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Like any export-oriented city, Hong Kong is vulnerable to changing winds in global trade. Hong Kong’s economy expanded 3.0% in 2018, lower than the government’s forecasted 3.2%, and below 2017’s 3.8%. With policy makers forecasting growth between 2% and 3% for 2019, investors should look beyond headline GDP, lest economic challenges outside Hong Kong’s control leaves everyone underestimating actual risks. Here are two of Hong Kong’s three biggest problems that investors should prepare for in the year ahead.
US-Sino tensions worsen global trade slowdown
Hong Kong’s economy is tied to global activity. It shipped US$550.2 billion worth of goods in 2017, accounting for about 3.4% of total world trade. Hong Kong’s two largest trading partners, China and the United States, make up 54% and 7% of this figure, respectively. That leaves Hong Kong vulnerable if Washington and Beijing fail to reach an agreement amid their current trade tensions.
This matters to Hong Kong for a couple of reasons. First, Hong Kong’s trade sector, which includes logistics and warehouses, employs approximately 475,000 workers, 12% of the city’s workforce, and contributes about 18% to the economy.
Second, Hong Kong’s export numbers are slightly misleading, thus vulnerable to the wrong policy response. Chinese-made products are often “sold” to Hong Kong company affiliates at a zero profit, then later re-exported from Hong Kong, where taxes are lower than China’s. But while corporate sales and profits cancel this activity out, Hong Kong’s re-trade activity is counted into the final export figure, thus exaggerating the organic trade number and making early detection of a slowdown harder to recognize.
When domestic shoppers pause, the pressure falls onto visitors
When weak domestic confidence creates a pause in discretionary shopping, the onus falls on visitors to drive sales. Hong Kong relies heavily on Mainland Chinese shoppers, who account for approximately 40% of Hong Kong retail activity. This contribution is expected to rise alongside Beijing’s Greater Bay Initiative (GBI), which aims to connect Hong Kong, Macau, and nine Guangdong cities into an integrated economic and business hub.
The opening of the Hong Kong-Zhuhai-Macau Bridge in October 2018 is an initial test for the GBI. Though it remains early days, the impact of Hong Kong’s closer physical connection with Greater China appears not only mixed, but inconsistent. While Chinese visitors to Hong Kong jumped more than 20% in the final two months of 2018, Hong Kong retail sales were flat in December. Though Chinese visitor momentum continued in January, rising 35%, this came alongside a better, but still soft, 7% increase in retail sales.
The unknown going forward is whether the increase in foot traffic translates to better profits for Hong Kong retailers. The early indications appear worrying, as the rise in Chinese visitors is growing alongside the increase in day trippers. The rise in visit frequency is likely to spill over into lower spending per trip, creating cyclical risk for Hong Kong’s retail sector, which employs 273,000 people, approximately 7% of the workforce. The pickup in visitors also produces social anxiety, as local residents complain about crowded public spaces and higher living expenses.
Hong Kong is no stranger to tourists, with 65.1 million visitors arriving in 2018, with mainland visitors accounting for 51 million visitors. But Hong Kong could suffer a similar fate to South Korea and Thailand, where increased in tourism translated to higher sales, but lower sales per visitor.
One more challenge ahead for Hong Kong
Watch for the next and final article in this series, detailing the third big challenge Hong Kong must confront, and what investors should watch for to prepare for it.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.