Hong Kong budget: Paul Chan’s forecast of a quick recovery from Omicron is just not realistic

The financial secretary acknowledged the impact of the Omicron wave but expected a swift recovery in the rest of the year
With a zero-Covid policy in place, can Hong Kong really reopen to the mainland and the rest of the world in a matter of months?

David Dodwell

Published: 4:28pm, 25 Feb 2022

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There was a sense of surreal disconnection as I listened on Wednesday to Financial Secretary Paul Chan Mo-po unveil his 2022 budget. On top of the social distance of the video conference was the economic distance between the almost normal picture he was painting, and the zombie economy we are feeling for ourselves.

Paul Chan’s description – 6.4 per cent economic growth in 2021, with unemployment down from 7.2 per cent to 3.9 per cent, private consumption up 5.6 per cent and exports up 19 per cent – does not match what I see: shuttered stores and empty streets, restaurants under curfew from 6pm, and thousands of small enterprises on life support.

Our hotels would be zombies too, were they not providing quarantine facilities and a smattering of staycations to our hermit population.

04:18

Hong Kong budget earmarks HK$170 billion in fight against Covid-19

Hong Kong’s statistical measures have always been adrift from the reality on the street, but the past two pandemic years have created a clear and cruel disconnection. How is it, for example, during what the International Monetary Fund has said is the deepest recession worldwide in a century, that our Official Receiver’s Office has reported fewer bankruptcies in 2021 than in almost any year in the past decade?

How is it that bankruptcies could surge in 2002 and 2003, around the severe acute respiratory syndrome outbreak, and again after the 2008 financial crisis, but flatline through the Covid-19 pandemic?

Despite the disconnect, our financial secretary, who could be a leading candidate to succeed Carrie Lam Cheng Yuet-ngor as chief executive if she opts not to stand for reselection in May, on Wednesday acknowledged the real-world distress being experienced by most Hong Kong families.

“The new wave of epidemic has disrupted the pace of economic recovery,” he said. The pandemic has “dealt a heavy blow to many people, disrupting both their life and work, and seriously affected the operations of small and medium-sized enterprises”, creating a “gloomy atmosphere”.

While he remained optimistic about the medium term, he acknowledged that the Omicron wave had created short-term challenges.

He said he was “not optimistic” about the first quarter of 2022, but expected recovery to resume soon thereafter, underpinning his forecast for 2022 growth of 2 to 3.5 per cent.

To achieve this, he has allocated HK$170 billion to fight the pandemic and see the community through the crisis. This includes HK$67.5 billion for specific antivirus efforts, like HK$22 billion to strengthen testing capacity, HK$12 billion for building quarantine facilities and HK$6 billion to buy vaccines.

There will be a fresh round of HK$10,000 consumption vouchers, salaries and profits tax cuts up to HK$10,000, and a HK$1,000 cut in electricity charges.

But it is beyond these life-support outlays that Chan’s budget starts to look surreal – because it assumes a quick return to pre-pandemic normality. In an economy starved of oxygen, he is dispensing aspirin.

How can funding help tourism development, arts development, biotech start-ups, aviation, air cargo, investment promotion and the Trade Development Council and its conventions and trade fairs when zero-Covid rules shut Hong Kong off from the rest of the global economy?

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Even if a biotech investor wants to take advantage of one of the many incentives Chan plans to offer, he or she is unlikely to travel to Hong Kong at present to explore.

If the financial secretary believes that Hong Kong can move within months from March’s compulsory testing to bringing Covid-19 cases down to zero, opening up to the mainland and then to the rest of the world, and restoring normal air travel to Hong Kong, then I for one believe he is deluding himself.

Even if the testing blitz proves to be a swimming success, the reduction of home-grown cases will be gradual, and restoration of anything resembling normal economic activity cannot be likely until the later part of the year.

When the rest of the world is already accepting and living with Covid, Hong Kong’s “dynamic zero Covid” strategy would be put in immediate jeopardy when international travellers are allowed back in Hong Kong. We might be able to open to the mainland, but quarantine would need to remain in place for travellers arriving from countries where the virus runs loose and unmonitored.

Paul Chan made much in his budget speech of the recovery opportunities open to Hong Kong on the mainland, and in particular in the Greater Bay Area. But without opening to global markets, Hong Kong’s value to both China in general and the Greater Bay Area in particular is severely limited. To recover, Hong Kong needs to open both ways. And while “zero Covid” stays in place, that remains an impossibility.

Hong Kong budget sweeteners help, but economists worry about Covid-19 strategy

Perhaps the only seriously good news in the budget is the extraordinary and unexpected budget surplus. Instead of a HK$100 billion deficit forecast a year ago, the financial secretary now expects a surplus of HK$18.8 billion, mainly because of a windfall in land auction revenue and profits tax. Hong Kong is a rare and lucky economy to be confronting the pandemic with almost no debt, and with reserves back up to HK$950 billon.

With such robust reserves, the administration has been able to lift eyes beyond immediate adversities, and keep faith with commitments to Lantau Tomorrow Vision, the Lok Ma Chau Loop, and the 330,000 homes to be completed in the next decade.

I can admire the financial secretary’s optimism, and ability to focus on long-term challenges. But his unrealistic faith in a speedy revival after Omicron puts these long-term aims in jeopardy. The handouts may buy us a little time, but while “zero Covid” stays in place, that may not be enough. I pray I am wrong. We will find out soon enough.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view