growth and rising living standards, Hong Kong’s aging economy must do with slower growth, stagnant living standards and income polarization.

In the past, Hong Kong’s property developers reduced risks by relying on prudent financial policies, funding flexibility and recurring income streams. Today, those positives have been offset by rising supply, slower growth, and the Fed’s future rate hikes. However, developers’ presence in China’s urban growth centers has protected margins.

Similarly, retail sales can contribute to Hong Kong’s growth but not without the mainlanders' role in the economy. The same goes for logistics and Chinese firms. Moreover, the city’s thriving tourism is not viable without mainlanders who account for more than three of total arrivals.

Without China, Hong Kong would be left with only half its trade and a quarter of its foreign investment.

To Brexit or to OBOR

Unfortunately, Hong Kong is also highly vulnerable to Brexit spillovers. Outside Europe, it has relatively greatest trade, investment and financial linkages with the UK. Due to the Hong Kong dollar, which is rising with the US dollar as investors are scrambling for safe havens, it faces even greater headwinds than Singapore.

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Gary Anderson 3 years ago Contributor's comment

It is unfortunate that the derivatives world has helped to insure greater inequality, which will eventually reach dangerous levels. I still hold out the hope for helicopter money to rebalance the economies of the nations: www.talkmarkets.com/.../helicopter-money-is-being-misrepresented-by-bill-gross-and-others

Currency Trader 3 years ago Member's comment

Very insightful, I hadn't thought of just how susceptible Hong Kong would be to #Brexit.