SINGAPORE, February 16, 2022 – Hong Kong’s economy has been rebounding strongly due to the progress in COVID-19 vaccinations, and recovering domestic and external demand. Targeted policy support to hard-hit sectors and supportive credit conditions remain important to safeguard the recovery. In the long term, further efforts to address structural challenges including an aging population, housing supply, economic inequality, and climate change are essential to ensure sustainable and inclusive growth.

These conclusions are highlighted in the 2021 Annual Consultation Report on Hong Kong published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report is based on findings from AMRO’s Annual Consultation Visit to Hong Kong from August 16 to 27, 2021, and data and information available up to 30 September 2021.

Economic developments and outlook

Growth rebounded strongly by 6.4 percent in 2021 according to the recent official data. It is projected to remain robust at 3.6 percent in 2022. Sizable fiscal and foreign reserves, as well as strong banking buffers, underpinned economic resilience, but the recovery has been uneven across sectors. On the one hand, financing and insurance continued to do well. On the other hand, although activities in retail, transport, and accommodation improved moderately, they remained below pre-recession levels in 2018 as inbound tourism was still at a standstill.

Looking ahead, the recovery of exports and private consumption will likely continue, supported by the improving global demand and the government’s Consumption Voucher Scheme. With the increased vaccination rate, labor market conditions will likely improve further. A sustained and broad- based economic recovery would require the lifting of social distancing measures and the reopening of borders with mainland China.

Risks and vulnerabilities

While the growth outlook has improved, downside risks in the short term are still significant, though they are not unique to Hong Kong. The most prominent risk stems from renewed infections and the consequent weakening in domestic and global demand. While relaxing border control measures prematurely could exacerbate such risk, prolonged strict border control measures might affect business sentiments. In addition, a sudden and sharper-than-expected tightening in US monetary conditions could impact financial market and economic activities. Furthermore, business and investor sentiment could worsen from an escalation of US-China tensions and protracted uncertainties over the regulatory environment.

In the medium term, there is uncertainty over the impact of the implementation of Base Erosion and Profit Sharing 2.0 on multinational corporations’ investments and government revenue. In the longer term, the aging population and climate change could pose major risks to growth and financial stability.

Policy recommendations

A gradual phase-out of fiscal support is appropriate to avoid “fiscal cliff” effects, given the lingering uncertainty over pandemic developments. Fiscal policy should continue to provide sufficient targeted support to hard-hit sectors and households in the near term. Authorities could deploy more stimulus measures should adverse shocks arise.

It is important to continue to ensure that liquidity in the banking system is sufficient and conducive to further credit expansion, especially to support hard-hit small and mid-sized enterprises. At the same time, the authorities should continue to closely monitor banks whose non-performing loans could surface more quickly once the forbearance measures and credit support are further phased out.

The authorities should maintain the current tight macroprudential policy stance for the residential property market, and could consider tightening measures if prices were to increase significantly faster in the short term, taking into account the risk management of banks and the resilience of the banking sector, economic fundamentals and the external environment. Steadfast efforts to boost the supply of both public and private residential housing will be essential to address the supply-demand imbalance and housing affordability down the road.

In the long term, it is essential to enhance Hong Kong’s competitiveness, explore new growth areas, and ensure sustainable and inclusive economic development. Expanding economic and financial linkage with mainland China and a strong edge in trade-related and professional services, as well as establishing Hong Kong’s status as a global green financing and fintech center will bolster growth. It is increasingly crucial to strengthen policy measures to address the issues of an aging population, income inequality, and climate change to ensure sustainable and inclusive economic development.

Looking ahead, fiscal prudence continues to be important and the government may consider increasing fiscal reserves when it is opportune to do so. The government is also encouraged to review the tax system and remain open to exploring other revenue options such as more progressive income taxes, a wealth tax and a modest value-added tax post-pandemic. In addition, the government can also consider issuing more long-term bonds to enhance its financing flexibility.

[1] For brevity, “Hong Kong, China” is referred to as “Hong Kong” in the text.

About AMRO

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute towards securing macroeconomic and financial stability in the ASEAN+3 region, comprising 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangement, the Chiang Mai Initiative Multilateralisation (CMIM), and provide technical assistance to members.

About AMRO’s Annual Consultation Report

The Annual Consultation Report was prepared in fulfillment of AMRO’s mandate. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.