Hong Kong, S.A.R.
major macro economic indicators
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(e): Estimate (f): Forecast *Fiscal year 2023: 1st April 2023 - 31st March 2024
- Open economy
- High-quality infrastructure
- Top-class global financial centre, airlock between China and the rest of the world
- Healthy banking system
- HKD pegged to USD
- Lack of innovation and diversification of the economy
- Exposure to slowdown in mainland China
- Mismatch between business cycles in the United States and China amid HKD-USD peg
- Real estate sector risks and housing affordability
- Rising income inequality
- Industry has fully relocated to mainland China
- Caught in between US - China tensions
Economic activity rebounds following the post-Covid reopening
In 2022, Hong Kong's economy contracted, held back by the fifth local wave of Covid and the associated very tight restrictive measures applied under the "zero-Covid" policy. Government spending, up 8.1% year-on-year, was the main driver of growth, while tighter financial conditions significantly impacted domestic demand and the deteriorating external environment hampered exports.
The recovery will be modest in 2023, helped by the gradual post-Covid reopening. The economy will be driven by private consumption (68% of GDP) which will pick up again under the effects of brighter trends in the economic outlook, the cessation of emigration, which had led to the departure of a qualified, wealthy and high-spending workforce still at the beginning of 2022, as well as the expected continuation of a strong labour market. While the seasonally adjusted unemployment rate gradually declined to reach 3.4% in January 2023 after peaking at 5.4% in April 2022, job market conditions are expected to continue to improve in the coming months as economic activities gradually return to normal, inbound tourism bounces back and travel between Hong Kong and the mainland recovers fully.
The improved business outlook will also encourage private investment, which is expected to pick up in 2023 with the acquisition of intellectual property products and equipment for financial and transport services, Hong Kong being one of the world's major international financial and commercial centres. However, the level of investment could be impacted by the tightening of financial conditions and the deterioration of the business environment. On that score, recent changes in governance practices have reduced political pluralism and appear to have undermined the confidence of the population and foreign investors in the state. Public investment, too, will contribute positively to economic expansion as the government continues its efforts to develop infrastructure and housing provision. As the island has been experiencing a severe property crisis, which the central government in Beijing believes has caused public discontent, the expansion of housing stock has been a key focus of government policy. Local authorities have thus accelerated the development of new projects on existing land, in line with the development strategy of the northern metropolis, which should help support fixed asset investment.
Last, net exports will contribute negatively to growth as weakening growth momentum in advanced economies will weigh on exports of services and goods. For the latter, this mostly involves re-exports due to the weak manufacturing base, as well as Hong Kong's roles as a regional hub and gateway to mainland China. Exports will, however, be partly supported by the expected rapid recovery of the mainland economy and the lifting of trucking restrictions at the Hong Kong-mainland border. In addition, tourism will be a genuine growth driver as the lifting of quarantine measures on incoming visitors will encourage more tourists to the island.
Strong public and external finances
Hong Kong's fiscal position deteriorated in FY22 (April 2022 to March 2023) mainly due to increased public spending related to the pandemic. However, its budget deficit is expected to narrow in 2023 as financial support initiatives for households and businesses - including unemployment assistance, government loan guarantees for businesses, and unconditional electronic cash transfers to households - are lifted. The government plans to reduce its total expenditure by 6% to HK$761 billion despite ongoing spending to address the population’s quality of life concerns, particularly regarding housing issues. To support the economic recovery, the government will issue new green bonds, while increased fiscal spending and the roll-out of aid measures led to a sharp decline in Hong Kong's fiscal reserve over three years. It fell by about 12 percentage points over this period and could fall to 24% of GDP by FY24. That said, Hong Kong's public debt, excluding the exchange fund instruments used to manage the currency board for the US dollar peg, remains low.
Despite lower imported commodity prices and growth in services exports, the current account surplus is expected to narrow slightly further in 2023 on back of the decline in the trade surplus. The strengthening of domestic demand and the consequent increase in imports will widen the deficit in trade in goods. This development will only be partially offset by growth in the surplus on services. The latter will benefit from the rebound in the tourism sector and the continued strength of financial services as Hong Kong remains an attractive location for wealth and asset management with links to mainland China. Moreover, while profits repatriated by domestic companies will remain strong, the primary income surplus will continue, more than offsetting the modest secondary income deficit. The current account surplus will allow Hong Kong to accumulate external financial assets as the island is already a major creditor to the world, with sovereign net foreign assets of about 130% of GDP and an international investment position of about 590% of GDP.
Tightening of the political system and changes in the electoral system
Hong Kong's political climate has been profoundly transformed since the passage of the National Security Act and the mass resignation of opposition lawmakers in 2020. Radical changes to the electoral system, in particular the reduction in the proportion of directly elected legislators in the Legislative Council (LegCo), have eradicated political pluralism when opposition parties once advocated greater autonomy for Hong Kong. With no opposition in the LegCo, the political stability of the current government, led by John Lee since May 2022, is expected to go unchecked until the next elections in 2025. Tighter controls over the political system, reinforced by forthcoming local security legislation aimed at discouraging objections to central government influence over local politics and hindering public debate on politically sensitive issues, makes the widespread protests seen in 2019 and 2020 unlikely.
Foreign reactions to recent developments in Hong Kong's political landscape have been mostly negative, with G7 foreign ministers expressing "serious concerns" about the Special Administrative Region's electoral changes. Since the National Security Act, the US now considers Hong Kong and mainland China to be one and the same customs territory and has imposed sanctions on some local officials.
Last updated: June 2023
Bank transfers are one of the most popular payment instruments for international and domestic payments in Hong Kong, thanks to the territory’s highly developed banking network.
Standby Letters of Credit also constitute reliable payment methods, as the issuing bank guarantees the debtor’s credit rating and repayment abilities. Irrevocable and confirmed documentary letters of credit are also widely used, as the debtor guarantees that a certain sum of funds will be made available to the beneficiary via a bank, once specific terms agreed by the parties are met.
Cheques and bills of exchange are also frequently used in Hong Kong.
During the amicable phase, the creditor sends one or more notice letters (summons) to the debtor, in an attempt to persuade them to pay the due debts.
The Practice Directions on Mediation, introduced in 2010, set out voluntary processes that involve trained and impartial third party mediators. This helps both parties involved in a dispute to reach an amicable agreement for repayment. Debtors and creditors are usually urged to pursue this process before resorting to legal action.
The judicial system in Hong Kong comprises three distinct courts:
- The Small Claims Tribunal handles relatively small cases (of up to HKD 75，000 in a fast and efficient manner. The rules of procedure are less strict than in those of other types of courts and no legal representation is permitted;
- The District Court has jurisdiction over more substantial financial claims, ranging from HKD 75,100 to HKD 3,000,000;
- The High Court deals with much larger legal disputes and is additionally charged with handling claims of over HKD 3,000,000.
Hong Kong’s District court and High Court allow legal representation. Cases in these courts are initiated by issuing a Writ of Summons to the debtor, who then has 14 days to file a defence. The creditor is also required to file a notarised Statement of Claim. If the debtor responds to the Writ and requests a payment plan, the creditor has two weeks to reply. If the parties find it impossible to enter into an agreement, a hearing will be called for by the judge, during which a judgment is normally made. If the debtor does not respond, a default judgment can be rendered.
Enforcement of a legal decision
A domestic judgment is enforceable once it becomes final (if no appeal is lodged within 28 days). If the debtor fails to comply with the judgment, the creditor can request an enforcement order from the court. This usually entails either a garnishee order (allowing the creditor to obtain payment of the debt from a third party which owes money to the debtor), a Fieri Facias order (which enables a bailiff to seize and sell the debtor’s tradable goods), or a charging order (for seizing and selling the debtor’s property to satisfy the debt).
Foreign judgments are enforced under the Foreign Judgments (Reciprocal Enforcement) Ordinance. Decisions issued in a country with which Hong Kong has signed a reciprocal treaty (such as France or Malaysia) only need to be registered and then become automatically enforceable. Where no such treaty is in place with a country, enforcement can be requested before the court, via an exequatur procedure.
An Arrangement on Reciprocal Recognition and Enforcement of judgments in Civil and Commercial Matters (REJA) was concluded with the People’s Republic of China in 2006. This makes judgments rendered in Mainland China or in Hong Kong automatically enforceable by the courts of the other contracting party.
Out-of court proceedings
The law does not provide for formal procedures for restructuring company debts. Restructuring proceedings therefore need to take place through informal “workouts” or a scheme of Arrangement.
The main formal procedures for companies in financial difficulties in Hong Kong are as follows:
- A scheme of arrangement.
- Appointment of receivers.
- A members’ voluntary liquidation (which is only available for a company which is still solvent) but may be used where, for example, an entity is itself solvent but is part of a wider group which is in financial difficulty.
- A creditors’ voluntary liquidation.
- A compulsory liquidation.
Hong Kong legislation also contains a procedure which allows the directors of a company to commence a voluntary liquidation without holding a shareholders’ meeting.
Scheme of Arrangement
A Scheme of Arrangement is a statutory, binding compromise reached between a debtor and its creditors. It must be accepted by all classes of creditors. A court reviews the plan, before sanctioning the convening of separate meetings with creditors. The scheme must be approved by the court, at least 50% of creditors in terms of number and 75% of creditors in terms of value of debts. An administrator is appointed to implement the scheme.
Appointment of receivers
An application for the appointment of a receiver by the Court is made by summons to a Judge of the High Court of Hong Kong following a procedure set out in the Rules of the High Court of Hong Kong. Note that a Master of the High Court of Hong Kong also has the power to appoint a receiver where the appointment of the receiver is made by way of equitable execution against a judgment debtor.
As regards the appointment of receivers out of Court, the procedure for appointment will normally be set out in the relevant security document. A receiver appointed under the statutory power implied into mortgages of land must be appointed in writing. In order for the appointment of a Receiver out of Court to be valid, the receiver must accept his appointment.
Liquidation can be voluntary or compulsory. It involves selling the debtors’ assets in order to redistribute the proceeds to creditors and dissolve the company. Voluntary liquidation can be either a member’s voluntary liquidation (MVL), or a creditors’ voluntary liquidation (CVL). In both cases, company directors lose control and a court-supervised liquidator is appointed.
Creditors can initiate a compulsory liquidation by filing a winding-up petition with the courts on the grounds of insolvency. An MVL is a solvent liquidation process whereby all creditors are to be paid in full and any surplus distributed among the company’s shareholders. CVLs are insolvent liquidations.
Regulatory Update on Insolvency regime
The Hong Kong Government Gazette’s Companies (Winding Up and Miscellaneous Provisions) Ordinance 2016 (“Amendment Ordinance”) entered into force on February 13, 2017. These updates were introduced in order to increase protection for creditors, and to streamline and improve regulations under Hong Kong’s corporate winding-up regime.