If this is a downturn, then Hong Kong can live with it

Hong Kong's economy is growing steadily despite global headwinds, in large part thanks to the high proportion of city residents in employment

PUBLISHED : Monday, 19 November, 2012, 12:00am
UPDATED : Monday, 19 November, 2012, 4:21am


Related topics

Despite dire warnings of gloom from Hong Kong officials, the city has succeeded in avoiding recession.

Figures released on Friday showed that output rose 0.6 per cent in the July-September quarter compared with the previous three-month period.

That might not sound much, but it equates to an annualised growth rate of 2.4 per cent. For an economy whose headline growth numbers are so dependent on the sluggish global trade cycle, that's thoroughly respectable.

In contrast, Singapore's economy contracted in the third quarter at an annualised rate of 5.9 per cent.

Despite the clouded global picture, however, Hong Kong's relatively strong performance doesn't seem particularly surprising. After all, this doesn't feel much like an economic slump.

The reason is simple enough. Hong Kong's labour market is in robust health. The chart below shows the proportion of Hong Kong's working-age population currently in employment.

This number is in a long-term downward trend as more of our relatively wealthy population age and choose not to work.

But as the chart shows, overall employment is currently above its average rate since the 1997 handover, and well above the lows seen during the Asian crisis, the Sars outbreak or following the financial crisis.

This is an encouraging indicator of economic strength. Unlike the unemployment rate, which only captures those actively seeking work, the overall employment rate gives a picture of the labour situation across the whole population. When the economy is strong, more people who have the option not to work choose to find employment, and so the rate goes up, even if the unemployment numbers remain much the same.

Of course there are flaws with this measure. It is a lagging indicator, and it says nothing about under-employment - the number of people working part-time who would like to be in full-time work.

Even so, Hong Kong's high employment rate helps explain why private consumption and hence private investment in the city both remain strong, despite the localised slowdowns in trade and financial services.

If this is a slump, it's the sort of slump we can live with.


On Friday, mainland authorities announced new dividend tax breaks for long-term investors in an attempt to revitalise the moribund local stock markets.

Anyone selling shares within a month of purchase will now be subject to a punitive dividend tax of 20 per cent, up from 10 per cent. Investors holding on to shares for more than a year will see their dividend tax rate cut to 5 per cent.

The aim, said regulators, is to encourage long-term investment while discouraging short-term speculation.

Well, I can forecast exactly what effect these new dividend tax rates will have: none at all.

To see why, look at the chart above. The black line shows the dividend yield on the mainland's CSI 300 big-company index, which currently stands at 2.3 per cent. The blue line represents the one-year fixed deposit rate, now at 3 per cent.

For the last six-and-a-half years, the stock market's dividend yield has consistently been lower than the benchmark deposit rate.

As a result, it's safe to assume no one on the mainland buys stocks for their dividends.

(There are companies trading on higher dividend yields - banks and property developers, for example - but that reflects the amount their share prices have fallen in response to negative sentiment, rather the generosity of their payout.)

So if no one buys stocks for their dividend payments, then no one is going to be deterred by a higher dividend tax on quick sales, or encouraged by a lower tax rate if they sit on them.

It will take a lot more than this to restore investor confidence in the battered mainland market.