Hong Kong adapts to new market realities
Hong Kong has long been one of the world’s preeminent trading and financial hubs, and consistently viewed as an ideal location for conducting business in Asia.
With its pro-business policies, tax structures, rule of law and top-class infrastructure, the city was ranked third in the World Bank’s ‘Ease of Doing Business’ 2020 rankings.1 It is also home to one of Asia’s most active stock markets, which ranked number one globally in terms of worldwide IPOs in 2019.2 And since its return to China in 1997 the two economies have become more closely interlinked, helping Hong Kong benefit from the mainland’s enormous growth in the past two decades.
Near-term challenges
Over the past several months, however, Hong Kong’s open but highly trade-dependent economy has been hit by the effects of a global slowdown and the protracted China-US trade negotiations.3
“We are feeling the pressure of the global trade climate, as we are focusing on the US market but also have manufacturing in mainland China. As a result, customers are becoming more conservative and slower to order,” noted Patrick Ho, Managing Director of Product Infinity International.
Affected by various macroeconomic and geopolitical factors, the city’s economy shrank 1.2 per cent in 2019.4 The coronavirus outbreak could further hurt the economy, which is now expected to contract as much as 1.5 per cent in 2020.5
Dealing with disruption
As the city deals with these challenges, mid-corporates in Hong Kong, just like their counterparts on the mainland, are also working to adapt to disruptive trends in their respective sectors. Altering their business practices to serve changing customer needs and demands is one such change that companies are coming to terms with.
Firms such as Leo Paper Group are beginning to offer product variations “with customisation options that are easy to implement. This is also a way to reduce our production costs and fight the commoditisation trend,” said King Lai, the group’s chief financial officer.
In their efforts to sustain growth, local corporations are also turning to new technology. According to Thomson Lai, chairman of Trio Engineering, his firm has invested heavily in manufacturing execution system, automation and Industry 4.0 technologies such as Internet-Of-Things (IoT), to improve business performance.
“The digital transformation allowed us to improve our KPIs and we currently have an on-time delivery rate of 99 per cent and a quality level of 99.99 per cent,” Lai said.
The low-value manufacturing segment, where Hong Kong remains a global hub for the sourcing of products such as garments, is also experiencing rising competition and supply chain disruptions. For instance, traditional markets such as the United States, the European Union and Japan provide preferential access to goods produced in developing countries, including the Association of Southeast Asian Nations (ASEAN), which has in turn eroded the competitiveness of domestic manufacturers.
These issues, coupled with the uncertainty resulting from trade tensions, have “pushed us to focus more on markets other than the US. We are now also intending to shift a greater part of our production outside of mainland China,” noted Kevin Au Yeung, Director of Tak Fook International Trading.
Growing regional focus
Despite global market uncertainties, Hong Kong companies are well placed to gain from the substantial trade growth potential buoyed by regional deals. With mainland China being a source and destination for a large proportion of Hong Kong’s high-value products, the Closer Economic Partnership Arrangement (CEPA) offers mid-corporates preferential access to the mainland’s market.6
Further, mainland China and ASEAN have upgraded the ASEAN-China free trade area (ACFTA) agreement to further liberalise trade as well as economic, investment and regulatory cooperation.7 Hong Kong has been a direct beneficiary of the resultant increase in trade.8
Beyond the mainland, Hong Kong stands to gain from the recent ASEAN-Hong Kong, China Free Trade Agreement (AHKFTA), which provides the city’s businesses greater access to new regions and allows them to expand beyond traditional markets, such as the United States and the European Union.9 In 2018, Hong Kong’s domestic exports to ASEAN amounted to over USD1.07 billion, accounting for 18.2 per cent of Hong Kong’s total domestic exports, making ASEAN the second largest export market for Hong Kong goods.10
South Asia, as the fastest growing consumer market globally, also provides a wide range of opportunities for low-value goods. The region saw a compounded annual growth rate (CAGR) of 4 per cent in global exports between 2012 and 2017 and 3 per cent CAGR in imports from Hong Kong during the same period.11 In 2018, South Asia’s imports grew by as much as 15.3 per cent and were forecast to grow by 5.7 per cent in 2019.12
A promising future
Mainland China has long been Hong Kong’s largest trading partner, accounting for about half of the city’s total trade by value. Likewise Hong Kong was mainland China’s largest source of realised foreign direct investment in 2018, accounting for about 54 per cent of FDI inflows.13
At the same time, Hong Kong has served as a gateway for foreign investors seeking to enter mainland China. This is especially evident in the banking and finance sector with initiatives such as the Stock and Bond Connects, and Mutual Recognition of Funds, supporting the opening up of mainland China’s markets to global investors and helping the city to integrate better with the mainland’s economy.14
The city stands to benefit from being part of China’s Greater Bay Area initiative.15 The GBA, which connects Hong Kong with Macau and nine other cities in southern China, including Shenzhen, will strengthen regional cooperation by enabling these cities to leverage each other’s core strengths and resources – such as technological innovation, access to financial markets and manufacturing prowess – and foster overall economic development.16
The Hong Kong government has also taken fresh steps to revive business confidence in the city.17 These include a nearly USD2.7 billion economic stimulus package in late 2019;18 USD15 billion relief package to the city’s residents and businesses to offset the impact of the coronavirus outbreak;19 and, plans to attract private equity funds and family wealth management offices to set up shop in the city20 to shore up its reputation as a global financial hub and advance long-term growth.
For Hong Kong, clearly, short-term obstacles are significantly outweighed by its strengths, which should generate fresh economic momentum and help brighten the city’s growth prospects.
1 opens in a new windowhttps://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.pdf
2 https://www.caixinglobal.com/2019-12-18/hong-kong-ranks-top-in-global-ipo-markets-for-2019-101495294.html
3 https://www.caixinglobal.com/2019-08-15/hong-kong-cuts-gdp-growth-forecast-amid-unrest-101451445.html
4 https://www.scmp.com/news/hong-kong/hong-kong-economy/article/3052729/sp-expects-gradual-weakening-hong-kong-economy
5 https://www.ft.com/content/e170894c-5866-11ea-a528-dd0f971febbc
6 https://www.scmp.com/news/hong-kong/economy/article/2100442/china-and-hong-kong-sign-two-trade-agreements-giving-local
7 https://www.china-briefing.com/news/asean-china-fta-amendments-ease-market-access/
8 https://www.gtreview.com/news/asia/asean-hong-kong-fta-enters-force-to-begin-intra-regional-tariff-removals/
9 https://theaseanpost.com/article/asean-hong-kong-fta-comes-effect
10 https://www.tid.gov.hk/english/aboutus/publications/factsheet/asean.html
11 PwC report; World Bank, World Integrated Trade Solutions, ‘Textiles and Garments Trade’, 2012-2017
12 South Asia Economic Focus report – The World Bank; Fall 2019; page 84; opens in a new windowhttp://documents.worldbank.org/curated/en/111541571218505623/pdf/South-Asia-Economic-Focus-Fall-2019-Making-De-centralization-Work.pdf
13 https://www.tid.gov.hk/english/aboutus/publications/factsheet/china.html
14 HKTDC Research, ‘Economic and Trade Information on Hong Kong’, August 2019
15 https://www.straitstimes.com/asia/east-asia/timeline-to-more-integration-outlined-in-greater-bay-area-plan
16 https://www.bayarea.gov.hk/en/about/overview.html
17 https://www.ft.com/content/6bf3a144-e63e-11e9-9743-db5a370481bc
18 https://www.reuters.com/article/us-hongkong-protests-stimulus/hong-kong-announces-fresh-relief-measures-of-255-million-to-boost-economy-idUSKBN1X10R6
19 https://www.thestar.com.my/news/regional/2020/02/26/hong-kong-unveils-stimulus-package-with-cash-handout
20 https://www.scmp.com/business/companies/article/3026599/hong-kong-unveils-plans-repair-damage-inflicted-protests-its