Hong Kong reopens further into an uncertain 2023

HONG KONG’S economy is likely to recover next year from a tumultuous 2022, observers told The Business Times, but the path ahead is not necessarily smooth. The city’s ability to attract and retain talent and how it can instill confidence in investors are among the key factors determining how robust its growth will be in 2023.

Analysts told BT they are expecting Hong Kong’s economy to shrink this year, and notch growth of between 1.4 to 3 per cent in 2023, with growth is likely to only pick up significantly in the second half of next year.

They add that the city’s expected growth next year is due to a lower base in 2023, and is largely dependent on how investors and residents are responding to the pace of China’s and Hong Kong’s reopening after three years of Covid-19 restrictions into a dimmer global outlook. 

“Investment sentiment will be key for Hong Kong’s economic outlook beyond consumption,” said Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis. 

“The city’s eroded competitiveness due to the lost years during Covid-19, coupled with investors’ pursuit of diversification to buffer the US-China tensions also affected Hong Kong’s attractiveness,” she added.

In 2022, Hong Kong tightly controlled its borders to combat the spread of Covid-19. The resulting restrictions on travel prompted residents and expatriates to leave the city, and weighed on consumer and investor sentiment. In November, the government said it now expects the economy to shrink by 3.2 per cent for the year.

On Tuesday (Dec 13), Hong Kong’s government finally dropped some of its remaining restrictions that would have otherwise prevented visitors who test negative for Covid-19 on arrival from entering bars and restaurants in their first three days of arrival in the city, chief executive John Lee said at a press conference on the same day. The change takes effect on Dec 14.

The government will also scrap a rule requiring individuals to scan a QR code that would show their vaccination status on a health app in order to enter venues. Some locations will still require proof of vaccination, however, Lee said.

Hong Kong’s reopening, coupled with the government’s plans to attract talent, should bode well for the city’s outlook next year. Louisa Fok, China equity strategist at Bank of Singapore, noted that airport net departure numbers have stabilised recently, while immigration visa data seem to denote an uptick in applications.

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“These would have important implications on whether there’ll be a population net inflow,” which in turn affects consumer sentiment and economic activity, she said.

“A further reopening of the city will likely be reflationary, lifting domestic consumption and the services sector. Within services, we think retail and travel related ones will benefit and contribute to growth,” said Lloyd Chan, senior economist at Oxford Economics.

Even as Hong Kong makes steps towards dismantling pandemic-era restrictions, all eyes are on mainland China’s easing of pandemic curbs.

The Hang Seng Index, a gauge of the city’s S$5.8 billion stock market, has been swinging wildly in recent weeks as investors rushed in as several major Chinese cities started to loosen some restrictions, but then sold off when Covid-19 cases shot up in China forced them to fear Beijing’s commitment to reopening.

How Hong Kong’s stock market, which is home to several Chinese listed companies, performs “is hinging on opening of Covid policies and … how China’s new senior leadership are emphasising economic priorities”, said Fok.

China’s reopening also bodes well for Hong Kong’s financial sector. Should travel between the territory and the mainland becomes normalised, dealmaking is expected to pick up and in turn, the city should see an uptick in IPO activity and mergers and acquisitions.

“Open borders will help in this recovery period in that it will facilitate deal-making and due diligence, and the expectation of an ensuing economic recovery will increase both Chinese organisations’ ability to make acquisitions and increase the attractiveness of Chinese assets for foreign capital owners,” said Jason Ho, FTI Consulting’s Asia head of capital solutions.

Even if the reopening stars align in Hong Kong’s favour, the city’s property-sector slump will be a drag on its growth. Low fertility rates, a rapidly aging population and the recent emigration wave have all dampened Hong Kong’s real estate sector.

Coupled with rising interest rates that are curbing buyers’ appetite, Hong Kong’s home prices have been tumbling. In October, they sank to their lowest levels in five years, official data show.

Garcia-Herrero from Natixis expects that without further policy support, home prices in Hong Kong will fall further by 12 per cent in 2023, then grind to a halt in 2024, eventually extending the decline from its peak at the end of 2021 to 25 per cent.