Hong Kong: Risk Assessment
Country Risk Rating
Business Climate Rating
- Open economy
- High-quality infrastructure
- Top-class global financial centre, airlock between China and the rest of the world
- Healthy banking system
- Anchoring of the currency to the US dollar
- Robust institutional quality and judicial system thanks to the “one country, two systems” principle
- Vulnerability to the slowdown of the economy in mainland China
- Mismatch between business cycles in the United States and China, as the HKD is pegged to the USD
- Industry has fully relocated to mainland China
- High exposure to real estate sector and housing unaffordability
- Rising income inequality
- Lack of innovation, both in the financial sector and more broadly
Growth will decelerate in 2019
Growth will remain strong in 2019; but will decelerate slightly owing to external headwinds. The slowdown in the Chinese economy and the global trade war will weaken trade growth: exports represent over 190% of Hong Kong’s GDP, and over 50% of these are re-exports to mainland China. Investment growth might stall on the back of weaker sentiment stemming from uncertainty regarding the trade wars and tighter credit conditions in line with the US FED’s tightening. Hong Kong’s currency board pegs the Hong Kong dollar to the US dollar, and this mandates that the Hong Kong Monetary Authority (HKMA) mirror FED rate hikes. There is a risk that private consumption, which accounts for 68% of GDP, could decelerate as higher rates imply higher debt repayment costs. At the same time, the sector will continue to benefit from better tourism revenues, low inflation, and a tight labour market (unemployment rate stable around 2.5%), which should spur real wage growth. Inflation will remain limited in 2019, even considering strong demand and wage increases, as imported inflation will be reduced with the Chinese renminbi’s depreciation. Rent price pressure should also decrease. Higher interest rates could translate into sluggish housing prices, which may also drag on consumption through the wealth effect. Chinese tourist numbers (75% of total visitors) will likely decline due to slower economic growth in mainland China and the depreciation of the RMB relative to the HKD.
In addition, Hong Kong port activity, a hub of global trade, is expected to continue to grapple with increasing competition from larger, more cost-effective ports in mainland China. The growth of financial services will remain dynamic.
Solid Financial System
The budget balance will remain in surplus in 2019. Moreover, the budgetary situation of the Special Administrative Region (SAR) is solid in view of large reserves, representing above 20 months of expenditure. Even if spending increases slightly following from new infrastructure investments, revenues from land and property sales should remain robust, provided the correction in housing prices is mild – our baseline scenario. Public debt will remain virtuallynon-existent.
The trade balance will deteriorate slightly as goods imports grow faster than exports. The same trend will be observed in the secondary income balance given the amount of exiting remittances. However, the current account will remain in surplus thanks to the significance of resident and local firms’ foreign income repatriation.
Banks should remain strong, even in case of a steep correction in housing prices, thanks to household debt limits and regular stress tests performed by supervisory authorities. In addition, Hong Kong is a top global initial public offering (IPO) centre, and the connection between the Hong Kong and Mainland Chinese stock exchanges, which enable foreign investors to trade listed securities in Shanghai/Shenzhen and vice versa, further cements the city’s role as a financial hub.
The New Head of the Executive Power Embodies Continuity
Carrie Lam was elected as Chief Executive by the Electoral College, in which the pro-Chinese camp has a majority. All three candidates were proposed by a committee set up by Beijing. Carrie Lam was elected in 2017 and will remain in power until 2022. The legislative council remains dominated by a pro-Beijing majority that supports the Chief Executive’s policy stance, limiting any potential discontent from China. Her following of the “one country, two systems” principle will entail curtailing of advocacy for greater autonomy, or independence of Hong Kong. In September 2018, a political party was banned for the first time since Hong Kong’s handback in 1997: the Hong Kong National Party, a small pro-independence party. The Chief Executive will pursue another controversial policy goal: bringing the school curriculum closer to China’s “patriotic” model of education. Popular discontent and political tensions have been a source of concern for the city, as the growing influence from mainland China is not favoured by all. The newly opened bridge and train line are good examples: although both infrastructure developments offer economic benefits, they also pose a specific challenge in relation to the location of customs and border controls. To manage discontent, the government will continue to target funds at youth programs and increase the availability of housing. Internationally, the signature of a free-trade agreement with the ASEAN will favour economic relations with other ASEAN countries.