he warning is stark. “The China-US trade conflict has been escalating again, with both sides announcing an increase of tariffs. There are worries in the market about advanced economies entering economic recession, the worsening external situations and persistent violent clashes in the Hong Kong community, leading to the gradual formation of an economic typhoon that is poised to hit Hong Kong directly,” wrote Hong Kong Financial Secretary Paul Chan in his official blog on August 25.
Figures show that visitor numbers to Hong Kong have dropped by 50 percent, Chan said. Many hotels and restaurants have been forced to send staff on unpaid leave, and Chan said he is worried that if the situation continues, people may get laid off. “The adverse effects of the sustained conflicts in Hong Kong over the past two months to the economy are gradually emerging. Whether the impact will expand, widen or spread and affect the ‘rice-bowls’ of more people depends on the goodwill of everyone,” Chan wrote.
Chief Executive of the Hong Kong Special Administrative Region (HKSAR) Carrie Lam said in early August that the protests were hurting the economy more than the 2007-2008 global financial crisis and the devastating SARS epidemic of 2003. She lamented that the negative impact to the economy cannot be mitigated in the short term. “Some people say it’s like a tsunami,” Lam told reporters during an earlier public appearance.
In reality, economic data for the first two quarters of 2019 indicated a downward trend in Hong Kong before the extradition bill revision crisis was ignited. According to Zhang Yansheng, a researcher with the China Center for International Economic Exchanges, a Beijing-based think tank, there are three reasons for the economic slowdown in Hong Kong. Firstly, the region has been buffeted by the external global financial situation, including impacts from a slowdown in the Chinese mainland and the deteriorating US economy. Second, Hong Kong’s economy is mainly focused on finance and real estate which is prone to global economic and political disturbances. Lastly, its high Gini coefficient indicates a huge disparity between the rich and the poor which can cause economic and political instability. In October 2018, Hong Kong’s Gini coefficient, a measure of income distribution from zero to 1, was 0.539, which indicates great income inequality, according to the South China Morning Post. The report said that the poorest would have to work three years and eight months to make what the richest earn in a month. Recent economic data indicates a GDP growth forecast for Hong Kong for as low as zero, down from the previous range of 2 to 3 percent. Liao Qun, general manager and chief economist of the research department, China CITIC Bank International, predicted that due to the social turmoil since June which will impact the local economy, overall GDP for 2019 will measure around 0.8 percent.
“For the short term, industries such as tourism, retail and transportation will be influenced a lot, while pillar industries including trade, shipping and finance won’t be critically impacted. Once the unrest ceases, Hong Kong’s economy can get back on track very soon,” Liao told NewsChina. He cautioned that if the social disturbance continues, capital outflow caused by loss of public confidence might wreak more devastation on the Hong Kong economy.
Zhang was more optimistic. He believes the instability is controllable and its impact on the local market, investment and legal environment will be limited. “This issue’s impact is temporary. But [overcoming] the existing deep economic and political problems, including the local government’s governance incapability, will be vital to the long-term stability and prosperity of Hong Kong.”
On August 15, the government adopted a HK$19.1 billion (US$2.4b) spending package in a bid to stimulate the economy, aiming to release the pressure shouldered by enterprises and residents.
The policy stipulates that to help small- and medium-sized enterprises (SMEs) weather the crisis, the local government will waive 27 types of fees and charges for 12 months to benefit sectors including maritime, logistics, retail, tourism, construction and fisheries.
In the 2019-20 Budget the government planned to reduce salary tax, personal assessment tax and profits tax by 75 percent. The government soon announced the tax reduction will be increased to 100 percent. As a result, some 1.43 million taxpayers will benefit from a further saving of HK$1.84 billion (US$233m).
There will be direct subsidies to ordinary citizens. Apart from an extra allowance for social security recipients, the government promised to provide a subsidy to kindergarten, primary and secondary school students at HK$2,500 (US$318) per head in the 2019/20 school year to alleviate parents’ financial burdens.
Other measures included providing an electricity subsidy of HK$2,000 (US$255) to each residential electricity account and paying one month’s rent for lower income tenants living in public rental units.
These policies are scheduled to be implemented from October 2019. Chan said the package is expected to boost Hong Kong’s economy by 0.3 percent.
Liao sees the measures as temporary incentives to stabilize the shaky economy, mitigating to a certain extent the impact on low- and middle-income residents. “From a long-term perspective, the most important issue for Hong Kong people is the housing issue. As demand continues to exceed supply, how to increase the housing supply remains unresolved as always.”
In October 2018, Lam announced the “Lantau Tomorrow Vision” project which would reclaim another 1,700 hectares of land near Lantau Island to provide homes for up to 1.1 million people. The first phase is scheduled to start in 2025 and finish by 2032. The area is planned to become a new business center for Hong Kong which can provide more than 340,000 job opportunities.
Liao said the plan is promising, but he expressed concern that considering the social instability in Hong Kong, progress on the project might be heavily influenced. “So for the moment, the key issue is to revive and stimulate local economic development. Only when incomes increase will everyone benefit, so the major issue is solving the real estate problem which has been dogging Hong Kong for years,” Liao said.
In February, the Development Plan for Guangdong-Hong Kong-Macao Greater Bay Area was launched. Hong Kong, one of the four key cities involved, occupies a high strategic position, described in the official document as an “international finance center, air transportation hub and trade center.” In Zhang Yansheng’s view, the future of Hong Kong will decide the future of the whole greater bay area. According to Zhang, the Beijing reseacher, there are three planned development stages for the area. The first aims to achieve integrated development of a modern manufacturing and service industry with per capita GDP from US$21,700 up to US$42,300. Then there will be a focus on modern finance and high-end service development to increase per capita GDP further to US$84,600. The third stage is to develop technological innovation and achieve a per capita GDP of US$107,000.
“From a long-term perspective, the economic development of Hong Kong’s economy requires its integration with the mainland,” Liao Qun said. The overall development of the bay area can propel the economy in Hong Kong, with finance and technology as two key drivers for its development. In return, the bay area will also benefit from the integration process, Liao said. Compared to the neighboring city of Shenzhen, a small fishing village which has evolved into a metropolis over the past four decades, Hong Kong’s economic development seems to have slowed. In 2018, GDP in Shenzhen surpassed Hong Kong’s for the first time in 2018.
Liao said that compared to the mainland, Hong Kong’s economy has slowed, but that is natural since Hong Kong was already a developed economy. He compared it to being in middle-age, while the mainland is comparatively young and still has potential to boom. “In fact as a developed economic entity, Hong Kong saw a GDP increase of 2.5 to 3 percent. Though slower than GDP growth in the mainland, it’s still pretty fast compared with other international developed economic entities thanks to the booming momentum supported by demand from the mainland,” Liao said. He believes the momentum will continue, but it depends on whether Hong Kong can grasp the opportunity, especially the potential for new industrial development in high-tech industries.
Zhang said the development of Shenzhen and Hong Kong will be complementary. Shenzhen will lean more toward trade and transportation, while Hong Kong may put more resources into becoming an international shipping center including businesses such as ship registration, freight insurance, financing and ship leasing. Modern finance and multi-tiered capital markets will still need to be served by the comprehensive financial structure in Hong Kong.