Hong Kong announced Wednesday it is scrapping all property curbs to revive a faltering housing market, increasing spending to boost tourism and strengthening efforts to lure back foreign capital.
The city, China’s international financial center, has been on a prolonged economic downturn not just because of the impact from the COVID-19 pandemic. More significantly it is suffering due to Beijing’s crackdown on the city’s various freedoms – supposedly allowed under the “one country, two systems” formula – that has spooked investors. The government is logging a deficit of HK$101.6 billion (US$12.9 billion), with fiscal reserves dropping to HK$733.2 billion for the financial year ending in March.
In his budget for 2024-2025 delivered to lawmakers, Financial Secretary Paul Chan said Hong Kong is lifting all extra stamp duties immediately to revive the city’s housing market.
“After prudent consideration of the overall current situation, we decided to cancel all demand-side management measures for residential properties with immediate effect,” Chan said, adding that the property-cooling measures are no longer necessary under current economic and market conditions.
Hong Kong’s property sector accounts for 8.5% of its GDP, one of the major contributors to growth. But housing prices, once among the most expensive in the world, have plunged 20% since their 2021 peak, hammered by fragile market sentiment and interest rate hikes. Analysts project a further 10% drop this year.
Chan said the Hong Kong economy is expected to expand by 2.5 to 3.5% in 2024. The economy grew 3.2% last year.
To revive the beleaguered tourism industry, the government has earmarked HK$1.1 billion to bring back visitors. The Hong Kong Tourism Board (HKTB) will host firework displays and drone shows at the city’s landmark Victoria Harbour every month, enhance the nightly light-and-sound show along the harborfront, as well as set up shops and restaurants in the vicinity.
“It's all part of an energizing effort to soft-sell Hong Kong,” Chan said. Selling the Hong Kong brand will also cover mega-events in the sports and arts areas, as well as financial forums. In the past few years, political uncertainties have prompted outflows of foreign and domestic capital and talent, much of it to nearby Singapore where investors are drawn to a stable investment environment.
Whether the latest spate of measures will pay off remains to be seen given the political pressure that the Chinese Communist Party sustains over the city.
The Hong Kong economy which is closely intertwined with that of China’s also bore the brunt of a slowing Chinese economy.
In recent years, the Hong Kong government has followed the path set by Beijing to raise capital through bond issuance. In 2024-25, it will issue HK$120 billion worth of bonds, of which HK$70 billion will be for retail investors. Taking the bond issuance into account, a deficit of HK$48.1 billion for the year is expected, and fiscal reserves will decrease to HK$685.1 billion.
A calculation by Radio Free Asia found that the total outstanding amount of bonds issued by the Hong Kong government stands at least at HK$300 billion, of which more than 20% are due within this year.
Some analysts worry that Hong Kong is heading towards a structural fiscal deficit, and its revenue from land sales model comes into question.
Chan said premiums from land sales and stamp duties in 2023-2024 total HK$19.4 billion, lower than the original estimate by HK$65.6 billion and also far lower than the previous year. Revenue from stamp duty of HK$50 billion is lower than the original estimate by HK$35 billion.
Debt and credit risks
Financial commentator Ngan Po Kong said that while bond sales are a common fund-raising tool used by the United States and other countries to increase asset flows, and the scale of their issuances exceeds that of Hong Kong’s, the Hong Kong issues bore higher risks.
“Hong Kong’s future debt level will be quite high, which will affect credit ratings and the stability of the Hong Kong dollar. The U.S. dollar is a stronger currency, and hence larger annual bond issuance is not a big problem. On the contrary, China's bond issuance level has been questioned for reaching an unhealthy level.”
Lee Siu-po, a research fellow at the Asia-Pacific Institute of Business at the Chinese University of Hong Kong, questioned the feasibility of the government's regular debt issuance to cover expenses, at a time when both the stock and property markets are in a slump.
“According to international accounting standards, borrowing money is not regarded as income. If the government uses debt as income, the repayment must be more because you have to pay interest. The question is where to use the borrowed money?
At present, Lee said Hong Kong’s debts are at a healthy level of below 4% of GDP, but warned that the next two years will be crucial, given the economy’s reliance on land sales and stamp duties if the property and stock markets remain in the doldrums.
Translated by RFA staff. Edited by Mike Firn.