Hong Kong

All eyes on the Mainland

A2

MEDIUM RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD341.4bn (World ranking 33, World Bank 2017)
Population 7.4mn (World ranking 102, World Bank 2017)
Form of state Limited Democracy
Head of government Carrie Lam (Chief Executive)
Head of government 2020, legislative
  • 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

It is all about the Mainland…

Hong Kong started the year on a fragile note due to lower external demand – especially from the Mainland – a tightening of monetary policy and the cooling of the property market. Economic growth is expected to decelerate to +2% in 2019 (after +3.1% in 2018). However, looking ahead, we see a modest rebound happening in the coming months.  

First, the central bank of the U.S. has signaled a more dovish stance on interest rate hikes this year. This is positive for Hong Kong’s financing conditions and will provide a boost to the property market. Second, China’s stimulus is set to become stronger in the coming months and this should support a rise of Hong Kong’s exports. Third, domestic demand will show some resilience. Private consumption will benefit from a solid labor market and favorable fiscal measures (income tax cuts, extra-allowances for fragile economic agents).  Investment will see some stabilization, helped by a rise in government spending (e.g. infrastructure, healthcare). Non-residential private investment will remain moderate as we expect corporates to be cautious in a context of trade uncertainties. The economy is extremely vulnerable to trade – exports of goods and services in particular account for 188% of GDP – and financial shocks due to its large openness. 

Policies: using buffers

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 and this resulted in a rise of borrowing costs. Now that the Fed has adjusted its stance, we see an improvement of credit conditions in the short term.

Hong Kong has built significant buffers over the past years. Fiscal reserves stand at 33.7% of GDP. Public debt is low and the fiscal balance is in surplus. The 2019-20 budget is expansionary. It includes tax cuts for households and corporates, allowances for senior citizens and the poor and social security and healthcare-related spending. In the longer term, the authorities signaled their desire to diversify the economy away from the four core pillars, namely financial services; tourism; trading and logistics and professional and producer services.

The external position is robust

Hong Kong continues to record large 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. Hong Kong also benefits from a robust net creditor position: net external financial assets are 4.6 times the GDP.

Trade structure by destination/origin

(% of total)

Exports Rank Imports
China 55%
1
45% China
United States 8%
2
9% Taiwan (PRC)
India 3%
3
6% Japan
Japan 3%
4
6% Korea, Republic of
United Kingdom 2%
5
5% United States

Trade structure by product

(% of total)

Exports Rank Imports
Electrical machinery, apparatus and appliances, n.e.s. 31%
1
32% Electrical machinery, apparatus and appliances, n.e.s.
Telecommunication and sound recording apparatus 18%
2
17% Telecommunication and sound recording apparatus
Gold, non-monetary (excluding gold ores and concentrates) 10%
3
8% Office machines and automatic data processing machines
Office machines and automatic data processing machines 9%
4
6% Gold, non-monetary (excluding gold ores and concentrates)
Miscellaneous manufactured articles, n.e.s. 5%
5
5% Miscellaneous manufactured articles, n.e.s.

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

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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Collection complexity Hong Kong

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