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Hong Kong is on the verge of the biggest recession since the Japanese occupation

31 Oct 2019 15:54|Marcin Lipka

“Protests in Hong Kong in the last 5 months have resulted in a contraction of the Hong Kong economy by more than 3% in just one quarter. Considering the scale of weakening exports, shrinking investments, and a dramatic drop in the number of tourists, one should not expect a quick return of the GDP growth path”, writes Marcin Lipka, Conotoxia Senior Analyst.

In mid-2019, widespread protests began in Hong Kong. Although these are mainly political, when young people demonstrate it is also associated with a deteriorating standard of living (a considerable increase in property prices) and significant income inequalities in this Special Administrative Region (SAR).

The social concerns also coincided with the unfavourable economic situation in Asia. The China-United States trade war which has started before millions of citizens marched into the streets caused a reduction in Hong Kong's trade with the world. Both exports and imports began to shrink by the end of 2018. August and September of this year show an overall decline in trade of around 8% (year-on-year), which is the worst result since the financial crisis over a decade ago.

Not only trade but also investments are going down

The reduction in trade and uncertainties related to the condition of the global economy have contributed to a decrease in investments. According to the Census and Statistics Department for (CENSTATD), already in the second quarter of this year, they decreased by more than 10%. In the following quarter, according to preliminary data published on Thursday, the investment component in GDP dropped by 16.3% compared to the same period last year.

Over the last 45 years, investments have fallen only once. These were the quarters of the greatest Asian crisis at the end of the previous century. In recent months, the regional government has tried to save the country by increasing public spending by as much as 5.3% (year-on-year) in the third quarter - the highest value in 15 years, but it did not prevent a dramatic collapse of the whole GDP.

The sale dropped by a fourth, the number of tourists is smaller by half

Closed streets or police intervention are not good environment for shopping. This is especially the case for goods other than food and beverages. The overall level of retail sales dropped to 11.5% in July and 23% in August (both year-on-year). Sales of durable goods (electronics, vehicles, furniture) decreased by 14.3% y/y in August and sales of clothing by 32.1% y/y in the same month. The sales value in shopping malls declined by almost one third, while consumer demand for jewellery, watches, and other luxury goods fell by 47.4% in August, according to official data provided by CENSTATD.


The last category is also a good measure of tourist spending. Hong Kong Tourism Board data show that the number of SAR visitors fell by more than 34% to 3.1 million in September. This is the second consecutive year-on-year decline of more than 30%. The majority of tourists visiting Hong Kong are Chinese citizens (70-80%). According to the Hong Kong Economic and Trade Office, tourists visiting the region spend an average of 6.6 thousand HKD (about 770 EUR) per person during one visit (2018), and the total annual expenses reached 328 billion HKD (about 13 percent of the total GDP).

So far, there are no signals that the tourism is improving. On Wednesday, Bloomberg quoted the Hong Kong administration head Carrie Lam who said that in the first half of October, the number of visitors decreased by about half compared to the same period last year. Given this enormous contribution of tourism to retail sales, it is expected that the rate of decline will remain at around 25% in the coming months. Bloomberg's economists estimate that in September, it could have contracted by 28.5% y/y.

This could be the worst period since the Japanese occupation

The combination of three negative factors - a terrible situation of the foreign trade, a collapse in investment and a spectacular decline in retail sales - means that during the third quarter of this year, the GDP declined by 3.2% q/q (in the second quarter it was decreased by 0.4% q/q) and 2.9% y/y. In the last 30 years, Hong Kong suffered only once a slightly worse downturn - by 3.4% at the beginning of 2009, but the next quarter was characterised by 3.6% increase.

Taking into account that the preliminary data do not include September retail (publication in early November), it is expected that they will be revised downward even further. There is also no expectation of a rapid recovery in the coming weeks, as was the case in 2009. The protests are in progress, the investment is falling, tourists are avoiding the region. The current situation may, therefore, be much more complicated than at the time of the financial crisis. Looking at the World Bank's data (1960-1990), Hong Kong has not been in recession at all. Also, in the 1950s, due to the extremely rapid growth and inflow of labour, this was probably a period without a few quarters of GDP contraction. As a result, the current decline in economic activity is likely to be the greatest since the occupation of Hong Kong by Japan and the dramatic migration of more than half of the region's population in the first half of the 1940s.

31 Oct 2019 15:54|Marcin Lipka

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