Hong Kong’s Chief Executive Carrie Lam’s policy address at the end of November was her first speech since the enactment of the national security law in June. It came at a time when protests have largely dissipated, but political tension and polarisation within society remain high.
The speech placed significant emphasis on Hong Kong-China integration, and many of the economic policies—from finance, to tech to youth employment—included a mainland China element.
Ms Lam didn’t announce any new fiscal stimulus apart from some targeted support to the tourism and creative sectors. Many small businesses that are struggling will be disappointed, especially as the city is experiencing another wave of COVID-19 infections.
We think that after rolling out a record-breaking stimulus package of HK$310 billion ($40 billion, or 11.5% of GDP) this year, concerns around Hong Kong’s fiscal health were responsible for this more prudent approach (Exhibit 1). Indeed, Ms Lam’s speech acknowledged an expected decline in government revenue due to a weak economy and the difficulty in increasing expenditures. We believe this is an indication the government will consolidate its spending at a faster pace than we had previously expected.
Exhibit 1: Budget deficits to shrink next year
New initiatives will strengthen Hong Kong’s role as a financial centre
Ms Lam’s speech focused heavily on closer economic ties with mainland China. On economic policies, the policy address stressed efforts to consolidate Hong Kong’s role as “China’s international financial centre”.
New initiatives in the area of finance include: expanding the existing stock connect schemes with China, establishing cross-border after-sales insurance services in China, promoting real estate investment trusts and family office businesses in Hong Kong, and offering tax incentives to attract private equity managers to the city.
Following a record-breaking budget deficit this year due to the roll-out of massive COVID-related fiscal stimulus, we expect some fiscal consolidation in 2021.
The address also announced initiatives in other areas to increase cross-border integration. One of the key highlights is the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) Youth Employment Scheme, which will provide subsidies to companies that hire graduates from Hong Kong universities with job placements in the GBA.
The government will also launch a ‘GoGBA’ platform to help small and medium enterprises from Hong Kong explore opportunities in the GBA. To deepen cross-border ties on the tech front, the ‘Shenzhen-Hong Kong Innovation and Technology Co-operation Zone’ will be established.
We think these initiatives should strengthen Hong Kong’s role as the gateway in and out of China. As we have argued previously, Hong Kong will be able to broadly maintain its role as a ‘regional’ financial and business hub, benefitting from China’s policies to open up. This is especially true in the financial realm.
Hong Kong will continue to attract Chinese companies to list their stocks and bonds on its stock exchange, especially given that the US markets are now less attractive owing to the ongoing US-China tensions and changes in US policies toward Chinese investment.
Indeed, Chinese enterprises now account for 80% of Hong Kong’s stock market capitalisation, a 10-percentage point increase from just a year ago. In addition, the city’s free flow of capital will continue to be a competitive edge vis-à-vis Shanghai and Shenzhen, at least over the medium term.
So far, there are no signs of a large-scale exodus. Anecdotal evidence suggests many foreign companies in Hong Kong have been trying to manage operational and legal risks that they may run into.
Political uncertainty has risen notably, but things aren’t too gloomy just yet
The national security law and the international response, notably the US withdrawal of Hong Kong’s preferential treatment, have dampened confidence among foreign companies and investors. The recent disqualification of four pro-democracy legislators, which triggered the mass resignation of opposition legislators, has certainly added further concerns among domestic and foreign stakeholders in the city.
Some multinationals in Hong Kong have plans or already moved parts of their operations to Singapore amid the rising political uncertainty in Hong Kong, while some will, or have, moved their Greater China operations to mainland China (notably Shanghai).
But so far, there are no signs of a large-scale exodus. Anecdotal evidence suggests many foreign companies in Hong Kong have been trying to manage operational and legal risks that they may run into, rather than planning to leave or move a significant part of their operations out of the city. Indeed, many multinationals in Hong Kong have been actively seeking legal advice on how to avoid violating the national security law while complying with international regulations and US sanctions on Hong Kong and Chinese officials as well as Chinese businesses.
That the number of regional headquarters of corporations rose in 2019, despite local political unrest, is an encouraging sign that Hong Kong will continue to remain attractive to foreign companies. A few US companies did move their regional headquarters out of Hong Kong, and this trend may continue amid the ongoing US-China tensions (Exhibit 2).
Exhibit 2: No signs of large-scale exodus of foreign companies
But companies from other countries, including Europe, are continuing to set up regional headquarters in Hong Kong. Moreover, Chinese companies remain interested in setting up subsidiaries or separate entities in Hong Kong as well, especially those that plan to “go abroad” with their operations.
Given these trends and developments, we think that the role of Hong Kong has not diminished much, if at all, even with the raft of political developments. But that said, the composition and the ‘face’ of Hong Kong’s economy are evolving in reflection of these changes.
Tommy Wu is a lead economist at Oxford Economics. He covers macroeconomic research and forecasting on the Asia-Pacific region and the China economy. Prior to joining Oxford Economics, Tommy was an economist at the research department in Hong Kong Monetary Authority.
