In charts: Hong Kong’s economy is struggling to recover lost ground

Hong Kong’s economy is still struggling to regain momentum, according to a Financial Times analysis of the latest data, with any benefits from lower US interest rates and a Chinese stimulus package expected to take time to filter down.

The Asian financial hub recorded growth of 2.8 and 3.3 per cent respectively in the first two quarters of this year. Economists expect it to show another positive reading for the three months to September.

But Hong Kong’s economic prospects have been hampered by slowing economic growth in China, higher US interest rates and a fall in tourist numbers.

Mounting bad debts from distressed properties and businesses are weighing on the territory’s banks, and could inflict further pain on the broader economy, analysts warn.

“It is a question of whether the traditional business models” — including financial services, tourism and real estate — “can still fit the new economic reality”, said Gary Ng, a senior economist at Natixis, citing the challenge of decelerating economic growth in China.

“Such a change may not only affect investment in mainland China, but also indirectly through Hong Kong.”

Prior to the coronavirus pandemic, strong demand for property from mainland buyers made Hong Kong one of the world’s most expensive real estate markets.

New immigration and investment schemes targeting arrivals from China have helped revive their numbers and buoy rents. Mortgage rates were still outpacing gross rental yields, noted Edward Chan, a director at S&P Global Ratings.

“Homebuyers [are likely to] prefer to wait until mortgage rates to come down . . . before considering buying,” Chan said. “There’s also incremental residential demand from new immigrants from mainland China, who are more likely to rent initially while gauging whether they will stay in Hong Kong over the long term.”

The Federal Reserve’s recent 50 basis point interest rate cut has raised hopes of some relief for the territory, where the currency is pegged to the US dollar.

Sun Hung Kai Properties, one of Hong Kong’s biggest real estate developers, sold more than 200 flats in a single day at its landmark new residential project last week, with one executive pointing to improving market sentiment.

But new home supply “continues to outstrip demand”, said Chan. Many would-be buyers are waiting for prices to fall further, according to real estate agents and analysts.

The commercial real estate market is also grappling with oversupply. Prime office rents have fallen about 17 per cent since 2022, according to commercial real estate firm Cushman & Wakefield, compared to a more than 20 per cent drop for home prices over the same period.

While remote working has not taken as much of a toll on the densely populated Chinese territory as in London or San Francisco, it has suffered a different problem: foreign companies downsizing operations or leaving, many of them concerned by their exposure to opaque security laws or their loss of autonomy under Hong Kong’s stringent pandemic social controls.

“Fewer foreign firms are coming to Hong Kong while Chinese companies’ [demand for] office space has diminished”, said Alex Lam, a Hong Kong-based executive director of office services at property agency Colliers.

The number of multinational companies with regional headquarters in Hong Kong fell to 1,336 last year from 1,541 in 2019, with those from the US accounting for one of the biggest drops.

The rate cut is likely to “lift transactions rather than prices”, said Ng, but “lower interest rates may not be able to override the structural challenges in commercial properties with at least another year of downturn”.

Commercial real estate investment volume was almost HK$34bn ($4.3bn) in the first nine months of this year, the second-lowest level since 2008 over the same period, according to real estate group CBRE. More than half of that figure represents distressed assets sold by overly leveraged borrowers or banks.

As pressure has accumulated on the real estate market, HSBC’s exposure to defaulted Hong Kong commercial property loans has surged almost sixfold to more than $3bn in the first half of this year.

Companies aren’t the only ones who have yet to return. The total number of inbound tourists in Hong Kong — most of whom come from mainland China — is still at about 30 per cent of 2018 levels, almost two years after the territory lifted Covid restrictions.

They are also spending less. Per capita tourist retail spending fell 30 per cent in the first six months of this year compared with 2018, according to Jeannette Chan, senior director of retail at JLL.

Retailers in Hong Kong said consumers were still cautious, though some expressed optimism about the Golden Week holiday this month.

But in a reversal of traditional flows, Hong Kong residents are increasingly spending across the border in Shenzhen, lured by lower prices. Outbound travel by residents, including to mainland China, will continue to put Hong Kong’s retail sector under pressure, said Ricky Tsang, a director at S&P Global Ratings.

Lower mortgage repayments could give a boost to consumer sentiment over the next few months, said Marcos Chan, executive director and head of research for CBRE in Hong Kong.

China’s recent stimulus package also lifted market sentiment in Hong Kong in recent weeks, with the territory’s Hang Seng index soaring before taking its biggest one-day dive since 2008 on Tuesday after investors were disappointed when expected fiscal spending failed to materialise.

“A big chunk of Hong Kong-listed corporates are heavily weighted to the mainland,” said Zhikai Chen, head of Asia equities at BNP Paribas Asset Management.

The index is up almost 25 per cent year to date, according to data from Refinitiv, but remains more than 35 per cent down from its 2018 peak. Home appliance maker Midea raised about $4bn in a Hong Kong secondary listing last month, giving the territory’s markets another much-needed boost.

But analysts doubted that the share sale signalled a broader revival in public offerings. The “growing dependence on China just when China is slowing down is a challenge,” said Heron Lim, economist at Moody’s Analytics.

“If China does improve its prospects, Hong Kong’s benefits as the gateway to China will also improve,” Lim added. But with “scant” detail about China’s fiscal stimulus plans, “the growth prospects are conservative”.