Hong Kong’s economy showing some greenshoots
Hong Kong posted a negative GDP growth rate in Q3 but, at least, it was better than expectations (-3.4%) given the resurgence of the Covid-19 cases since July. After two months of strict control, the Hong Kong government has lifted much part of the restrictions in September, which gradually improved economic momentum.
So far, the sporadic daily cases still perplex the society, so the government has not yet fully reopened the economy with restrictions still weighing on the retail sectors. In September, retail sales were still below last year’s level ( 87%). This is understanbable given the falling number of visitors who had contributed significiantly to Hong Kong’s retail sales. The steps towards opening border with mainland China should help boost consumption, but even if it happens, the extent of the contribution depends on the demand recovery in mainland China.
As for investment, the business sentiment below 50 throughout the third quarter in line with the recession situation, but bounced back in September and edged even higher in October. The market participants seemed to have better adapted to the third wave of the Covid-19 compared with the initial outbreak.
On the external front, Hong Kong’s exports and imports gained momentum in September, heading back to significant positive year-on-year growth thanks to the rapid recovery from mainland China. Although the overall external trade balance remained in deficit, the rise in overall trade is good news for the city’s transport and logistics sector.
As for Hong Kong’s financial market, there was only a moderate change in the liquidity environment, with a first decline in HIBOR 3M in July and a comeback during September. Still, the positive spread vis-à-vis LIBOR as well as the large push for IPOs from Mainland Chinese companies have become a strong support for capital inflows into Hong Kong. However, the uncertainty after the pull-out of Ant Financial, though, could possibly lead to some volatility in the future, especially if no date is announced for a new listing.
On the property market, the volume of transactions declined significantly during the summer but has already started to show signs of bottoming out in September. The recent Centaline property index have stabilized and gradually moved upward, especially after early October.
Outlook: Overall, the Hong Kong economy is still in the dulldrums but there are some greenshoots in Q3 data and, even more so, October data. The prospect of the economy is likely to become brighter if the government can better bring the Covid-19 under control and gradually reopen the border with mainland China. The financial sector with a flurry of bond issuance and IPOs from Mainland companies has been helping although with renewed uncertainties due to Ant Financial.
Last but not least, the near future of Hong Kong also depends on the global environment. The new US president could suggest a more flexible approach towards Hong Kong, although the strategic competition with China would remain unabated. Given the improvement in the domestic and external environment and the apparent greenshoots in the most recent data, we are revising our Hong Kong GDP forecast upward to -5.6% for 2020 from -7% previously.