Growth forecast and support policies

In his 2024 budget speech, Financial Secretary Paul Chan projected that Hong Kong's economy will grow 2.5-3.5% in 2024. To achieve this forecast, the government plans targeted policies and support for industries. Specific initiatives include lifting property market curbs, boosting tourism spending, and assisting SMEs with capital challenges. The goal is to strengthen recovery that has faltered after a post-pandemic rebound. Deeper supports were also introduced to cement the city’s long-term competitive edge in strategic sectors such as green finance, healthcare, and wealth management.

Property market

Measures to curb housing demand will be cancelled with immediate effect. This includes a Buyer’s Stamp Duty (BSD) that targets non-permanent residents and a New Residential Stamp Duty (NRSD) for second-time purchasers. The HKMA has also relaxed mortgage regulations by suspending stress tests and allowing some homebuyers to purchase properties with smaller down payments.

Abolishing extra stamp duties and easing mortgage regulations aim to stabilize Hong Kong's ailing property market and provide spillover benefits to other industries. Developers may accelerate projects in response, enabling the government to potentially increase tax intake and land sale revenues if sentiment improves (see “budget deficit” section). While a prior relaxation of property curbs last October failed to achieve the intended outcome, as evidenced by subsequent price declines, the latest measures aim to shore up housing industry support more firmly.

The gap between rental yields and mortgage rates has narrowed of late, indicating improving demand for homes. Yet a more lasting recovery will hinge on two important factors. Interest rates will need to edge lower in 2H24 to sustain buyer appetite (see: HKD rates: Looking beyond seasonal effect). Investor sentiment, which depends on broader economic recovery, will also need to strengthen significantly to drive further transactions and support price appreciation over the long run.

Tourism and consumption

In the current fiscal year, HKD1.09 bn will be provided to support mega events and activities coordinated by the Tourism Commission and Tourism Board. This builds upon HKD$1.38 bn in funding approved for the 2023-24 period. The Government has also recently expanded the individual visit scheme to include Qingdao and Xian starting from March 6.

These policies aim to address valid industry concerns – while Chinese tourist arrivals are increasing, spending has decreased substantially. According to the HKTB, overnight and day-trip spending by Chinese tourists was down 14% and 48%, respectively, in 1H23 compared to 2018 levels. Younger mainland consumers are also altering their spending patterns, with goods accounting for just 52% of tourist expenditures in early 2023 versus 63% previously.

While the luxury goods sector may benefit from the new policies as they can still attract shoppers through tax-free prices (luxury goods sales remain 33-38% below 2018 levels as of end-2023), mid-to lower retailers face ongoing challenges. The weak Chinese yuan is prompting more Hong Kong residents to spend across the border on daily necessities and services. Proposals to extend operating hours at border crossings could exacerbate this trend.

Private investment and business confidence

To restore business confidence, the government will further increase the total guaranteed commitment under the SME Financing Guarantee Scheme by HKD10 bn to tackle SME capital flow issues. Additionally, 8,000 eligible SMEs in the food and beverage and retail industries will receive subsidies for digital transformation.

The government will also inject an additional HKD500 mn into the Branding, Upgrading, and Domestic Sales (BUD) Fund, along with raising the cumulative funding ceiling per enterprise. A profit tax deduction will be granted for expenses incurred in reinstating the condition of the leased premises.

Financial market

A legislative proposal will enable funds domiciled overseas to be re-domiciled in Hong Kong. The focus will be on Middle East, an issue discussed in our earlier report (see: Hong Kong SAR: Game over? Hardly). Already, the Asia first ETF that tracks stocks in Saudi Arabia was listed in Hong Kong. The Hong Kong Monetary Authority (HKMA) is also working with several financial institutions to list an ETF in the Middle East that tracks Hong Kong stock indices.

On a side note, the recent setup of HKD-RMB Dual-Counter Trading is the major testing ground for future RMB listing for Middle East companies. The FS plans to include this mechanism in Stock Connects. All these will foster the offshore RMB fund raising needs for Middle Eastern companies, given the stronger oil and infrastructure business with Beijing. For other mutual market access, there will be an expansion to cover REITS to support fund raising for the real estate market in China and Hong Kong. The GBA Wealth Connect 2.0 also commenced this week, with investment quota increased from RMB1mn to RMB3mn.

Green financing

The financial secretary proposed to extend the Green and Sustainable Finance Grant Scheme, which is currently set to end in mid-2024, through 2027. The scope would also be wider, with subsidies applying to transition bonds and loans in addition to existing support for green bonds.

This comes at a pivotal moment, aligning perfectly with China's ambitious climate targets of peaking carbon emissions before 2030 and achieving carbon neutrality by 2060. With Hong Kong's early adoption of green finance instruments like green bonds and its recognized leadership in green services, the new measures are timely to enhance further the city’s role as a key player in financing sustainable projects.

As other major cities in the Greater Bay Area also intensify efforts to support the country's climate objectives, addressing obstacles such as lack of experience and unified standards becomes crucial. By leveraging its expertise in green finance, Hong Kong can not only reap the benefits of China's ambitious climate agenda but also extend its influence in promoting sustainable development across the broader Asian region. Estimates indicate requiring roughly USD66trn across the region over the next three decades - representing over half of worldwide capital needed under a 1.5°C warming scenario.

Public investment

Stronger connectivity with the GBA, the growth engine of China, is crucial to Hong Kong's competitiveness. The Northern Metropolis will synergize with the GBA in professional services, logistics, innovation, and green travel.

As part of the project, the government will push forward the Hong Kong‑Shenzhen Western Rail Link (Hung Shui Kiu – Qianhai) and the Northern Link Spur Line to jointly develop the "GBA on the Rail" concept. However, those projects still in the preliminary planning or conceptual stage will be adjusted due to budget constraints. As a result, government spending on CAPEX as % of GDP is expected to increase slightly from 4.1% to 5.2%.

Other government spending

Beyond infrastructure projects, a key focus of the budget lies in investment gap in education and healthcare. After all, a vibrant economy requires investment in the future.

Despite Hong Kong being renowned for producing world-class professionals, there is still room for further investment in education. Education spending as a percentage of GDP has been steady and is significantly lower than in other developed economies, such as Israel (7.4%), the US (5.4%), and the EU (5.0%).

Among all areas of education, investment in STEM education is the top priority. Note that Hong Kong's R&D expenditure as a percentage of GDP is only 1.07% as of 2022, far below Shenzhen's 5.5%, the national average of 2.4%, and South Korea's 4.93%.  As such, the government has pledged to raise another HKD134mn for subsidy STEM studies for primary schools. Also, there will be HKD3bn funding for universities and the R&D sector on AI-related investment. 

Hong Kong's healthcare sector is poised for growth-driven regional initiatives. According to the latest budget, the government will set up a clinical laboratory in GBA. Also, the government is also promoting the use of Chinese medicine for both fatal diseases and health protection. There is also a need to improve the healthcare system that utilizes digital solutions and technology intending to diagnose and better general health intelligently. There will be an extra HKD1.4bn of injection into health database infrastructure.

Budget deficit

Hong Kong has reported fiscal deficits for four years since 2019. The government has revised the fiscal deficit forecast for FY23/24 from -1.8% to -3.4%. Concurrently, fiscal reserves declined from a peak of HKD 1,211 bn in 2019 to HKD 671 bn as of Dec 2023. The ratio of fiscal reserves to monthly public spending dwindled from over 30 months in 2014 to around 12 months, accordingly.

We expect Hong Kong will remain in fiscal deficit in FY24/25, albeit slightly narrow from -3.4% to -2.5%, compared to the government projection of -1.5%. The coalescence of a sluggish asset market the retreat of foreign and human capital remains major challenges to the city’s fiscal health.

Direct tax

Fewer taxpayers and corporations will potentially translate into a decline in direct tax, including profit tax and salary tax and accounting for around 45-50% of government revenue. The number of foreign regional headquarters fell by 13.3% compared to the peak in 2019.

Therefore, the government will increase salary tax. The government has cut the reduction ceiling on profit tax and salaries tax from HKD6,000 to HKD3,000. Note that this reduction was HKD20,000 before COVID.

Hopefully, the return of talent and the influx of Chinese capital will partially fill the gap of foreign capital. Accelerating China’s outward direct investment will certainly benefit Hong Kong, as the city typically receives over 50% of this investment. Reflecting this trend, the number of Chinese regional headquarters increased from 216 to 247 in 2023. Also, countries with relatively mild geopolitical conflicts against China, such as Germany, Switzerland, and Singapore, maintain their presence in Hong Kong.

The government announced that over 40 companies have signed strategic partnership agreements to expand offices in Hong Kong and are expected to bring about over HKD40bn in investment, creating about 13,000 jobs.  Their presence in Hong Kong will attract upstream, midstream, and downstream partners from their industry chains, promoting the vibrant development of its Innovation and Technology (I&T) sector. The newly set up Hong Kong Investment Corporation will also aid foreign investment.

Indirect tax and land premium

Stamp duties (20-30% of total revenue) have shrunk due to sagging market sentiment. The average daily turnover of the stock market has fallen from HKD105 mn in 2023 to just HKD93bn year-to-date. Property transactions are also subdued. The total number of transactions falls from 96,133 in 2021 to just 52,035 in 2023.

Land premium, which once accounted for 26.6% of government revenue, is expected to fall below government expectations. In the first 9 months of FY23/24, it only reached HKD15 bn, or 18% of the original target. Considering the significant post-SARS increase in primary market supply in residential property and the soaring vacancy rates in commercial real estate, government revenue from land premiums is anticipated to decline further. Hopefully, the lower interest rates environment in 2H24 will support the investment sentiment from developers.

Long-term HKD rates implication

The fiscal condition remains challenging due to both shrinking revenue and higher spending to support growth. Meanwhile, social welfare cost is set to rise on the aging population.

Therefore, the government planned to issue another round of HKD120bn government bonds, of which HKD70bn will be retail bonds, including Silverbonds, infrastructure bonds, and green bonds this year. The relatively lower interest rate environment from 2H24 onwards will support such issuance. Note that government bonds outstanding have jumped by 143% since 2020 amid QE.

While the movement of Hong Kong government bond yields is largely driven by the expectation of the Fed Fund Rate cuts scheduled in the near term, there could be potential upward pressure on overall bond yield in the medium-long term. The positive spread against the UST yields will thus widen. After all, the weaker fiscal situation and the increasing supply of the government bonds warrant some investors’ concerns. 

Conclusion

While the government's budget report outlines supports focused on specific industries, the synergistic effects of priority policies have the potential to catalyze revitalization more broadly across the economy. In particular, lifting property market restrictions and boosting tourism revenue are poised to reinforce recovery meaningfully, given the significance of these industries and the challenges they faced post-pandemic. Initiatives to further develop green financing and foster cooperation with Middle Eastern markets also look well-suited to cementing Hong Kong's long-term competitiveness by driving growth in its vital financial sector. By addressing immediate issues and emerging opportunities, the government is positioning Hong Kong to strengthen near-term recovery gains and establish sustainable prosperity.


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