For a true picture of Hong Kong’s economic challenges, look beyond brave headline numbers

While the economy grew 4.1 per cent in the third quarter, and unemployment and bankruptcy rates do not appear worrying, the feeling on the ground is quite different. In time, much more economic harm is likely to be revealed

David Dodwell

Published: 8:30pm, 5 Nov 2023

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In the wings of Chief Executive John Lee Ka-chiu’s doggedly upbeat policy address on October 25, Financial Secretary Paul Chan Mo-po is talking more cautiously about Hong Kong’s economy “gradually recovering”.

Hong Kong’s third-quarter gross domestic product growth was up 4.1 per cent year on year. In his budget speech in February, Chan had forecast GDP growth of 3.5-5.5 per cent for the year, but in August, the expected growth rate was revised to between 4 and 5 per cent. We will have to wait until Friday’s GDP data to discover if that will hold – Chan did say on Sunday that local economic growth this year would be lower than previously expected.

My own bet is that Chan will draw a deep veil around the gruelling challenges still facing Hong Kong’s economy, even though he has already warned that “heightened geopolitical tensions and tightened financial conditions may linger for a longer while”. Whatever his headline numbers proclaim, much of the background data available to us raises alarm bells.

Predictions that GDP growth will be lifted by a recovery in household consumption and a jump in tourist spending seem fragile – if not brave. Median monthly household income fell 2.8 per cent to HK$28,200 (US$3,604) between 2019 and 2022, with the poorest 20 per cent of households down by 10.7 per cent to HK$5,000. Now that the government’s HK$100 billion splash on consumption vouchers has ended, just where will this extra consumer spending come from?

And as for tourist spending, the shuttered bars and restaurants in Lan Kwai Fong, SoHo and Causeway Bay show that recovery remains a distant hope.

While the “feel” of Hong Kong still suggests recession – despite the government’s “Happy Hong Kong” and “Night Vibes” initiatives – the numbers that would make the picture clearer remain confusing.

Bankruptcies are at their lowest level since 2000 despite the pervasive anecdotal evidence of the company bosses I talk to. A recent International Monetary Fund working paper says around 10 per cent of companies worldwide – and about 12 per cent in Hong Kong – are “zombies”. Perhaps “zombification” is a phenomenon that our government finds hard to measure.

Government data shows that unemployment remains low, and both salaries and profits tax revenues are up since the start of the Covid-19 pandemic. Perhaps the anaemia that we feel is obscured by cuts in working hours and take-home pay, and the number of Hongkongers who work unnoticed and unrecorded in the “informal” economy.

Maybe there is simply a time lag before salaries and profits tax revenues begin to fall. At this stage in the Covid-19 recovery, it is impossible to tell.

While spending by Hong Kong’s poorest remains squeezed, our propertied middle classes are also facing acute difficulties. The Monetary Authority reported at the end of October that the number of families facing negative equity – as their mortgage debts have risen above the value of their homes – leapt from 3,341 in June to 11,123 in October.

As their property wealth has wilted, so too has the value of their stock market savings. Hong Kong’s stock market has fallen by over 20 per cent from this year’s high of 22,700. Stock market turnover in the first nine months of this year was HK$109.7 billion a day on average, compared with a daily average of HK$166.7 billion for the whole of 2021.

A woman takes a selfie near a screen showing the Hang Seng Index outside Exchange Square in Central on October 24. Photo: Jelly Tse

This comprehensive wilt is terrible for the government, too. From its very narrow revenue base of profits tax, salaries tax, stamp duties and land premiums – these account for around two-thirds of all revenues – all income streams are under stress.

The collapse in stock market turnover has clobbered stamp duties, as has the contraction in both domestic and commercial property sales. Rating and Valuation Department figures show that domestic property transactions were down around 40 per cent last year and were trending slightly lower in the first eight months of this year; and commercial property sales were down 48 per cent, and show no sign of an upturn. The government’s land auction revenue slumped from HK$143 billion in 2021-22 to HK$69.9 billion in 2022-23, with (an optimistic) forecast of HK$85 billion this year.

The impact on the government’s balance sheet has been terrible. After an estimated budget deficit of HK$139.8 billion last year, Chan forecast in February that the 2023-24 deficit would narrow to HK$54.4 billion this year. On October 27, he warned that the deficit could be more than HK$100 billion; accounting firm Deloitte projects that it could widen to above HK$130 billion.

The result has been a precipitous collapse in Hong Kong’s fiscal reserves – from around HK$1.1 trillion 3-4 years ago, to perhaps HK$800 billion by the end of the current financial year. To be fair, much of this collapse has been due to around HK$600 billion that was spent on anti-epidemic treatment and relief, but the fall is forcing the government to explore different funding options for its more ambitious infrastructure projects.

It also puts pressure on commitments to cut carbon emissions, initiate climate change mitigation measures, such as flood prevention, and preparedness for the next pandemic.

Quite how this litany of terrible and unstaunched contractions can leave Hong Kong with a forecast economic growth of 4-5 per cent is a puzzle to me. But I fear that a boost to local consumption and a revival of tourism activity will fall far short of generating recovery. In time, much more economic harm is likely to be revealed, and John Lee’s “Happy Hong Kong” vision may be further off than he hopes and predicts.

David Dodwell is CEO of the trade policy and international relations consultancy Strategic Access, focused on developments and challenges facing the Asia-Pacific over the past four decades