Why slower economic growth may not be a bad thing for Hong Kong
- Bernard Chan says with an economy at full capacity and after years of high rents and housing costs, a return to more affordable prices should be welcomed
- Hong Kong’s 2019 fortunes will rest on many factors, not least the outcome of the US-China trade talks, Brexit, and China’s challenging economic transition
Pessimists are expecting the worst. A recent round-up of bearish forecasts includes significant falls in the Hong Kong property and stock markets, a slowdown in mainland China, along with a weaker renminbi, and signs of looming recession in the United States – all made worse by a serious breakdown in US-China economic relations.
As a small open economy, Hong Kong is highly exposed to the ups and downs in the rest of the world. Already, we are hearing warnings from officials who are nervous about revenues and eager to manage expectations about budget handouts. And we are hearing business representatives calling for tax cuts and other measures. This is before we have any real signs of a serious downturn.
To put it into perspective, Hong Kong’s gross domestic product grew 3.7 per cent in the first three quarters of 2018 and the unemployment rate for September to November was a low 2.8 per cent.
It is understandable that our officials worry about possible economic downturns. We know from experience that things can change fast. And these shifts in global economic conditions are completely beyond Hong Kong’s control – we are largely helpless to do much about it.
The optimists are, of course, more cheerful. Essentially, they believe the world will avoid major problems in 2019. They assume that the US and China have far too much to lose from a trade war and protectionism, and the two countries will come to a deal that will encourage trade and investment flows. Such an outcome would be good for consumers in both countries, and would be a boost for US brands wanting to expand on the Chinese mainland. And, of course, it would be good for Hong Kong as an intermediary and trading and services centre.
Optimists also hope that Europe will avoid a disruptive Brexit. (Some local optimists here in Hong Kong see Brexit as an opportunity for the city to benefit from a free trade deal with the UK.) Unfortunately, anyone watching the news in the past few months will have noticed that there seem to be more pessimists than optimists.
One reason to be cautious is simply that the whole world is probably approaching the end of an economic cycle anyway. Economists are pointing to global debt and deleveraging and other big trends as reasons to expect slower growth.
I will stick my neck out and say a slower economy may not be a totally bad thing for us in Hong Kong. In many ways, our economy is at full capacity, with little spare space or labour. After years of rising rents and housing prices, many businesses and households would not mind a fall in accommodation costs.
A return to more affordable housing prices would not only help people get homes, it would help ease a critical social problem and political discontent. Lower business rents would encourage entrepreneurship and economic diversification. A more normal property situation would also confirm that the government is correct to focus on a longer-term strategic approach to land supply.
In both the pessimistic and optimistic scenarios, much depends on US-China relations. This is where 2019 could be a decisive year for the long-term future for all of us.
China faces a difficult and gradual, but critical, transition into an economy based more on technology, higher productivity and also economic equality and environmental sustainability. This transition will be easier if it can happen in an open global trade and investment environment. That means when Chinese and American leaders negotiate this year, they need to agree to serious reciprocal market access. Both sides will have to give some ground on opening various domestic sectors to external competition.
If they can do it, China will be able to use access to US know-how, technology and markets in upgrading its economy, while US investors and producers will be able to share the benefits of China’s continued development. Consumers on both sides will win. It would pay dividends in terms of trust and stability as well.
If the world’s two biggest economic powers retreat into protectionism and distrust, both countries, and the whole world, would suffer from lost opportunities. Of course, it would set Hong Kong back too – possibly for many years. A huge amount depends on what happens in 2019.
Bernard Chan is convenor of Hong Kong’s Executive Council