Hong Kong: Risk Assessment
Country Rating1
Rating: A1
Business Climate Rating1
Rating: A2
Risk Assessment2
Strong growth expected this year but the risk of a property market bubble will bear watching
Economic growth rebounded sharply in 2010 fueled by the recovery in international trade and an upturn in domestic demand underpinned by expansionary policies. Exports - which represent 350% of GDP - have begun to trend up again, especially capital goods and electronics. Investment has benefited from vast infrastructure projects, easy credit, and a construction boom. Private consumption, the main economic engine, has been bolstered by improvement in the job market, by measures in support of households, and by the positive wealth effect generated by the rise of the Hong Kong stock market's Hang Seng Index and the property market.
Despite a very good first quarter this year (7.2% GDP growth), the economy is expected to decelerate for the full year due to the completion of the restocking process and to the measures taken by the authorities to limit the boom in the property market. Private consumption will remain dynamic, driven by the rise of nominal wages, especially since the introduction of a minimum wage in May 2011. Investment will continue to trend up, buoyed by on-going infrastructure projects like the Hong Kong-Macau-Zhuhai Bridge and continuing low interest rates. And exports will moreover benefit from the strong economic growth in mainland China. On the supply side, financial services, sea transport, logistics, retailing, and tourism will continue to enjoy rapid growth. Inflation, particularly the increase in property prices, will bear watching. To stem the rise of prices, the authorities have very little room for maneuver with the dollar-pegged fixed exchange rate regime in force and the absence of controls on capital movements constraining monetary policy. In this context, Hong Kong has tended to follow the United States' lead in adjusting monetary policy, with interest rates remaining low in consequence, spurring growth of the money supply on which the availability of credit depends. In 2010, the property sector was the beneficiary of half the total amount of the loans granted. When property prices surged 20%, government authorities intervened to limit speculation and protect banks from a sharp decline in mortgage values. The risk of the property bubble bursting will thus bear watching this year.
Solid financial position and robust banking sector
The current account surplus remained stable in 2010 and could grow in 2011 as a result of the dynamism of continental China and the boom in services (tourism, financial services, merchandising, and logistics). In this context, foreign-exchange reserves will remain at satisfactory levels.
Besides, the Hong Kong dollar is expected to remain pegged to the US dollar in 2011, even though the chief of the executive evoked the long-term possibility of establishing a link between the yuan and the Hong Kong currency.
The banking system meanwhile has remained solid as evidenced by its good capitalization ratios and low proportion of nonperforming loans. And it benefits from effective oversight.
Reforms under way
In the political arena, 2010 was marked by a start in the reform of the electoral system, which paves the way for instituting universal suffrage in the long-term.
This reform represents the first major change in the election code since the 1997 retrocession. The reform will increase the number of seats in the assembly from 60 to 70, of which 40 will be chosen directly by the electors. The majority of the deputies seated in the assembly will thus be elected in the voting scheduled in 2012. The composition of the commission responsible for naming the chief of the local executive will moreover be increased from 800 to 1200 members.
However, the pressure exerted by democratic parties for the institution of direct universal suffrage is nonetheless expected to continue to weigh on relations with Beijing, which is not ready to envisage such reform before 2017.
Strengths
- Successful specialization in services (92% of GDP)
- Strong, transparent banking system
- Quality infrastructure
- The “one country, two systems” principle will likely endure considering the complementarity of the Chinese and Hong Kong economies
- Good business environment
Weaknesses
- Economy vulnerable to a slowdown in the Chinese economy
- Industry completely delocalized to continental China
- Increasing competition from continental China in the services sector
- High exposure to the property sector
- Growth of inequality in the territory
- Lack of transparency of financial data