Risks to Hong Kong Economy

Transcription

1 Thomas Shik Acting Chief Economist Risks to Hong Kong Economy The slowing mainland China economy, the US Federal Reserve s policy tightening, and the strength of the Hong Kong dollar are all currently posing downside risks to the performance of the Hong Kong economy. We have revised our full-year growth projection down to 1.5% from 1.8%, following the weak first-quarter gross domestic product (GDP) growth report. May/June 2016

2 China growth slowing Slowing economic growth in mainland China has increased the downside risk to the Hong Kong economy as the city s economic cycles have become more closely aligned with those of the Mainland (Exhibit 1). The correlation coefficient between the two economies rose from 0.52 in the period from 1998 to 2006 to 0.62 in the years since There are also other indications. The Mainland s share of Hong Kong s total trade has increased to currently over 50% from 38% in Mainland tourists now account for 78% of total visitor arrivals, up from around 25% in 1998 (Exhibit 2). In addition, turnover on the Hang Seng China Enterprises Index is now equivalent to about 74% of that on the Hang Seng Index (HSI), up from 61% just three years ago. Exhibit 1: GDP Growth (year-on-year %) Exhibit 2: Hong Kong Tourist Arrivals (annually) Fed tightening Hong Kong should keep monetary policy loose in response to the increased downside risks to growth. However, the city s linked exchange rate system means that it must follow the US Federal Reserve (Fed) and tighten monetary policy. 1 The higher the correlation coefficient, the stronger the economic relationship. 2

3 The Fed lifted interest rates for the first time since 2006 in December last year. Fed officials expect two rate rises this year and further hikes in 2017 and 2018 (Exhibit 3). Although the currently large amount of aggregate balance in Hong Kong s banking system a measure of interbank liquidity in the city means that there is little chance for Hong Kong banks to raise interest rates in 2016, the continuation of the Fed s policy tightening implies that Hong Kong banks may have to start lifting rates at some point in the next couple of years (Exhibit 4). Exhibit 3: US Fed s Interest Rate Forecast Exhibit 4: Hong Kong s Aggregate Balance Hong Kong dollar strength Even though Hong Kong interest rates have remained steady, the linked exchange rate system means that the Hong Kong dollar (HKD) tracks the US dollar (USD) closely and has therefore already appreciated considerably over the past few years. The Bank for International Settlements (BIS) HKD index a weighted average of the foreign exchange values of the HKD against a basket of currencies rose by about 13% between mid-2014 and early 2016 (Exhibit 5). While it has recently declined from its peak, markets expect the prospect of Fed tightening to lead to further strengthening of the USD and, hence, the HKD. A new phase of strengthening for the HKD may add to the list of the negative factors weighing on the Hong Kong economy, particularly with respect to investment and trade. 3

4 Exhibit 5: HKD & USD Index Exhibit 6: Hong Kong GDP Growth (year-on-year %) Economic outlook Hong Kong s first-quarter economic data surprised the markets, with gross domestic product (GDP) growing by just 0.8% on an annual basis, the lowest rate in four years (Exhibit 6). On a quarter-on-quarter basis, GDP shrank by 0.4%, the first contraction since the second quarter of The weakness was widespread across sectors. Tourist spending declined, contributing to a 4.9% annual decrease in exports of services, the biggest drop in seven years. Domestic spending slowed, with private consumption expenditure easing to 1.1% on an annual basis, a low not seen since the third quarter of Trade activity also declined, with a weakening outlook for the global economy. Real exports of goods fell by 3.6% on an annual basis, marking a fourth consecutive quarter of contraction, and imports were down 5.4%, the largest decline since the global financial crisis in Although net trade boosted GDP annual growth by 1.1 percentage points, this was mainly because of a larger decline in imports than exports. In addition, gross domestic fixed capital formation, a proxy of investment, dropped by 10.1% on an annual basis after a 9.4% drop in the fourth quarter last year. This reduced first-quarter 2016 GDP annual growth by 2.3 percentage points. 4

5 Given the weak first-quarter GDP growth rate, we have revised our GDP forecast for the whole of 2016 down from 1.8% to 1.5% (Exhibit 7). Incoming data continued to show annual declines in retail sales and exports in April, albeit at a slower pace than the first quarter. In any event, with the Mainland economy slowing, the Fed tightening monetary policy and the strength of the HKD, Hong Kong s economic growth is now trending down. The negative factors weighing on growth may persist for some quarters to come, serving to prolong this downward trend. Exhibit 7: Hong Kong Annual GDP Growth 5

6 Hong Kong Economic Monitor Statistics June 2016 GDP Retail sales Nominal Real Value Volume Exports Foreign trade HKD bn yoy (%) yoy (%) yoy (%) HKD bn yoy (%) HKD bn yoy (%) HKD bn (%) yoy (%) , , , , , , , , , , , , , , , Imports Trade balance Unemployment rate (s.a.) Inflation Q , Q , Q Q , Q , Q , Q Dec 2015 NA NA Jan 2016 NA NA Feb NA NA Mar NA NA Apr NA NA YTD , , Total deposit RMB deposit Total loan Money supply (M3) Residential property price Tourist arrivals HKD bn yoy (%) RMB bn yoy (%) HKD bn yoy (%) yoy (%) Index ytd (%) '000 yoy (%) , , , , , , , , , , , , , , , , Q , , , Q4 10, , , , Q , , , Q2 10, , , Q3 10, , , Q4 10, , , Q , , , Dec , , , Jan , , , Feb 10, , , Mar 10, , , Apr 11, , , YTD 11, , , NA: not available; yoy= year-on-year; ytd= year-to-date Source: Census & Statistics Dept., HKMA, Rating & Valuation Dept., Hong Kong Tourism Board, Macrobond, CEIC, Hang Seng Bank 6

7 GDP Growth Consumer Price Inflation Unemployment Rate (s.a.) Retail Sales Value Exports & Imports Residential Property Price Index 7

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