Why Hong Kong’s economy is set for a slowdown

For the past few decades, Hong Kong has enjoyed the dual benefits of high-powered development in mainland China and the freedom of a ‘Western-style’ market economy. However, as China’s economic growth continues to slow down, what does this mean for Hong Kong’s economy and investors?

 

Retail sales are falling

In recent times, tourists from the Chinese mainland have brought their new wealth to Hong Kong’s malls and markets. However, 2015 has seen seven straight months of decline in retail sales – Reuters reports a 6.4% drop in November compared to last year. This is widely attributed to China’s anti-corruption crackdown and Chinese shoppers taking their renminbi to other destinations like Japan, encouraged by a weaker Japanese yen and more flexible visa restrictions for Chinese travellers.

 

Currency strength can mean retail weakness

The Hong Kong dollar is a strong currency – mainly as a result of its peg to the US dollar, as policy-makers believe this close alignment helps keep the island’s economy stable. But if Chinese shoppers can buy designer goods more cheaply in places like Japan, the Hong Kong dollar’s strength may be contributing to its economic slowdown. Retail figures show the island’s sales of luxury goods have already fallen by 22.9% in September from the previous year.   

 

Property bubble ready to pop?

The strong HK dollar has had another effect. Property prices in the territory have doubled since the financial crisis of 2008 – driven by currency strength, low interest rates, the island’s good job market and its comparative stability. However, if Hong Kong’s economy is slowing, people’s ability to pay their mortgages could be under threat. This could be one reason for the sharp 41.7% year-on-year decrease seen in property sales in November.

 

US interest rate rise heralds a new era

Following the US Fed’s decision to raise its base rates from 0.25% to 0.5% – its first hike since June 2006 – the Hong Kong Monetary Authority immediately followed suit, raising Hong Kong’s interest rates from 0.5% to 0.75%. While the rise seems small, it is important symbolically, as it signals that the decade of cheap money could be over. Credit will be more expensive and those all-important mortgage repayments will be more difficult to meet.

 

What does this mean for investors?

Although Hong Kong’s dollar is strong because it’s pegged to the US dollar, the island’s economy is completely different to that of the US. So if US interest rates continue to rise, this could lead to an increase in hot money outflows from Hong Kong – as investors would get a higher rate of return from saving in a US bank. Despite this, Hong Kong’s GDP grew by an unexpected 2.3% in Q3 and unemployment remains low, leaving many analysts to believe the island could very well weather the gloomy economic forecasts.


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