Hong Kong's growth dips amidst high policy rates

The expansion will be driven by the recovery of tourism, and consumer spending.

Hong Kong is expected to grow by 2.8% as tourism and domestic spending recover however this is still lower than the 3.2% recorded in 2023.

In the latest Hong Kong Economic Monitor, Hang Seng Bank Chief Economist Thomas Shik said that despite the recovering tourism and domestic demand boosting the economy, high policy rates continue to be a challenge.

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“Hong Kong interbank rates are likely to stay high until the Fed actually moves to ease policy, and so are borrowing costs for businesses and households,” Shik said.

The analyst added this hurdle will be coupled with a weak external environment.

In the first quarter of 2024, Hang Seng Bank said financial market sentiment has improved due to expectations that the worst for the Hong Kong economy might be over. The Hang Seng Index has rebounded by over 10% after falling below 14,800 in late January as the city and China implement efforts to boost economic growth.

The report also noted China’s announcement last year regarding the issuance of an additional $1.08t (RMB1t) worth of special treasury bonds. Premier Li Qiang also said in March that ultra-long term bonds will be issued in the coming years. Meanwhile, the People's Bank of China has reduced banks' reserve requirement ratio by 50 basis points and lowered the five-year loan prime rate by 25 basis points.

Shik said that whilst these moves aim to stabilise the Chinese economy, they will also benefit Hong Kong since Beijing is the latter’s largest trading partner. 

Hong Kong is also implementing strategies to boost domestic growth, which includes Financial Secretary Paul Chan Mo-po scrapping property restrictions and announcing new initiatives to improve tourism and financial markets, the analyst said. These moves, however, will take time before they reflect on real activity, the expert noted.

Whilst export value grew 16.6% in the first two months of 2024, this can be attributed to low base comparison as data recorded in the same period last year was a 22.8% fall. Meanwhile, retail sales volume dropped by 0.4% in the first two months following a 4.8% increase in December 2023.

When it comes to home prices in February, these dropped to their lowest in more than seven years and the number of residential property transactions logged a four-month low.

“The recovery in the housing market and the broader economy is complicated by the fact that the US Federal Reserve is in no rush to ease its monetary policy, which Hong Kong has to follow due to the linked exchange rate system,” Shik said.