Commentary: Hong Kong’s way forward

These are particularly uncertain times for the global economy. Under Trump 2.0, a very noisy Washington has created considerable concerns about the outlook for national and international security, great power rivalry, long-held economic partnerships, trade, and financial markets. For Hong Kong, long under stress due to a struggling property market and weak consumer sentiments, the challenges are particularly acute.

But in distress lies the seed of renewal. Faced with outflow of professionals, Hong Kong has embraced liberal visa schemes. Weakness in property market has led to a number of supportive regulatory measures. Faced with a strong currency, the tourism model is being recalibrated. To support faltering demand, the public sector is stepping up.

The 2025 budget is an apt illustration of the challenges at hand and responses in play. The budget contained targeted measures to support investment, property sector, and tourism, with the goal to hitting 2%+ annual growth for the rest of the decade.

Tourism and consumption

The government has allocated HKD1.2bn to the Tourism Commission and Tourism Board to implement the “Tourism is Everywhere” initiative and the Development Blueprint for Hong Kong’s Tourism Industry 2.0. This policy aims to attract younger mainland Chinese consumers by shifting their focus from luxury goods to experiential tourism. The initiative is bolstered by the success of the multiple-entry Individual Visit Endorsement scheme, which has already facilitated over 700,000 visitors since its launch. Additionally, high-profile events, such as the National Games of China at the state-of-the-art Kai Tak Sports Park, are expected to drive both visitation and spending. These efforts are crucial given the weak retail market, evidenced by a 7.3% decline in sales last year.

Property

The government has further raised the eligibility threshold for minimum stamp duty (HKD100 per transaction) from HKD3mn worth properties to HKD4mn, aiming to support demand for smaller units. This move is expected to help stabilize the residential market, which is showing signs of recovery, thanks to the commencement of the rate cut cycle and the relaxation of loan-to-value ratios in 4Q24.

In response to the supply hangover in the commercial real estate sector, the government will halt commercial land sales. With an anticipated supply of 4.7mn sqft, compared to 2.4mn sqft in 2023-24, the action should soften the downward pressure on prices.

Private investment

The government will inject HKD1.5bn into the BUD Fund and the Export Marketing and Trade and Industrial Organization Support Fund. The principal moratorium under the SME Financing Guarantee Scheme lasts further to address capital flow challenges for SMEs.

Riding on the acceleration of global and China AI development, Hong Kong will allocate HKD1.0bn to set up AI R&D institute. It will also launch AI investment in manufacturing lines. A new batch of 10 strategic enterprises including tech and AI companies are expected to bring HKD50bn investments into Hong Kong and create 20,000 job opportunities.

Public investment

Northern Metropolis is the key initiative to strengthen connectivity with the Greater Bay Area (GBA) in upcoming years. The government will earmark HKD3.7bn to expedite infrastructures in Hong Kong Park in Hetao Co-operation Zone. The Hong Kong‑Shenzhen Western Rail Link and the Northern Link Spur Line will be advanced to develop the "GBA on the Rail" concept.

Government spending on capital expenditures (CAPEX) as a percentage of GDP is projected to increase from 4.1% 2023-24 to 4.9% in 2024-25 as a result. However, due to budget constraints, some projects may undergo adjustments.

Talent

Hong Kong is set to further enhance its “New Capital Investment Entrant Scheme” after easing restrictions last October. In the first 10 months since its launch, the program has attracted 240 applications, by generating HKD6.6bn in investments.

The government has expanded its talent shortage list, adding nine in-demand professions across finance, architecture, law, and transportation. By end of 2024, various talent admission schemes have received around 430,000 applications, with over 180,000 professionals and their families relocating to the city. Retention will be key, with officials expecting at least 50,000 successful visa extensions annually from 2025 to 2027.

Financial market

Advancing RMB internationalization with Middle East and ASEAN is the key focus. With offshore RMB liquidity pool expanded to RMB1.1trn, Hong Kong has provided more RMB investment products and risk-management tools. The HKD-RMB Dual-Counter Trading mechanism lays the groundwork for future RMB listings of foreign companies, with plans to integrate it into Stock Connect. The authorities will also legislate the stamp duty payable at renminbi stock trading counters to be settled in RMB. HKEX will also seek to increase recognition of overseas exchanges to attract secondary listing. Facilitating the listing of private equity funds is another key task in view of the rising demand for wealth management.

For corporate borrowings, the HKMA will launch a new RMB100bn trade financing liquidity facility for banks to provide low-cost renminbi financial services.

Budget deficit

Hong Kong has experienced fiscal deficits for three consecutive years since 2021, with the 2024-25 deficit forecast revised from 1.8% to 2.7%. The ratio of fiscal reserves to monthly public spending has significantly decreased, from over 28 months in 2019 to approximately 10 months.

While the government projects a reduction in the deficit to 2.0% by 2025-26, the city's fiscal position remains strained, compounded by sluggish land sales. The FS outlined a blueprint for maintaining fiscal discipline moving forward.

Expenditure

Cost efficiency has become paramount in managing the deficit. Social welfare and healthcare spending has increased by around 10% annually over the past 5 years, driven by an aging population, while housing expenditure jumped by 14%. Key policy measures include capping the HKD2 transport subsidy and tightening the threshold of the Public Transport Fare Subsidy Scheme. Additionally, a pay freeze for government authorities and a reduction of approximately 10,000 positions have been implemented as part of cost control efforts.

Land premium and other indirect tax

Declining land premium revenue remains a substantial challenge, with its share of total revenue falling from 27% in FY17/18 to 13% in FY23/24. From Mar-Dec 2024, land premium revenue reached only HKD6.9bn, representing about 20% of the forecast. Due to high unsold inventory and upcoming completions, developers have refrained from acquiring land, prompting the government to suspend commercial land sales. Meanwhile, the relaxation in stamp duty will further diminish indirect tax revenue.

Stronger asset market activity may mitigate some of these revenue losses. A major residential project was oversubscribed by 95 times, and daily turnover on the stock market increased from HKD105bn in 2023 to HKD139bn over the past 12 months, with projections indicating further growth to HKD150bn in 2025.

Air passenger departure tax has been raised from HKD120 to HKD200. Basketball betting duty is also under the government’s radar to broaden tax bases.

Direct tax

The expansion in the number of taxpayers and corporations is expected to increase direct tax revenues. Profit and salary taxes account for 45-50% of government revenue. The number of foreign regional headquarters in Hong Kong rose by 5.5% YoY to 1,410 in 2024, driven by the return of talent and increased Chinese capital and outward direct investment.

Bond issuance and HKD rates implication

Against this backdrop, the government plans to extend its infrastructure and green bond issuance to HKD150–195bn during FY25/26–FY29/30, with 56% being allocated to refinancing short-term bonds. The bond issuance cap will be raised from HKD500bn to HKD700bn. Hong Kong’s low public debt-to-GDP ratio provides ample room for this increase, and even with the additional issuance, the ratio is projected to rise only from 9% to 12%-16.5% in the medium term, well below international standards.   


To read the full report, click here to Download the PDF.