Macroscope | New year, new reasons for optimism on Hong Kong’s economy

In a report published earlier this month, Nomura said Hong Kong’s economy had been on a roller-coaster ride this year. No sooner did the reopening of the city’s borders with mainland China boost growth and asset prices than the rebound fizzled, undermined in part by the unexpectedly sharp slowdown in China’s economy.

Nomura said this “led to an anticlimactic conclusion to this highly anticipated recovery”, yet this is just one of many blows Hong Kong has suffered in the past six years as a succession of external and domestic shocks have hit the city hard. These crises have not just impeded recovery but have also sowed doubts about the underpinnings of Hong Kong’s role as a global financial centre.

One would be hard-pressed to find another major economy that is in a more disadvantageous position. Caught between the Scylla of China’s severe economic problems and the Charybdis of the US Federal Reserve’s most aggressive monetary tightening campaign in 40 years, the city has ended up with the worst of both worlds when the global economy is still recovering from the Covid-19 pandemic and geopolitical and monetary policy risks are acute.

The outlook for Hong Kong remains uncertain due to a lack of consensus over the two big determinants of the performance of the city’s economy and asset prices: mainland China’s growth prospects and the scope for cuts in US interest rates.

Making the right call on Hong Kong means getting mainland China and the Fed right, a challenge that proved devilishly difficult for investors this year. However, barring new shocks, 2024 looks like the year when headwinds could turn into tailwinds.

While scepticism is warranted given the frequency and intensity of shocks in Hong Kong since 2018, the confluence of a stabilisation of mainland China’s economy – in particular the bottoming out of the downturn in the crucial property sector – and the Fed’s shift towards less restrictive policy could serve as the catalyst for a marked improvement in sentiment.