A friend who has recently returned from Hong Kong expressed that the current situation of the island-city is not quite ideal, and indeed he is rather pessimistic about it. Looking at the photos taken, as well as considering various situations, while admittedly Hong Kong now is much better than during the COVID-19 period, it is still not quite the bustling and prosperous city we knew in the past. In fact, when discussing the state of Hong Kong's economy, the comparison should not be made based on the low point during the pandemic. Instead, it should be compared with the economy, cityscape, and urban prosperity of the city during the normal period.
If comparisons are done on the basis of these standards, it appears that the current state of Hong Kong's economy is not showing any signs of improvement. The economic data of the city also confirms this. According to the advance estimate figures released by Hong Kong's Census and Statistics Department, its GDP fell by 3.5% in 2022 compared to 2021. Among them, private consumption expenditure fell by 1.1%; the total fixed capital formation dropped by 8.5%; the total value of goods exports and goods imports recorded actual declines of 13.9% and 13.1%, respectively; while service outputs and inputs recorded declines of 0.8% and 1.4%, respectively. Structurally speaking, the economic situation in Hong Kong is indeed rather gloomy.
How then, can Hong Kong get out of this economic downturn?
The economic plight in Hong Kong does not pose much of a major problem for the wealthy. Highly wealthy individuals with the means have long begun laying out plans and making adjustments, some leaving early, taking their assets, or transferring investments along with them elsewhere. Even some individuals with a bit lesser wealth and affluent middle-class individuals with the means have probably relocated. This trend shows that people and assets will continue to flow out of the city once touted as the Pearl of the Orient in the future. If this situation continues, it will be a huge challenge for its economy as it spells changes in people's expectations. Faced with this challenge, many economists and financial experts in Hong Kong are thinking and researching, hoping to locate some solutions.
I believe that the most important focus for improving the future of the Hong Kong economy should be on two points. The first is that the value of Hong Kong's assets must be stabilized; the second being the residents' income must be guaranteed. The stability of asset values is, after all, related to the future of Hong Kong. Regardless of how much a government has done, if there is a large change in local asset values that cannot be stabilized, then the economy, whether it is Hong Kong or any other economy, will have no hope and will only get worse. In this case, stabilizing residents' income in Hong Kong is the most crucial aspect, as stable income is the fundamental basis and core of the economy. If the residents do not have the ability to make ends meet, then any discussion about the city's finance, economy, or international financial center status would be meaningless. Unstable resident income, in the end, will be unable to either stabilize asset values or ensure that they do not depreciate.
It is of course very difficult to achieve these two key points. Therefore, how to achieve them becomes a real, pragmatic issue.
In terms of solutions, my suggestion is that the first priority is to consider freezing or reducing rents. In Hong Kong, commercial service involves multiple industries and groups of people, and large industries often see a huge number of employed personnel. To stabilize the income of residents, a prerequisite is to improve the vitality of these industries and enhance their competitiveness, and this is particularly true when it comes to commercial and service industries. This is the key to the city's prosperity, the key to stabilizing its residents' income. How can this be achieved? The most direct way is to reduce the rent, which is tantamount to saving the cost of the enterprises. Relatively speaking, such a measure can increase the profit of the enterprises, which creates conditions for the rise of residents' income.
However, the reduction of rent will definitely affect the interests of some institutions or individuals, as well as the interests of developers, and this will hurt the profits of the property owners and investors. Whether they can hold on to it is also a major question. If they are unable to sustain rental reduction, or if it could only be done partially and symbolically, and any further reduction will cause their bankruptcy, this will be a major challenge as well.
The economic system often sees linked, intertwined aspects, and each aspect carries great influences and implications on each other. To reduce the rent, the interest rate, specifically the bank's loan interest rate, must be reduced as well. Loan interest is one of the most important cost combinations for investors, and investing in property construction often requires loans. Many investors and developers have bank loans and are under pressure to repay them. If the loan interest rate is too high and cannot be lowered, developers and investors will have no way to lower the rent, and it will be impossible to stabilize and improve the downward trend of residents' income, let alone increase it. All these aspects form a chain. At the upper end of the chain, bank interest issues are involved, and bank interest needs to be frozen or reduced. With this in mind, lowering interest rates, reducing rents, increasing residents' income, and stabilizing asset values, in my opinion, are the current and future public policies that Hong Kong can adopt to revitalize the economy.
Many economists may immediately think of another issue, which is Hong Kong's linked exchange rate system. The exchange rate system linking Hong Kong's currency to the U.S. dollar has restrained the interest issue of the city's banking sector. Under this system, if the interest rates in the international market and the financial industry, especially the USD interest rate, are still rising, and if the Hong Kong dollar insists on not raising interest rates, or even lowering interest rates, this will pose a great risk. As a result, many would conclude that cutting interest rates, reducing rent, and increasing residents' income will not be feasible hence cannot be realized.
Yet, I beg to differ. During the time when the Federal Reserve's strategy of continuing to raise interest rates, it may be considered unrealistic to cut interest rates and rents. However, the Fed's policy has now changed. It has reduced the rate hike, possibly stopping interest rate hikes in the future, thus creating a policy window period. To regulate the Hong Kong economy, the interest rate policy window period in the United States will be a crucial range of time. As things stand at this moment, the Fed is hesitating in making the next move. Although in face of the threat of inflation, there is still the possibility for it to raise interest rates, the Fed's stance on rate hikes appears to soften now, and become more dovish so to speak. It will be up to Hong Kong's macroeconomic management department to take advantage of such a policy window period to take some decisive measures and inject vitality into the city's economy.
There is another major point worth observing, i.e., the domestic political issue in the United States, which directly affects the development of the world, including that of Hong Kong. President Joe Biden of the Democratic Party certainly does not want to see inflation continue to rise, which may cause the common people to be dissatisfied with his performance, thereby affecting his re-election. Therefore, under the prospect of the general election, Biden and the macroeconomic management department of the United States will attempt to reduce inflation, stabilize interest rates, and maintain residents' income, which are all consistent with those of Hong Kong.
Therefore, under the current conditions, the recommendations of reducing interest rates, freezing rents, and increasing residents' income are indeed realistic moves for Hong Kong, and they are achievable within this window period. If these issues are not discussed within such a period, they will become meaningless. As this period will last for some time, Hong Kong's macroeconomic management departments should be aware of it, seize the opportunity, and take some decisive measures to promote the development of the economy, so as to increase residents' income and create conditions for the stabilization of asset value.
The starting point of all these policies is to consider the welfare of Hong Kong people. After all, not every Hongkonger has the means or willingness to leave the island. I believe that no matter what the situation is, millions of Hongkongers must live on, and find ways to live better, for themselves and their families. Under such circumstances, Hong Kong's decision-makers will need to put themselves in the shoes of these common people and give more consideration to the economic condition of the city.
Final analysis conclusion:
To get out of the current economic predicament, Hong Kong needs to focus on making the asset values steadier. During the window period when the United States slows down or stops raising interest rates, Hong Kong may consider freezing rents, reducing interest rates, and increasing residents' income to gradually stabilize the island-city's economy.
