Hong Kong: Risk Assessment
Business Climate Rating1
Contained slowdown in activity in 2012 and risk of property bubble bursting
The slowdown in economic growth is expected to continue in 2012, due to the deceleration in exports (which represent 350% of GDP) in the context of the eurozone recession. Nonetheless, Hong Kong is well protected despite its commercial openness and its international financial integration. Thanks to a resilient Chinese economy and continued positive growth in the United States, foreign trade will play a smaller role in spreading contagion than it did after the Lehman Brothers collapse. Furthermore, private consumption, the main economic engine, is expected to remain dynamic, bolstered by higher wages and lower unemployment (which has dropped to 3%).
Investment will be sustained by ongoing infrastructure projects (like the Hong Kong-Macau-Zhuhai bridge) and low interest rates. Low rates are attracting, in particular, private Chinese companies who have limited access to credit in mainland China due to the quantitative restrictions imposed. On the supply side, financial services, retail sales and tourism will continue to enjoy rapid growth. In contrast, the property sector is expected to slow, due to measures in place to cool the market: limit set on the debt/equity ratio in order to control household indebtedness, taxes on transactions to discourage speculation, increasing the supply of housing by constructing 20 000 new private residential units a year. In this context, the fall in transaction volumes and prices observed in 2011 is likely to continue in early 2012. Nonetheless, the banks will remain solid, due to the limits placed on household borrowing and regular stress tests carried out by the supervisory authorities.
Coface payment monitoring records are thus expected to remain relatively stable. However, company account information may be sparse for unlisted companies that are not under an obligation to publish their financial statements. But that shortcoming is offset by the claim collection possibilities afforded by an effective legal system, inherited from British law.
Solid financial system and development of offshore yuan market in Hong Kong
Financially, the current account surplus fell in 2011 due to slower exports to the eurozone (9% of total exports). It is expected to remain stable in 2012 thanks to the expected dynamism of mainland China and the boom in services (tourism, financial services). 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 2012, even though the Chief Executive has mentioned the long-term possibility of establishing a link between the yuan and the Hong Kong dollar.
Finally, the Hong Kong offshore yuan market for non-residents established by the Chinese authorities developed quickly in 2011 acting as a testing ground for the yuan's internationalisation. This market is accompanied by an offshore yuan bond market called the Dim Sum Bond market. This market will make Hong Kong the world's financial center for offshore yuan, much like London became the financial center for eurodollars in the 1960s, when controls on capital outflows were introduced in the United States.
Continuity of economic policy after the elections
In the political arena, Leung Chun-ying was elected as Hong Kong's next chief executive by a 1200-member committee, on March 25th 2012. Mr Leung will not assume the position until July 2012, when the term of the current chief executive, Donald Tsang, comes to an end. He will have to contend with various demonstrations by democrats seeking to institute direct universal suffrage. No reform of the method of voting is, however, expected in the near term with Beijing having announced that direct universal suffrage will not be instituted before 2017 for the chief executive and not before 2020 for Parliament (Legco).
- Successful specialization in services (92% of GDP)
- Robust and transparent banking system
- Quality infrastructure
- Retention of the “one country, two systems” principle, considering the complementarity of the two economies
- Good business environment
- Economy vulnerable to slowdown in economic activity in China
- Industry completely delocalized to mainland China
- Increasing competition from mainland China in the services sector
- High exposure to the property sector
- Growing inequality in the territory
- Lack of transparency of financial data