After two years of setbacks and uncertainty due to protests and the COVID-19 pandemic, Hong Kong is open for business and stronger than ever. The city’s resilience in the face of adversity proved unbreakable and prepared it to reclaim its deserving place back in the world financial stage.
The “One Country, Two Systems” approach implemented after the handover of the city to China became the cornerstone of its economic development. Under “One Country, Two Systems”, Hong Kong has maintained its institutional strengths and openness towards business.
These characteristics made Hong Kong an international center for finance, commerce and trade, home for corporate headquarters, as well as a major hub of investment, transportation and logistics.
According to the Basic Law, Hong Kong is a separate customs territory, with a zero-tariff policy and non-tariff barriers for protecting domestic industries. The city is also known for its simple tax regime with low tax rates and highly transparent regulatory regimes.
What separates Hong Kong from other cities in China is its independent judicial power, including that of final adjudication. Furthermore, Hong Kong is equipped with world-class infrastructure, constituting highly efficient local and regional transportation networks and advanced air and sea freight systems, as well as digital and telecommunications facilities which are among the best in the world.
A well-educated labor force adds up to the advantages of the city. Many foreign professionals call Hong Kong home and enjoy its dynamic culture and international standards, which help attract world-class talent from all over the world.
Hong Kong’s convenient geographical location has placed it in the center of the opportunities arising from the shift of global economic gravity from West to East, particularly those related to China’s rapid economic development.
Yet, the Hong Kong economy was hit by the social turmoil in 2019, and the outbreak of the COVID-19 pandemic since 2020.
According to a report published recently by the government of Hong Kong on the city’s business environment, the large-scale violence and damage triggered by the proposed legislative amendments to the Fugitive Offenders Ordinance took a heavy toll on the economy, society and people’s livelihood.
These violent acts caused the Hong Kong economy to plunge into a deep recession even before the outbreak of the COVID-19 pandemic. In the first half of 2019, the Hong Kong economy, affected by China-US trade tensions and the global economic slowdown, only recorded a modest year-on-year growth of 0.2%.
The economy worsened abruptly in the second half of the year because of black-clad violence, resulting in sharp contractions of 3.2% and 3.6% in the third and fourth quarters respectively. The economy contracted by 1.7% for the year, the first annual decline since the global financial crisis in 2009.
The labor market was also under pressure, affecting the livelihood of the working class at large. The seasonally adjusted unemployment rate rose from 2.8% in the second quarter of 2019 to 3.3% in the fourth quarter.
Tourism and consumption-related economic activities and sectors were particularly hard hit. Visitor arrivals recorded a year-on-year increase of 10.9% in the second quarter of 2019 but turned abruptly to a 26.0% drop in the third quarter, and the decline further widened to 50.5% in the fourth quarter.
Hong Kong’s rule of law and an independent judiciary are constitutionally protected under the Basic Law, which preserves the common law system, long- established and familiar to the international business community, and allows the city to have an independent judicial power.
However, the violence during the riots in 2019 weakened the law-abiding awareness of the community and seriously undermined the foundation of Hong Kong’s rule of law.
Local chambers of commerce unanimously considered that the violent incidents in 2019 directly impacted the operations of enterprises and small businesses, with the retail, catering and tourism sectors bearing the brunt. This situation, aggravated by the China-US trade tensions, hurt Hong Kong’s reputation and its hospitable image in the international community and threaten to undermine overseas investors’ confidence in Hong Kong and the economic prosperity achieved after decades of stability.
In August of 2019, the operation of the Hong Kong International Airport was halted, and flights were completely suspended due to protests. Many financial institutions worried that they would not be able to quickly deploy their staff if necessary and even considered moving their offices to other places. This weakened the competitiveness of Hong Kong as a financial center.
To avoid irreparable damage to the economy, the Hong Kong Monetary Authority (HKMA) provided timely and firm clarifications to reinforce the public’s confidence in Hong Kong’s financial system.
According to the report, since the implementation of the Hong Kong National Security Law (NSL), the US Government and Congress have been smearing it under the pretext of human rights, freedoms and democracy, alleging that the law has violated the Sino-British Joint Declaration and the Basic Law.
The US administration signed the Hong Kong Autonomy Act on 14 July 2020 and introduced a series of measures under The President’s Executive Order on Hong Kong Normalization (the Executive Order), imposing the so-called “sanctions” on those responsible for or involved in the enactment, adoption or implementation of the NSL.
Nevertheless, the American Chamber of Commerce in Hong Kong (AmCham) stated that Hong Kong remains a critical and vibrant facilitator of trade and financial flows between China and the rest of the world.
The President of AmCham remarked that the NSL did not impact commercial law, and that the city had excellent infrastructure and free flow of information and was still an ideal place for international companies to do business; and advised businesses not to withdraw from the Hong Kong market.
On the COVID front, the local government has been providing vaccinations for people in Hong Kong free of charge. At the moment, the number of confirmed cases in Hong Kong accounts for less than 0.2% of the population, lower than most of the advanced economies and other places in Asia.
To support enterprises and safeguard jobs, the government invested HK$30 billion in the local economy as early as the second half of 2019. Considering a series of relief measures announced in the 2020-21 Budget, the sum deployed to help various sectors and citizens amounted to over HK$300 billion.
With social stability restored, authorities unveiled several measures to inject energy into the Hong Kong economy, which included expediting the implementation of the GBA Cross-boundary Wealth Management Connect Scheme and the joint development of the Shenzhen/Hong Kong Innovation and Technology Co-operation Zone.
Hong Kong’s economic performance has been robust this year, with a distinct rebound of 7.8% year-on-year in the first half. Exports of goods were particularly strong. Domestic demand gained steam. Private consumption expenditure resumed year-on-year growth.
Labor market conditions improved notably, with the unemployment rate falling rapidly from a 17- year high at the start of the year. At the same time, sentiment in the property market remained positive, with flat prices staying firm amid quite active trading.
Hong Kong’s financial market has remained stable, and the Linked Exchange Rate System and various segments of the financial market have been functioning properly.
The Hong Kong dollar exchange rate against the US dollar has remained on the strong side of the Convertibility Undertaking, reflecting the market’s demand for and confidence in the Hong Kong dollar. Between last July, when the NSL was implemented, and last October, there were net capital inflows into the Hong Kong dollar market amounting to more than HK$300 billion.
As of June this year, total deposits in the Hong Kong banking system amounted to over HK$15 trillion, up by almost 8% over last June (i.e. before the NSL took effect). Hong Kong’s foreign exchange reserves also increased by 10.5% to HK$3.8 trillion, equivalent to 1.8 times the Hong Kong dollar monetary base.
Meanwhile, the banking system has remained robust, with the capital adequacy ratio and major banks’ average liquidity coverage ratio at 19.8% and 154.0% respectively in the second quarter of 2021, both well above the international regulatory standards. Although the economy was hit by the pandemic, the classified loan ratio remained relatively low at around 0.9%.
The bond market also continued to thrive. In 2020, the amount of bond issuance arranged by Hong Kong reached US$196 billion, ranking first in Asia in terms of the amount of international bond issuance arranged.