Hong Kong

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SENSITIVE RISK for entreprise

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

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GDP	USD366bn (World ranking 35, World Bank 2019)
Population	7.5mn (World ranking 102, World Bank 2019)
Form of state	Special Administrative Region of the People’s Republic of China
Head of government	Carrie Lam (Chief Executive)
Next elections	September 2021, legislative

Gateway to mainland China, close ties with the Chinese market (competitive advantage for trade, finance and services)
Strong external liquidity and public debt position
Sound banking system and proven monetary policy framework
Very strong business environment

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

Sharpest yearly contraction on record, uncertain recovery

The technical recession in Hong Kong already started in Q3 2019 following the double whammy of U.S.-China trade tensions and social protests locally. The global Covid-19 pandemic is another sharp pressure on the Hong Kong economy. Even as many countries around the world (including Hong Kong’s trading partners) started to gradually reopen their economies by the end of Q2, a new wave of infections (as of end-July 2020) has forced Hong Kong authorities to re-impose social distancing measures locally. The epidemic situation, along with (geo)political tensions resulting from the newly implemented national security law, are likely to continue weighing on business and household sentiment. The recovery in consumption, retail and tourism activities – and the broader economy – is thus likely to be very slow.

We expect GDP to contract by -5.9% in 2020, resulting in the sharpest annual contraction on record, and two consecutive years of negative growth for the first time (-1.2% in 2019). As of June 2020, we expect a gradual recovery to bring GDP growth to +4.1% in 2021. However, risks are very clearly on the downside, stemming from the duration of the third wave of Covid-19 infections in Hong Kong and U.S.-China tensions in the wake of the national security law (in our central scenario, the latter does not disrupt Hong Kong’s business environment).

Macro policies: using buffers

Monetary policy is determined by the currency board that pegs the HKD exchange rate to the USD. Therefore, interest rates in Hong Kong mirror those of the U.S. In that respect, Hong Kong’s monetary policy has been eased in H1 2020 in response to actions by the U.S. Federal Reserve (Fed). The Hong Kong Monetary Authority (HKMA) base rate had been lowered by 114bp since the beginning of the year. In line with our scenario for the Fed, we do not expect any further changes in the rest of 2020. Given escalating tensions in 2020, questions are arising about the solidity of the HKD peg. We find that the HKMA still has the willingness and means (e.g. in terms of FX reserves) to hold on to the peg.

On the fiscal side, Hong Kong has built significant buffers over the past years. Fiscal reserves stand at c.40% of GDP (as of May 2020). Public debt is low and the fiscal balance had been in surplus for fifteen years until 2019. The 2019-20 budget was already expansionary, including tax cuts and social security and healthcare-related spending. In the context of the global Covid-19 pandemic, fiscal easing has been further stepped up through measures such as cash transfers to households, tax breaks, financial assistance for vulnerable firms and sectors, etc.

The external position is robust

Hong Kong continues to record ample current account surpluses, and maintain large foreign exchange reserves. The external debt is hefty but should not be a matter of concern in the short-run. Indeed, in net terms, Hong Kong benefits from a strong creditor position: net external financial assets are 4.3 times the GDP (as of 2019).

Trade structure by destination/origin

(% of total)

Exports	Rank	Imports
China 55%	1	45% China
United States 7.3%	2	7.3% Taiwan
India 2.9%	3	6.5% Singapore
Japan 2.9%	4	5.8% Japan
Taiwan 2.2%	5	4.9% Korea, Republic of

Trade structure by product

(% of total)

Exports	Rank	Imports
Electrical machinery, apparatus and appliances, n.e.s. 56.16%	1	53.18% Electrical machinery, apparatus and appliances, n.e.s.
Machinery and mechanical appliances 13.17%	2	11.47% Machinery and mechanical appliances
Pearls, precious and semi-precious stones, precious metals, and articles thereof 10.1%	3	9.38% Pearls, precious and semi-precious stones, precious metals, and articles thereof
Optical, measuring, precision, medical instruments and related products 3.35%	4	3.05% Optical, measuring, precision, medical instruments and related products
Plastic products 1.69%	5	2.49% Mineral fuels, mineral oils and related products

The payment behavior of domestic companies is acceptable, taking 30 to 90 days on average but delays are frequent and late payments are not regulated by law.

Low
Medium
Sensitive
High

Payments
Court proceedings
Insolvency proceedings

Payments
Court proceedings
Insolvency proceedings

Hong Kong courts are reliable and swift in dealing with business claims; however when it comes to dealing with insolvent debtors, the law provides no formal procedures to achieve a restructuring of the company’s debts.

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Contacts

Euler Hermes Economic Research

research@eulerhermes.com

Françoise Huang

Senior Economist for Asia Pacific

francoise.huang@eulerhermes.com

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