Here's what could save Hong Kong's shrinking current account balance

Big infrastructure projects are crucial.

According to Deutsche Bank, if global growth were to rise quickly, the growth in transshipment receipts alone would likely push the current account surplus higher.

But as long as US and EU growth remains lacklustre the relatively stronger growth in demand in Hong Kong will likely continue to shrink the current account balance.

Deutsche Bank noted that stronger global growth next year will probably push the current account back up into surplus. Much depends, then, on prospects for domestic demand – especially construction because we think this is where most of the rise in retained imports originates.

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We still expect a strong recovery in the US and EU economies by year-end, but at this point it looks to us like the current account will remain in deficit for most of the rest of this year. 

The government’s big infrastructure projects have helped to support growth as exports weakened since 2010, but in a classic currency board arrangement, with the current account in deficit the government would be looking to pull back investment spending to protect the currency.

We don’t see any sign of that, and with reserves of USD303bn there probably isn’t any need to be overly concerned.

In any event, the West Kowloon Cultural District project is reportedly falling behind schedule and with property prices stabilizing – and the government’s housing policy seemingly focussed on long-term projects (more land reclamation, a new town in the New Territories) -- perhaps the peak of construction growth has passed.

If so, then import growth may slow down somewhat, allowing the current account surplus to rise in 2014.