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Hong Kong economy

Did Hong Kong fumble the ball on China’s ‘golden era’? Yes, says Credit Suisse

Hong Kong enjoyed only peripheral benefits in the form of a tourism boom as China rose to global economic prominence, says Credit Suisse economist Tao Dong

PUBLISHED : Wednesday, 04 October, 2017, 6:25pm
UPDATED : Wednesday, 04 October, 2017, 11:02pm

Hong Kong has missed the boat on a more than decade-long opportunity to benefit from China’s development, as the mainland’s growth super-cycle is now set to cool amid credit deleveraging and as consumption replaces investment as the centrepiece of the economy, according to Credit Suisse.

Tao Dong, senior adviser and economist with Credit Suisse Private Banking Asia Pacific, told a press briefing on Wednesday that the city gained only peripheral benefits from China’s once-in-a-generation transformation.

“I personally feel Hong Kong has missed this golden window period... in the past decade, there was this huge surge in the Chinese economy, and the Hong Kong economy failed to benefit, with the exception of the tourism sector,” Tao said on Wednesday during a briefing on the outlook for the Chinese economy in Hong Kong.

“By missing this window, Hong Kong missed an opportunity for economic transformation, which holds the key for solving some social problems,” he said.

Hong Kong’s economy, worth an annualised US$177.4 billion in 1997, had tripled in size from US$50.6 billion in 1987. However, in the next 10 years the economy grew by just 20 per cent to an annualised US$211.6 billion in 2007.

The real economy contracted by 2.8 per cent in 2009 as a result of the global financial turmoil. Following a strong rebound in 2010 from a low base, the economy has since been growing at around 3 per cent annually.

Meanwhile, the mainland has enjoyed high single-digit growth rates, even after the global financial crisis, thanks to property and infrastructure related investment.

However, an aggressive expansion of credit has pushed China’s debt levels to among the highest in the world, a trend that does not appear sustainable.

“I think the turning point for China’s credit cycle has arrived,” Tao said. “President Xi himself has a strong will to push for deleveraging in a bid to realise long-term stability, even though it would cause short-term pain.”

China’s ratio of nationwide housing value to GDP rose to 250 per cent in 2016, overtaking similar readings which show Japan at 200 per cent and the US at 170 per cent, according to Credit Suisse.

Tao said China’s property boom was doomed to undergo a correction in the coming decade, describing inflation in housing as “unheard of in the modern history of mankind”.

However, Tao said consumer-led consumption, led by the generation born after the 1990s, who show a greater willingness to spend than their parent’s generation, is likely to become a pillar of economic growth. He forecast annual growth rates of around 4 per cent in the years ahead.

Tao said that Hong Kong’s property market prior to 2003 was driven primarily by US monetary policy. More recently, however, it has become more aligned with the mainland property cycles.

“In fact in the last few years, there were several times Hong Kong property market seemed heading for a correction, but that was interrupted by inflows of mainland hot money,” he said.

Tao was philosophical about what policy approach the government should take, adding that the city’s laissez-faire model had served it well in the past.

“If you look back at the last 100 years, the government did quite little. It was the Hong Kong businessmen and citizens that brought Hong Kong to prosperity. So looking forward, it still relies on Hong Kong people to make the city great again,” he said.