(Bloomberg) — Hong Kong’s leader is expected to make boosting the economy a priority in an annual speech this week, using it to lay out an agenda that includes a possible cut in liquor tax and possible measures to improve the city’s status as a financial center.
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Chief Executive John Lee will deliver his policy speech at 11 a.m. Wednesday, with an expected focus on bringing the city’s mojo back after a pandemic slump. China’s slowdown and geopolitical uncertainties have also weighed on its nearly $400 billion economy, which relies heavily on the flow of goods and money between its giant Chinese neighbor and the rest of the world.
Lee has set his sights on boosting the economy after strengthening Beijing’s authority over the former British colony with a national security law. He introduced the legislation this year to silence dissent he accused of stifling business, although the move risked increasing tensions with Western governments, which criticized the law for restricting open discussion silenced.
Lee pledged to seek innovation and change as he invited public opinion on his third policy report before it is presented to the Legislative Council this week. At a regular press conference on Tuesday, he said the theme of this year’s speech is “reform for development and building our future together.”
High on the city’s list of headwinds are an ailing real estate sector and sluggish consumption. China’s recent stimulus and U.S. Federal Reserve interest rate cuts may provide some relief, though these factors are largely out of officials’ hands in the city of about 7 million.
“I don’t think there should be many new policies that will shock Hong Kong,” said Ronald Chan, chief investment officer at Hong Kong-based Chartwell Capital Ltd. “I am generally positive about the opportunities ahead, but whether these opportunities will materialize would be difficult to immediately kick-start or stimulate the economy.”
According to the South China Morning Post, Lee will try to attract more investors by renewing a HK$2 billion ($258 million) Innovation and Technology Venture Fund. The newspaper, citing unidentified sources, also reported additional measures to diversify the economy, including boosting the medical and biotechnology sectors.
When it comes to the real estate market, Lee has few obvious policy options. His government lifted most restrictions on home purchases in February, and Lee announced cuts to property purchase taxes in his 2023 speech. Prices rose slightly earlier this year before falling further to their lowest level since 2016.
Any proposals will probably provide little relief for equity investors. Lee cut stamp duty on stock trading last year to boost liquidity, but the city’s Hang Seng index remains one of the worst-performing major stock measures globally as of late 2020.
A wave of bankruptcies points to eroding corporate finances. Retail sales and tourist arrivals remain below pre-pandemic levels, a period when the city’s image took a hit from draconian quarantine measures and a crackdown on pro-democracy political opposition.
In an effort to burnish its reputation as a premier nightlife and dining destination, Hong Kong planned to cut liquor taxes, Bloomberg News previously reported. If implemented, this measure could help revive sales for restaurants and retailers struggling to cope with the decline in consumption, which accounts for more than half of economic growth.
What Bloomberg Intelligence Says…
“This year’s policy speech could focus on reviving the economy through the key pillars of tourism, trade and finance. Potential measures such as lowering alcohol taxes and organizing more mega-events fit into a broader theme of revitalizing tourism and consumption in the city. In the area of housing, policy may perhaps focus on the issue of sub-divided housing, but given that all restrictions on house purchases, or ‘heavy’ measures, have recently been abolished, it is not clear how much more policy government will provide in terms of housing. the short term.”
– Marvin Chen, analyst
However, this could also depend on whether Beijing can revive China’s growth momentum, as the city’s tourism and service sectors are closely tied to sentiment across the border. Much also depends on the pace of Fed rate cuts, as the city’s currency is pegged to the US dollar.
If China’s policy stimulus “can effectively get growth back on track, retailers and the broader services sector would likely be the biggest beneficiaries across the Asian region,” Bank of America economists said. Chinese demand makes up almost 10% of the total value of the city’s service sector, they said in a research note, citing OECD data.
Samuel Tse, economist at DBS Bank, said Hong Kong is in a period of “soft recovery” as lower interest rates and the boost from additional Chinese stimulus measures flow through.
“We are obviously not looking at a V-shaped recovery because all this recovery depends on the stock market movement, which depends on the policies in mainland China,” Tse said.
Attracting talent has been a major challenge for Hong Kong after thousands of expats left the city following the strict curbs on the Covid pandemic. Tse expects Lee will focus on policies that make it easier for foreign workers to move to Hong Kong.
–With help from Twinnie Siu and Alfred Liu.
(Updates with Lee’s comments in fourth paragraph)
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