Hong Kong’s economy will prove harder to revive than after Sars, but city must find a way

Ties with the mainland were invaluable in rescuing the city’s economy after 2003, but the rise of competitors means Hong Kong can’t take that for granted now
A post-pandemic rebound in a challenging global environment will take not just mainland ties but integrating into new supply chains and rebuilding the city’s international image

Janet Pau

Published: 12:30pm, 17 Jan, 2023

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Hong Kong’s economy bounced back strongly following its health crisis 20 years ago – the severe acute respiratory syndrome (Sars) outbreak. Back then, the rebound was swift. This time, it will be more challenging and Hong Kong must find new ways to revitalise its economy.

In the aftermath of Sars in 2003, the Closer Economic Partnership Arrangement (Cepa) between the mainland and Hong Kong that fostered trade and investment liberalisation proved to be a lifesaver, resulting in a boom in trade, logistics, and professional and business services. An individual visit scheme led mainland tourists to flock to Hong Kong.

In the next several years, Hong Kong achieved strong annual GDP growth rates of above 6 per cent. Subsequent supplemental agreements brought further liberalisation measures. The introduction of Cepa also coincided with China’s global integration, enabling Hong Kong to play an essential intermediary role.

With recession or at best anaemic GDP growth expected in Europe and the United States this year, China’s ongoing reopening will give global economic growth a much-needed boost. Chinese consumers have more spending power than they did 20 years ago, and any destination or sector that serves Chinese consumer needs at home or abroad stands to benefit.

More than three-quarters of visitors to Hong Kong before the Covid-19 pandemic were from the mainland, reaching more than 50 million people in 2018 at its peak.

However, the repatriation of consumption in China during the pandemic, and the emergence of competitor destinations – such as Sanya in Hainan province for duty-free shopping, Singapore for property investment and Seoul for arts and culture – means Hong Kong must improve its game to boost the volume of travellers spending and investing in the city.

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China remains a global trade powerhouse. Its goods exports to the US amounted to about US$500 billion in 2022, more than tripling from US$150 billion in 2003. Exports to the European Union grew even more rapidly, from less than US$100 billion to more than US$500 billion in the same period.

For two decades, mainland China’s growing trade significantly benefited Hong Kong as a transshipment hub. As of 2019, more than 40 per cent of Hong Kong’s total trade consisted of re-exports going between the US and mainland China.

But the trust deficit between China and its largest trade partners threatens to reverse these rising trends. The US is implementing more protectionist policies, including restrictions on sectors ranging from semiconductors to green technologies, as it seeks to become less dependent on international supply chains.

Although Hong Kong’s dependence on mainland China has increased over time, China’s own exports account for a shrinking share of its economy, falling from 27 per cent of GDP in 2003 to 20 per cent in 2021. The reduced centrality of China in global supply chains means that its trade growth, which has buttressed Hong Kong’s pillar industries in the past two decades, could further weaken in the future.

Hong Kong’s post-pandemic economic rebound will depend not just on closer connections with mainland China but also on its ability to integrate into new supply chains that have diversified away from the mainland through the provision of capital, technology and expertise.

Having said that, some of the potential new markets are struggling with debt issues and are vulnerable to debt distress or default in an environment of rising interest rates. Ultimately, Hong Kong does not have the luxury to choose but must maintain ties with both old and new markets.

On the people side, higher inflation and stagnant real wages are likely to mean potential tourists in the region will tighten their belts and look for closer locations to visit. It could take a long time before tourism rebounds fully, but Hong Kong should boost its attractiveness to high-quality regional tourists. The city needs to restore its reputation of openness, cultural diversity, efficiency and predictability to attract travellers to visit and talent to stay.

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Ensuring Hong Kong strengthens its attractiveness in sectors that serve mainland China, Asia and other regions in a less-globalised world is no small feat. Sectors with less risk of decoupling and bifurcation because of geopolitical conflict will hold promise.

The health sector, sustainable infrastructure, mobility, consumer products and services catering to key demographic segments of ageing consumers and young, tech-savvy consumers are all promising areas for growth.

Fostering skill upgrades for Hong Kong’s workforce by collaborating with businesses and academic institutions, offering entrepreneurship incentives and bridging talent and ideas with capital will all be common ingredients to help enhance the prospects of job-rich growth and productivity across these sectors.

In the end, not every sector will win, but multiple sectors will still benefit from policy coordination to create the well-run ecosystem and regulatory environment they need.

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Generating new growth opportunities for Hong Kong and improving the incomes of its skilled and educated population are an important task, but the much more challenging global economic and geopolitical environment will mean none of it will be easy for Hong Kong.

Finally, what the current period has in common with the era after Sars is that the population is fatigued and stressed from the fear of infection and public health interventions that have made life difficult for many. However, this time, the duration of the outbreak has been much longer. Revitalising the economy will be a key part of improving the livelihoods and quality of life for those who call Hong Kong home.

Janet Pau is executive director of the Asia Business Council