As the world’s post-Covid recovery takes off, a closed Hong Kong is poorer than it thinks

The city’s economy relies on four business pillars. Finance and property have proved Covid-resilient; tourism and logistics have been severely damaged
The city is rich, and its reserves mean it can ride things out by giving away free money to puff up GDP. But it is becoming poor as a place to work, study, or shop – and its zero-Covid approach means it risks missing out as the rest of the world speeds past

Neil Newman

Published: 9:30am, 15 Nov, 2021

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I felt rather privileged to receive a note from the chairman and CEO of British Airways to tell me a historic event had occurred: the vast majority of people in the UK, fully vaccinated and with a quick Covid test, could again fly to the United States. After 18 months of disruption, non-essential travel is being welcomed back by America across its air, sea and land borders.

This is a big deal for Mexico and Canada, where crossing borders had become a way of life for many thousands who entered the US daily to work, study and shop. Unvaccinated travellers can still engage in essential travel, but only until January next year, at which point everyone needs to be vaccinated to incentivise the stragglers.

ONE WORLD

To mark the event, frenemies British Airways and Virgin Atlantic celebrated with a “synchronised departure on parallel runways at Heathrow”. At 8.30am on November 8, BA001 – the old Concorde flight – and VS003 took flight for the US. It was a little like watching the Red Arrows, but much slower and less exciting – yet it still brought a tear to my eye.

American Airlines staff were wrestling with red, white and blue balloons to decorate Terminal 3 while their old friends at Japan Airlines were checking-in passengers for JL044 to Haneda – including businessmen, who can now go to and from Japan on short trips once the formidable paperwork is in order.

For Japan Airlines and British Airways’ Oneworld alliance partner Finnair, the US opening was also very big news. By April 2022 the Finns plan to have 79 European, 10 Asian and four American destinations back online. Grand news, though it’s still significantly less than the pre-pandemic peak. Back then Japan was Finnair’s second largest destination after Europe, with five routes to Tokyo, Osaka, Nagoya, Fukuoka and Sapporo. The Nordic airline could back then offer the shortest route to 150 European destinations, and it was a favourite of cost-conscious Hong Kong globe-trotters.

01:10

Joy as US borders reopen to fully vaccinated visitors after 20 months of Covid-19 restrictions

Unfortunately, Cathay Pacific, also part of Oneworld, could not join in such festivities this time.

Japan has also decided that enough is enough, and will start to let in increasing numbers of people as a nod to the Japan Business Federation Keidanren, which has been lobbying the government ahead of the general election to set businessmen free. And although the infection rate is still high in Britain, the National Health Service appears to be on top of it and Brits are welcomed.

Europe has been open to double-jabbed travellers from England and the rest of the infected British Isles for a while, with just about everyone moving around during Covid-19 spikes with little more than a PCR test, and taking the risk upon themselves to travel.

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MOVING PEOPLE

This is an immediate boost for airlines and tourism. Prices of transatlantic seats jumped significantly and are certain to stay elevated ahead of the Christmas holidays and New Year’s Eve. An economy round-trip from the US to the UK is running at about US$1,500. This time last month you couldn’t give them away.

Thanks to the generosity of the US and UK governments’ stimulus packages, and being tired of shopping on Amazon, these travellers are loaded and the hotels are pricing accordingly. No wonder Heathrow did not miss a trick and introduced hefty new passenger fees, installing high-speed Covid-19 testing at up to £119 (US$160) for outbound and £189 for inbound travellers in all the terminals, with a drive-through option too. And then they nick five quid from drivers just to drop off passengers.

A Covid-19 testing centre at London’s Heathrow Airport. Photo: Neil Newman

There are mixed views on when the airline industry will recover to pre-pandemic levels of activity, but as travellers return to the skies for non-essential journeys, the general expectation is that we won’t see load levels near “normal” until at least 2023, as some consumers remain hesitant. But fast-moving businesses, such as Heathrow Airport, can cash in alongside the airlines to catch the surge in demand coming off a very low base.

MOVING BOXES

Aside from moving people, the airlines have made ends meet by transporting goods while ocean shipping was still in a fix. Ports such as Los Angeles and Long Beach still have 7-12 day berthing wait times, though they are stepping up their game and according to US President Joe Biden will work 24/7 to reduce the logjam caused by various Covid-19 knock-on effects. Yet at the containers’ departure points in Shanghai and Shenzhen, the wait times to berth and transfer cargo are much shorter, at 1-3 days. This suggests that port operations are a lot smoother in China than say, Europe or the US where Rotterdam and Savannah ports are near 6-day waits.

That sure sounds like good news for Hong Kong’s logistics business, especially if container traffic continues to improve through to Lunar New Year. The risk, though, is mainland China’s zero-Covid policy, which Hong Kong also adheres to. Even the smallest wave of infections could delay operations and throw a spanner in the works of the whole operation.

Some shipping industry analysts are thinking much along the same lines as the airline industry, expecting a global return to normal around 2023-2024, although in the short term the recovery could be more swift. The electronics industry, and the automotive industry which relies on it, is also talking about another two years of disruption. Electronics, particularly internet-connected devices such as computers, tablets and smartphones along with all of the infrastructure that supports them, is not likely to see demand drop off even beyond that, as working from home will continue to be a global trend as future outbreaks keep this region and that away from the office.

04:32

Asia’s ‘walled city’: why Hong Kong’s travel curbs hurt more than tourism

MOVING THE ECONOMY

Hong Kong has a near-unique economy. In the past I have likened it to that of Monaco and predicted that in future it could really prosper as the “ Monaco of Asia”, with an economy largely based on financial services, property and tourism. The port will go.

However, Hong Kong’s economy is currently also driven by a fourth industry in addition to the three I mentioned above: trading and logistics. Now, the pandemic has not hit these all at the same rate, with financial and other professional services and property being the most resilient, tourism decimated, and trading and logistics somewhere in-between.

Certainly, Hong Kong is rich in terms of reserves. There is no doubt it can ride out Covid-19 for a long time and keep puffing up GDP by giving away free money. But our city is becoming poor in terms of its international standing as a place to work, study, or shop.

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The fact that Hong Kong doesn’t make much of anything, does not rely on car or computer manufacturing, and progressively relies less on logistics has worked to its advantage in this crisis. But the recovery will be hampered as long as Hong Kong’s borders remain this tightly closed, causing the city to miss out on revenue that comes from its connection with the rest of the world, particularly in trading and tourism. The bottom line is Hong Kong relies on the flow through of money, goods and services.

November is turning out to be a pivotal time for the world’s largest economies and trading partners, one in which they start doing new business while at the same time facilitating tourism. They are willing to take a risk based on the assessment of that risk and about their ability to deal with a Covid-19 outbreak. Hong Kong should be able to do this too, given its history with SARS and the people’s willingness to strictly adhere to personal hygiene measures. The fast-moving businesses that can tap the surge in spending through the relaxation of quarantines and Covid-19 restrictions will do well, which puts the HKSAR Government in a difficult position. It can stick with a zero-Covid policy and 21-day quarantines, in which case Asia’s World City effectively remains closed while the rest of the world speeds past; or it can take a risk, open up now and benefit from the global reopening.

Neil Newman is a thematic portfolio strategist focused on pan-Asian equity markets