Turning a difficult corner

HK's COVID-battered economy may see light at the end of the tunnel this year, but revised strategies are needed to reboot the local economy for long-term sustainable growth. Oswald Chan reports from Hong Kong.

Decimated by the triple whammy of lingering trade frictions between the world's two largest economies, the COVID-19 pandemic and a deglobalization trend, Hong Kong's economy shrank a record 6.1 percent in 2020.

Economic experts aren't forecasting a quick turnaround. US-based credit rating agency Moody's Investors Service warned in its sovereign rating report in January that even though Hong Kong's economic situation may turn a corner this year, the level of recovery may not revert to that of 2019 due to sustained pandemic-related constraints.

OCBC Wing Hang Bank economist Carie Li Ruofan expects the special administrative region's economy to grow just 3 to 5 percent in 2021, as the positive factors of a resilient financial market, trade activities, and the mass COVID-19 vaccination campaigns at home and overseas will be offset by bankruptcies and rising unemployment in the first half, as well as the possible unwinding of broad-based relief measures.

The administration estimates city's economy will grow by 3.5 percent to 5.5 percent in real terms in 2021, Financial Secretary Paul Chan Mo-po said in his 2021/22 budget reading on Wednesday, citing the latest internal and external situations as well as the stimulus effect of the fiscal measures. In the medium term, Hong Kong's economy will grow by an average of 3.3 percent per annum in real terms from 2022 to 2025.

The four main components of economic growth - local consumption, private investment, government expenditure and exports - will mirror varying degrees of recovery this year.

Private consumption expenditure tumbled 10.2 percent, government consumption expenditure slipped 7.8 percent, and gross domestic fixed capital formation fell 11.6 percent in 2020, according to the Census and Statistics Department. Total exports of goods fell 0.3 percent, while total exports of services plunged 36.8 percent.

As for domestic consumption, it's seen to depend on the effectiveness of the vaccination drive as it could lift consumer confidence and mean more jobs and wage increases.

"This year's major headwinds in economic growth are mounting unemployment and the associated sluggish wage growth," said Tang Heiwai, a professor of economics at HKU Business School and associate director at the Hong Kong Institute of Economics and Business Strategy.

The situation is not optimistic, he told China Daily. Hong Kong's unemployment rate hit 7 percent - the highest in nearly 17 years - for the three months from November to January, compared with 6.6 percent in the previous quarter, with almost 253,300 people out of work. Retail sales value dropped for the 23rd consecutive month in December and plummeted more than 24 percent in 2020 from the previous year.

"Even if consumption expenditure rebounds, it won't be high as consumer behavior has changed due to the pandemic. People now opt for takeaway food, groceries and housing appliances rather than dining out or going shopping as they prefer staying at home to avoid getting infected," said Tang.
Political and policy uncertainties created by the spread of the coronavirus have sapped the confidence of private businesses, with more local companies closing down, curtailing investment growth.

"Hong Kong saw a difficult start to 2021 with business activity slumping as enterprises struggled to keep themselves afloat at home and overseas. Domestic demand and export sales sank sharply, while delays in supplies rose at an unprecedented rate, and worries about further waves of the virus hit companies' confidence in the near-term outlook," said Chris Williamson, chief business economist at IHS Markit, a global business information service provider.

The SAR government will fork out a financial stimulus package of HK$120 billion ($15.38 billion) for the 2021/22 financial year to shore up the beleaguered economy battered by the COVID-19 pandemic after throwing a HK$318 billion lifeline last year. Government expenditure may not see significant growth this year that can boost the economy.

Economic prospects
The trade sector is expected to pick up this year, with the city's trade figures having staged a rebound in the third and fourth quarters of 2020. This year's outlook will depend on whether the Chinese mainland will strengthen relations with other major economies, and whether a vaccine-induced global economic recovery will spur regional trade and external demand.

Although Hong Kong's economy is tipped to rebound this year, the four economic growth engines have shown various degrees of slowing in the last decade, warranting closer attention from the government.

Hong Kong still retains its crown jewel as an international financial center. In fundraising, the city has granted innovative companies weighted voting rights since April 2018, involving pre-revenue or pre-profit biotech and qualifying enterprises seeking a secondary listing in the SAR. Hong Kong is now the world's second-largest fundraising venue for biotech companies. In the past 12 years, it has led the world seven times in terms of total funds raised in the city through initial public offerings.

There's abundant liquidity in Hong Kong's capital markets, with an average daily turnover of $16.7 billion in December last year - up 49 percent over the same period in 2019 - while market capitalization is more than 16 times the city's gross domestic product. In the asset-and-wealth management sector, non-local investors contributed 64 percent of the total assets under management at $3.7 trillion by the end of 2019.

In professional services, Hong Kong still has a competitive edge in the legal, auditing, insurance and consulting sectors as they're generally aligned to international standards and deeply linked to other economies.

A lifting of travel bans can be expected following the vaccination campaigns, enabling the tourism sector to recover. Tang sees business travel enjoying growth faster than that of leisure travel as companies are keen to resume business conferences and company visits. Business travel by executives of mainland and ASEAN-based companies will be buoyant, providing boost for the hotel-and-aviation industry.

However, until global mass vaccination programs can lead to the lifting of all travel restrictions, tourism's contribution to Hong Kong's economic growth will still be volatile.

Hong Kong's trade and logistics sector has been diminishing rapidly, with the city's role as the mainland's export intermediary waning since China's admission to the World Trade Organization in 2001, according to the Hong Kong Economic Policy Green Paper, jointly prepared by HKU Business School and the Hong Kong Institute of Economic and Business Strategy.

This is due to the decline of manufacturing firms in Guangdong province, the rise of mainland indigenous private firms at the expense of State-owned enterprises, and the loosening of the predominant power of State-owned trading firms after China entered the WTO, the report said.

As the four major pillars falter in varying degrees, economists have proposed recipes for rekindling Hong Kong's long-term competitiveness - ramping up investment in education and talents, fostering the reindustrialization initiative, leveraging the macroeconomic backdrop of the Guangdong-Hong Kong-Macao Greater Bay Area, and capitalizing on closer regional trade integration provided by the Regional Comprehensive Economic Partnership - the world's largest free trade pact signed in November last year.

Regarding education and talents, the HKU Business School and HIEBS report highlighted that the Hong Kong government's education expenditure accounted for 3.3 percent of the city's GDP in 2018, which is still much lower than the average 5.1 percent of that of the Organization for Economic Cooperation and Development countries.

The SAR government needs to double human-capital investment within five years, the report urged. Measures include raising the GDP share of public expenditure on education to 5 percent, increasing the number of University Grants Committee-funded places, boosting the GDP share of public expenditure on research and development to 2 percent, at least doubling doctoral degree places, as well as issuing educational bonds as a long-term funding source.

Besides increasing education expenditure, attracting talents is desperately required, particularly the supply of mid-level skilled science and technology talent that's important in fostering technology R&D commercialization, the report said. The government is urged to provide economic incentives to attract overseas and mainland new-economy companies to set up affiliates in Hong Kong, thus solving the talent shortage by providing job opportunities to those trained science and technology professionals.

Reindustrialization promotes sustainable and diversified economic growth by enhancing the manufacturing sector's share in value added or employment. As manufacturing accounted for less than 1 percent of the local GDP in 2019, the city has lost its status as the supply chain network of advanced manufacturing because many production procedures are being relocated to the mainland.
The HKU Business and HIEBS report reckoned that Hong Kong should leverage its competitive advantage in finance and medical-related fields to transform itself into a manufacturing and design pivot for high-tech products in the medical, biotech, pharmaceutical and financial sectors.

Tang says the costs of establishing advanced manufacturing lines in Hong Kong may not be as high as expected because less labor input is needed in advanced manufacturing, and companies can concentrate on certain parts instead of producing an entire product.

Bay Area roadmap
The Bay Area's macroeconomic roadmap offers Hong Kong its future economic growth engine. The Bay Area, comprising Hong Kong, Macao and nine cities in Guangdong province, is an emerging city cluster integrating more than 72 million people and a combined GDP of $1.7 trillion.

Tao Zhigang, associate dean (human resources) of HKU Business School and HSBC professor in global economy and business strategy, told China Daily that the markets of Hong Kong and other 10 cities in the Bay Area could form a single market.

"Hong Kong companies like Octopus and HKTVmall are good companies. If they have the Bay Area market, they will grow faster and will have better ecosystems. When the market is big, entrepreneurs will have more incentive to develop the ecosystem, said Tao, referring to the many different goods and services that Octopus and HKTVmall need to do business.

Tang argued that closer integration between Hong Kong and the Bay Area can narrow the wage differential that could foster labor mobility within the city cluster area, thus restoring the competitiveness of the labor market in due course.

Hong Kong should also not miss out on the business opportunities arising from the closer trade links with the Asia-Pacific region provided by the RCEP. The SAR should leverage its experience and talents in services trade, such as supply chain management and export financing in adapting to the new business model of trade and logistics.

Hong Kong's re-exports have contributed a lot to mainland exports, but the ratio for imports is very low, and imports are mainly concentrated on production goods. Hong Kong should not only participate in the international market in helping the mainland to export to Europe and the US (external circulation in China's "dual circulation" strategy), but also help the mainland to import consumer goods (internal circulation).

"Hong Kong is privileged as the bridge of internal circulation and external circulation and can do something in between. We should understand what mainland consumers like to have and what the world has to offer to the mainland. This is the competitive advantage the city needs to seek - understanding mainland consumers and knowing the world's producers," said Tao.

He urged the SAR government to expand its established international links by opening more trade promotion offices in Asia, and nurturing local talents that can deeply understand the Asian market.

"The two key steps are training and attracting talents, and sending talents in different parts of Asia to study various consumer markets in depth, as well as providing platforms for the world."

Contact the writer at
oswald@chinadailyhk.com