Hong Kong taking a hit from global business cycle is a design feature, not a bug

Being Asia’s premier international finance hub has brought great benefits to Hong Kong’s people. The city has enviable transit infrastructure, one of the world’s best performing school systems and gross income per capita of US$54,370, slightly higher than Germany’s.

On my recent trip to the World Economic Forum in Davos, many business and political leaders asked me how Hong Kong has been faring in the wake of Covid-19. I answered that this is undeniably a difficult moment. While the worst of the Covid-19 pandemic is behind us, and activity is normalising, external shocks from two wars, US inflation and higher interest rates are taking a toll.
Global volatility naturally trickles into Hong Kong’s economy; indeed, its markets tend to take a bigger hit than most from fluctuations in the world’s business cycle. However, this is a feature, not a bug, of Hong Kong’s design. It is a natural expression of this city’s extraordinary openness, and its connection to the US$18 trillion powerhouse in mainland China.
It’s important to understand the upsides and downsides of the intentional policy decisions that underlie Hong Kong’s economic structure. The Hong Kong dollar is pegged to the US dollar, because China’s “ one country, two systems” model preserves a special space for this city’s political, legal and financial arrangements.

This regime has proven crucial to Hong Kong’s value proposition, both to overseas investors and mainland Chinese companies seeking to raise funds for international expansion.

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Why Hong Kong pegs its currency to the US dollar

Why Hong Kong pegs its currency to the US dollar

However, when American inflation spikes, monetary authorities must raise local rates upwards, alongside the Fed, regardless of local conditions. This time, the interest-rate-raising cycle is concurrent with a cooler mainland economy, plus US inflationary pressure and geopolitical uncertainties that have intimidated trade and investment flows.
Lifting borrowing costs during a moment of economic uncertainty naturally affects business risk appetite and property values, and can also trickle into consumption.

In the long run, it will be healthy for Hong Kong’s famously high property prices to recalibrate; as Hong Kong’s biggest lender, we are confident the market is fundamentally stable and will revive. But the current situation is certainly painful for some.

If openness exposes Hong Kong to market forces operating far away, it also underpins its famous resilience. The city has bounced back from invasion and world wars, from the 1997 Asian financial crisis and the 2008 global financial crash; it has survived multiple epidemics and defended its dollar peg from multiple attacks.

It has survived and prospered, in no small part because Hong Kong maintains one of the highest labour productivity rates in Asia.

I know the current situation is manageable because Hong Kong is demonstrably managing it. Unemployment is below pre-pandemic levels. Headline GDP grew 4.1 per cent year on year in the third quarter. This US$360 billion economy probably grew over 3 per cent in 2023, a solid rate for a high-income economy – five times faster than the European Union expects for itself.
Yes, serious challenges remain. The population rebounded to 7.5 million by mid-2023, back to pre-pandemic levels, but fundamentals remain tough.
This is one of Asia’s most rapidly ageing societies. Between mid-2020 and mid-2023, the city’s working-age population (15-64 years old) contracted by nearly 170,000 people.
Elderly Hongkongers rest in a park at Cheung Sha Wan on August 16, 2023. Photo: Jelly Tse
Hong Kong’s openness to immigration has traditionally counterbalanced this trend, but it is a work in progress. To attract and retain young new immigrants, officials must constantly advocate for the city, and inspire confidence in its future, not just as a market but as a place for young couples to live, work and raise children.

That case is not hard to make. For businesses, Hong Kong remains an irreplaceable interface between the mainland economy and the rest of the world; it is China’s only fully fungible hard currency market, and Beijing actively supports its unique stature.

Time to showcase the real Hong Kong to draw tourists back

Families move here because it is a beautiful, safe place to live and work, and has a mild climate where playgrounds, campgrounds, hiking trails and beaches are a subway ride from the stock exchange. It hosts one of the world’s top-ranked education systems by Programme for International Student Assessment (Pisa) scores, and is also one of the most equitable.

Hong Kong’s people have repeatedly shown they can surmount difficulties by integrating with the rest of the world, adapting, upgrading and repositioning their businesses in response to changes in demand.

David Liao is co-chief executive, Asia-Pacific, at HSBC

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