Hong Kong

Coping with China’s slowdown

Country Rating A2


  • Being a gateway to China and close ties help Hong Kong capitalize on competitive advantage in finance and services
  • Good record of strong dynamic growth
  • Strong external liquidity and public debt position
  • Sound banking system and proven monetary
  • policy framework
  • Very strong business environment


  • Long-term competition from Mainland cities
  • Sensitive to political developments in mainland China
  • As a small, very open and financially integrated economy, Hong Kong is highly sensitive to global economic and financial shocks
  • Exposed to property sector price fluctuations

Economic Overview

Bouncing back but...

GDP growth decelerated once more in 2016 (1.9% from 2.4% in 2015) due to limited export opportunities and weak growth in domestic demand. In 2017, the economy is set to bounce back (+2.2%) but remain below its long-term performance (+3.5%). Exports of goods and services are set to rise gradually. Reasons include: (i) demand growth in advanced economies strengthened, (ii) economic growth becomes more balanced in China, (iii) activity growth speeds up in the other emerging markets. Investment should also improve due to favorable fiscal policies. In the longer term, the outlook is more uncertain. First, a more protectionist US, weaker growth in China or a stronger local currency (HKD) could hamper the fragile exports recovery. Second, a strong tightening of global financing conditions (due to more hawkish Fed, e.g.) or a rise in global risk aversion (Brexit) could act as a drag. Domestically, uncertainties stem from the change of chief executive and its policy direction. Against this backdrop, insolvencies are set to remain on an upward trend (+8% in 2017 after +7% in 2016).
Improving demand growth in large advanced economies will provide limited cushion due to its nature (more domestic   oriented) and pace (very moderate). Domestic conditions will remain unconducive for private investment growth with tightened monetary policy, lower new orders and volatile financial sentiment. Government support will likely step up with further expenditures in infrastructures and salaries tax cuts. Lower inflation, more favourable fiscal environment and firm labour market will help keeping private consumption in positive territory.

Monetary policy: on a tightening mode

Monetary policy is determined by the currency board that pegs the HKD exchange rate to the USD. Therefore, interest rates mirror those of the U.S. In that respect, Hong Kong’s monetary policy was tightened in line with the previous Fed hikes. Assuming the FED will continue to raise rates, this trend is set to continue. This will translate into tougher credit conditions for the private sector but also low inflationary pressures.

Public finances and external position at healthy levels

Hong Kong has built significant buffers over the past years. Fiscal reserves stand at 37% of GDP. Public debt is low and fiscal balance is in surplus. The 2017-18 budget is expansionary. It includes tax cuts for households; allowances for senior citizens and the poor; supportive measures for targeted sectors such as travel agents, hotels and restaurants, aircraft leasing companies, construction; and public spending for youth development. Furthermore, the external position is comfortable. Hong Kong continues to record large current account surplus, and maintain large reserves. The external debt is hefty but should not be a matter of concern in the short-run. Hong Kong benefits from a robust net creditor position: net external financial assets represent 357% of GDP.
Last review: 3/15/2016