London this past week saw the holding of an important Hong Kong Business Update event, sponsored by a collection of organisations including the China Britain Business Council (of whom PLMR are keen members and who do excellent work), the Hong Kong Association, InvestHK, the British Chamber of Commerce Hong Kong and the London bureau of the Hong Kong Economic and Trade Office. The proceedings were generously hosted by Standard Chartered Bank and was brimming with old China hands, partners at top law firms, and many bankers and investors all looking to the future of Hong Kong and the likely trajectory of UK-Hong Kong business relations and opportunities at this crucial time. For those of us who have been to Hong Kong, the long term potential of it to a post Brexit UK remains important.
During the course of the event, the Hong Kong – UK relationship was frequently described as special, precious, and unique. The trade relationship between us and Hong Kong is worth £22 billion annually and the UK runs a trade surplus. In fact, the UK sells more to Hong Kong than to any other place in Asia aside from mainland China. My experience is that most Brits are unaware of that reality. UK investment in Hong Kong is worth over £65 billion. I share the wish to not underestimate the size of the British business hub and presence that Hong Kong represents. Above mainland China and the US, the UK represents the leading source of new business going into Hong Kong.
I think that For UK businesses in a post-Brexit world, Hong Kong should remain firmly at the top of the list. UK businesses will do well to focus their efforts in healthcare, financial technology, infrastructure and construction, education and new opportunities in the design and creative industries. Hong Kong’s fundamentals support continued business opportunities. Hong Kong is the biggest gateway for Chinese companies trying to access the international market, and for international companies trying to access the Chinese market and as long as it continues to hold this role it will remain relevant. Beyond this it has a role as a gateway to the wider Asian region, and this role is expected to grow as businesses seek to reduce their dependence on the mainland and appeal to a wider geographical base. If so, Hong Kong will remain a launchpad for UK businesses in Asia.
In the past year, Hong Kong’s business community has shown an impressive resilience and a will to continue with business as usual. This was demonstrated anecdotally with an account of the speed with which some of the rampant vandalism has been cleared up and a sense of normality restored. That said, it is evident that the Hong Kong business landscape is shifting, and a new normal is emerging. Businesses must continue to adapt to this new normal, adjust their strategies, and even change their targets and goals.
Most notably, the gathering heard that the business outlook, though certainly affected by the circumstances of unrest over the course of 2019 which has continued into the new year, was broadly encouraging. The negative impact of the ongoing situation has affected some sectors more than others. Tourism and hospitality have been hit by a 10% decline in visitor numbers to Hong Kong. Hotels have seen occupancy rates drop by an average of 40% and room rates are down too. There was some discrepancy over the resilience of the exhibition and conference sector with some speakers asserting that the number of exhibitions hosted in Hong Kong has remained stable while others suggested that a number have been cancelled as a result. However, by and large, business travel has been less affected than tourism.
Attributed to declining numbers of mainland visitors and a dip in the willingness of mainland consumers to spend in Hong Kong, high-end retail is another market segment that has been negatively affected, with decline in sales more drastic than during the SARS outbreak in 2003. It was noted however, that due to shifting trends in mainland China’s economy the trend of mainland consumer spending in Hong Kong was peaking 18 months to 2 years ago, long before tensions took hold in 2019. Reassuringly, there is evidence that some players in these affected sectors are refocusing. For example, retailers are starting to shift their product mixes to appeal to a consumer base beyond the mainland shoppers they had previously relied upon.
With the end of the fiscal year on 31 March 2020, Hong Kong is bracing itself for its first budget deficit since 2004. Though some international ratings agencies have adjusted their ratings for Hong Kong downwards, banking, capital markets, and flow of funds all remain strong as do the Shanghai and Shenzhen Stock Connects. The Hang Seng performed better in 2019 than in the preceding year. The banking sector, with its large balance sheets, saw no spike in defaults on the retail side, which mostly consists of mortgages and credit cards, or on the corporate side for the most part.
IPOs hit a record level and kept Hong Kong at the top of the global IPO leader board. Hong Kong is still competitive as a financial centre. It is ranked at number three on the World Bank’s Ease of Doing Business Index for 2020 and the WEF’s most recent Global Competitiveness report, and takes the top spot on multiple Global Economic Openness Indices. These rankings and the conditions that support them are deemed unlikely to be affected. US listings of Chinese companies are likely to continue their drastic decline and this will be good news for Hong Kong. Alibaba’s landmark IPO listing in HK late last year proves that Hong Kong is still the top destination for Chinese companies.
SMEs were hit the hardest in 2019, with some defaulting on loans but not to a level deemed particularly troubling to the banking sector. Even so, the Hong Kong government has and is continuing to take steps to support SMEs through various economic approaches including tax cuts, a new 90% loan guarantee on loans up to HK$6 million, and a principal moratorium available for two terms of 6 months designed to relieve cash flow pressures for SMEs. The government has earmarked HK$3 billion to help SMEs expand into overseas markets, in particular to those countries with which Hong Kong has a Free Trade Agreement (FTA). Both the government and business contingent offered assurance that dialogue between the two is taking place. What is often not appreciated externally is that Hong Kong’s chief executive Carrie Lam has taken over 160 private meetings with business leaders over the past three months and is committed to broadening that dialogue into the public arena as and when the business community are comfortable doing so. It is a process that needs to be handled sensitively.
Concerns for 2020 centre on the increasing politicisation of the business arena which is difficult to avoid given the current circumstances. There is a worrying sense that Hong Kong is being weaponised on the global stage both because of the domestic situation, and in the US China relationship. Notably, the US China trade relationship was highlighted as more of a source of potential distress to the business environment than the protests and local unrest. The uncertainty that it has brought about has seeped into the psyche of the business community but a trade deal is certain to have a positive psychological impact and bolster business activity. However, if uncertainty does prevail, M&A deals may start to dry up in Q3 and Q4 2020.
Many sectors continued to perform well through 2019 and are expected to stay stable through 2020 and beyond. These sectors include infrastructure, logistics, financial technology, and healthcare and they are supported by the strategic priorities of both the Hong Kong and mainland governments. These strategic priorities revolve around increasing integration with international economies through FTAs as well as the development innovation and technology and the Greater Bay Area (GBA) plan. The GBA, an ambitious initiative to link Hong Kong and its neighbouring regions through infrastructure and regulatory harmonisation, is the focal point for economic development and plans to leverage HK’s competitive advantage in international business and financial services.