Hong Kong is often seen as proof that capitalism is the economic system. When you compare the growth and freedom of Hong Kong to mainland China, it is clear that investors and business people prefer to be associated with the former.
The Hong Kong economy is recovering nicely during the coronavirus pandemic. However, the recovery is also uneven. Due to a zero-tolerance Covid policy, private consumption has been dragging.
The financial sector has been strong and is supported by a well-functioning Linked Exchange Rate System (LERS), strong institutional frameworks, and significant buffers.
Securing a strong recovery and keeping Hong Kong in a competitive position will require a policy strategy aimed at growth and financial stability.
In this article, we will go over the top things that you need to know about the economy of Hong Kong.
1. The Hong Kong Economy Has Recovered Strongly
The economy of Hong Kong has been dealt a variety of external and domestic shocks since 2019. This includes the coronavirus pandemic, tensions between China and the United States, and social unrest. Due to the coronavirus pandemic, Hong Kong’s economy contracted for two years in a row.
Thankfully, there are have been fast and strong policy actions to help mitigate these shocks. That includes a large fiscal stimulus in both 2020 and 2021.
Private investment and consumption have offset the drag on growth from softening external demand and fiscal withdrawal.
2. The Recovery Remains Uneven
There is continued stress in Hong Kong on tourism and other activities that typically foster contact because of the state’s zero-tolerance approach to Covid.
Private consumption is still far behind other components of GDP (gross domestic product). It is also far below pre-pandemic levels. This shows that there is a big decline in household income and an uneven recovery in the labor market.
Employment in retail services and tourism has declined even though the unemployment rate is falling overall.
3. Real GDP is Expected to Grow Significantly in 2022
As we noted earlier, we are seeing a continued recovery in private demand. This means that growth projection anticipates a moderate slowdown in fiscal consolidation for the new year. We’ll also see more scaling back of the fiscal stimulus measures.
The border is also expected to gradually be opened again in 2022. This is going to start with a limited opening to Mainland China.
The negative output gap is also going to narrow. And CPI inflation should gradually rise to around two percent in 2022. This shows that there will be better conditions for the labor market.
The pandemic will have scarring effects on potential output for the short term. This is due to the uneven recovery in the labor market and the impact that it is having on labor participation. That will hopefully be balanced out by an increasing move to digitalization.
4. Climate Change Also Poses Risks to Financial Stability and Growth
There is a chance that global efforts to lower carbon emissions will fall short of their planned benchmarks. This means that could be more risks related to the climate and they can impact financial institutions and businesses.
Banks that are exposed to transportation, metals, and fossil fuels are very vulnerable as the world transitions to alternative forms of energy.
5. As the Recovery Gains Further Momentum, Financial Policies Are Going to Move Towards Addressing Solvency Concerns
The government plans to engage with banks to come up with an exit strategy from the loan repayment deferral scheme. This is expected to expire in April of this year.
Financial policies will facilitate the efficient restructuring of viable firms while leveraging some of Hong Kong’s robust corporate insolvency frameworks. This will allow nonviable companies to exit.
With this in place, the planned introduction of a corporate rescue procedure from the government is in line with international best practices.
6. Financial Linkages with Mainland China Will Grow Stronger
Recently, we saw the launch of the cross-boundary Wealth Management Connect Scheme in the GBA. We also saw the Southbound Bond Connect Scheme. The Hong Kong Monetary Authority (HKMA) is also now collaborating with the People’s Bank of China.
It is doing this to potentially use a wholesale CBDC (central bank digital currency) for cross-border payments (Multiple CBDC Bridge project). It has tested the cross-border retail use of the e-CNY in Hong Kong.
The e-CNY might be able to lower the costs and boost the speed of transactions across the border for both companies and residents. This will strengthen the financial integration between the two economies even more.
However, there are possible risks. This can include problems with compliance with regulations in both jurisdictions.
7. A Comprehensive Tax Reform Remains Imperative
The government is going to be spending a lot of money in the near future to maintain fiscal sustainability and address rapid population aging. They will likely consider a comprehensive tax reform to broaden the tax.
The tax system in Hong Kong can be very confusing for people. You can read more on tax services here.
The Importance of Knowing About the Hong Kong Economy in 2022
Hopefully, after reading the above article, you now understand how the Hong Kong economy might look in the year 2022. As we can see, the economy should grow significantly as it attempts to rebound from setbacks caused by the coronavirus pandemic and social unrest.
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