Hong Kong: Risk Assessment
Country Risk Rating
Business Climate Rating
- Flexibility of the economy
- High-quality infrastructures
- First-rate financial center, airlock between China and the rest of the world
- Healthy banking system
- Favorable business climate
- Anchoring of the currency to the US dollar
- Maintaining the “one country, two systems” principle between mainland China and Hong Kong
- Vulnerability to the slowdown of the economy in mainland China
- Exposure to the US economy via the US dollar anchoring
- Industries fully relocated in mainland China
- High exposure to real estate conditions characterized by lack of housing
- Rise of inequalities
- Lack of transparency of financial information
Activity Will Slow Down in 2018
2017 was the year of the strongest growth in six years, thanks to exports to Chinese and European markets, as well as domestic demand. Household consumption was the main driver, supported by a wealth effect due to the excellent health of the stock market. However, activity will slow down in 2018. The slowdown in the Chinese economy and new trade barriers in key markets, such as the United States, will negatively affect the exports of goods and services (200% of GDP, more than 50% of which goes to mainland China), especially tourism (Chinese representing over 75% of visitors). The Hong Kong dollar will remain anchored to the US dollar. The key rates have been adjusted to reinforce the anchoring. This will continue to weigh on competitiveness. In addition, China’s anti-corruption policy and entry quotas initiated by the island will lead some Chinese tourists to focus on other destinations and spend less. In addition, Hong Kong port activity, a hub of Chinese trade is expected to continue to suffer from increasing competition from mainland China ports. However, the growth of financial services will remain dynamic.
In addition, even if real estate prices and rents hinder growth, consumption will remain well-oriented thanks to the increase in disposable incomes and to an easing of the pressure on import prices through a depreciation of the renminbi against the Hong Kong dollar. It will be very vigorous in the luxury sectors (fashion, cosmetics, and electronics) because of the concentration of income among the wealthy classes. However, the low unemployment rate – 3.1%, close to full employment –, regular wage growth and increased redistributive spending for the poorest and the elderly will help stimulate other sectors. Confident and attracted by a further 8.25% reduction in corporate taxes, foreign investors will finance projects in the new technology, transportation, and real estate sectors. The latter will remain a significant risk factor in 2018, despite measures to contain prices and prevent the bursting of a housing bubble.
Solid Financial System
The budget balance will remain in surplus in 2018; the budgetary situation of the Special Administrative Region (SAR) is solid in view of large reserves, representing almost 23 months of expenditure. The public debt will remain virtually non-existent. Despite a slight decrease due to the increased imbalance in the trade balance, the current balance will remain largely in surplus. The significance of resident and company foreign investment income makes it possible to transition from a trade deficit in goods to the current account surplus. In this context, the level of foreign exchange reserves will remain satisfactory at 8.5 months of imports.
Banks should remain strong, even if the real estate bubble bursts, thanks to household debt limits and regular stress tests by supervisory authorities. The offshore non-resident yuan market is generating an offshore yuan bond market, which is expected to remain buoyant in 2018, making Hong Kong the world’s financial center for xeno-yuan. In addition, the connection between the Hong Kong and Shanghai stock exchanges since 2014 allows investors on the island to exchange-listed securities in Shanghai and vice versa.
The New Head of the Executive Power Embodies Continuity
In March 2017, Carrie Lam, former chief secretary of the Administration, was elected, for five years, head of the executive power by the Electoral College, in which the pro-Chinese are the majority. She won against two other candidates, also from the upper administration of the SAR and selected by a committee set up by Beijing. Her previous duties suggest that there will be no major change in political leadership. The main challenges will be the management of popular discontent, relations with the opposition and the Chinese central government. She will avoid the political controversies related to Chinese interference and the limits of the “one country, two systems” principle, focusing on the economy. She intends to integrate young people into civic life and introduce educational reforms. The “Umbrella Revolution” of 2014 and the rejection in 2015 by the pro-democracy parliamentarians of the voting system considered a “sham democracy”, with Beijing retaining control over the candidates, confirm that identity and political tensions subsist. A free trade agreement between ASEAN and Hong Kong is under negotiation. Finally, despite a lack of transparency of financial information, Hong Kong enjoys a very favorable business climate.