After more than six months, COVID-19 is still plaguing the globe and pushing economies into the shadow of recession. Recovery seems to unforeseeable in the near future. As the current pandemic situation remains unstable, how could the economies of Hong Kong and the mainland confront the difficulties and forge ahead?
E Zhihuan: The New Economic Model Brought About by the Pandemic Provides Momentum for Revival
As COVID-19 infections have seen a resurgence over the last month, E Zhihuan, Chief Economist of the Bank of China (Hong Kong) Limited (BOCHK), anticipates that the downward trend in the economy for the whole year will be extremely difficult to reverse. However, capital has continued to flow in throughout the recent period and will be critical to supporting Hong Kong’s economic development over the medium to long term.
E explained that the significant rise in unemployment rates and the ongoing restrictions to deal with the pandemic have had a major impact on the tourism, retail, hospitality and exhibition sectors, and she expects this to limit the capacity and opportunity for the economic to recover during the second half of the year. “The earlier financial budget and the raft of supporting measures were worth almost 10% of local GDP and included a six-month Employment Support Scheme that mitigated the impact of the pandemic to some extent.”
The rise of fintech and innovative science and medicine has huge potential
E believes that the pandemic will inevitably cause banks and the finance industry to focus on financial technology. “Fintech is a very broad field and will help the industry to better serve clients with diverse needs, while online services also help to reduce the cost of dealing with so many different services at bank branches, so fintech will continue to see strong, long-term growth even after the pandemic draws to an end.” She went on to explain that the launch of an increasing number of financial management apps such as Licaitong, as well as other cross-border payment solutions, will stimulate closer fintech cooperation in the Guangdong-Hong Kong-Macao Greater Bay Area.
The pandemic is also driving the adoption of new technology in more traditional industries such as education and restaurants, presenting new growth opportunities as firms strive to ensure their products and services meet customer needs. “The continued rapid development of 5G, artificial intelligence (AI), robotics and big data continue will further increase human quality of life and business productivity, as well as helping to reduce manufacturing and service industry costs.”
On the medical front, E believes that the development of new technologies is likely to provide solutions to more life and health problems, while increased life expectancies will also provide new opportunities for the industry.
The ongoing influx of capital is stabilizing confidence
In terms of the economic outlook for Hong Kong, E expects that the pandemic will continue to make its presence felt over the short term. As the baseline figures for last year were already relatively low and the world’s major central banks have adopted ultra-loose monetary policies, the huge financial package launched by the SAR government is expected to provide significant support for the economy during the second half of the year, although it is unlikely to be sufficient to prevent an overall downward trend for the full year.
In the medium to long term, she believes that there are two key factors that will be critical to supporting Hong Kong’s economic development: first, the development of Hong Kong’s role as an international financial centre; and second, the development of the key industries. “The performance of the Hong Kong stock market has essentially remained in sync with the major global markets since the start of the year and the Hong Kong dollar exchange rate has continued to tend towards a strong-side convertibility undertaking, showing that capital continues to flow into Hong Kong markets and demonstrating that investors have confidence in Hong Kong as an international financial centre.”
Bringing the pandemic under control has helped create an orderly recovery in Mainland china
Turning to the issue of economic development in the Mainland, E noted that since China brought the pandemic under control in late March and has not yet seen a second wave, proactive financial measures and prudent monetary policies put in place by the authorities have effectively supported a return to work and production, resulting in the mainland economy recording significant improvements. “This is providing positive support for economic confidence, spending and investment, as well as the employment market.”
She went on to say that a number of new industries, methods of operation and business models have arisen during the pandemic in the Mainland and are providing strong support for an economic rebound. “For example, new models such as remote working and online education have effectively resolved a number of real-life bottlenecks and difficulties. Moreover, new technologies like cloud computing, big data and AI are developing rapidly, while new industries such as the digital economy, intelligent manufacturing, and life/health sciences are forming more ‘growth poles’ that are expected to deliver high-quality growth for the mainland economy.”
Tang Hei-wai: Transformation and Agility Crucial for Post-pandemic Economic Recovery
The COVID-19 situation has remained volatile. According to Tang Hei-wai, Professor of Economics, the Faculty of Business and Economics of the University of Hong Kong, it is still difficult to predict a time for Hong Kong’s economic recovery. At present, service sectors such as tourism, retail and restaurants, are all operating with great difficulties, but high-end services such as the financial sector is seeing an opportunity to expedite its digital transformation.
Retail, restaurants and tourism operating with grave hardship
Tang pointed out that affected industries may need to suffer for a while in the face of the uncertainties of the pandemic. He underscored the importance of being agile and flexible and encouraged affected industries to adopt an active stance in transformation. For example, the restaurants sector could incorporate takeaway services in their business. Even when there is no foot traffic to their eateries, there is still a business to operate. The retail sector, on the other hand, could actively develop their online shopping platforms.
The tourism industry is also a hardest-hit area. According to Tang, while tourism is one of the four major industries of Hong Kong, it only represents about 5% of the local GDP. Hence, it does not have a particularly strong impact on the overall GDP. However, as the number of employees takes up more than 10% of the working population, the government must take a serious look at job protection. Tang estimated that, “The tourism sector would not see a turning point until the emergence and popularization of a vaccine. Optimistically, the tourism sector may recover after a year.”
De-globalization accelerated by pandemic
On the contrary, Tang was glad to note the recent incorporation of stronger fintech elements in the financial sector, which would accelerate the industry’s digital transformation. He pointed out that the financial industry has always had more resources and room for development in multiple areas. The pandemic has driven the industry to speed up its pace in developing fintech. “The pandemic has pushed an increased demand for digitization. To meet the market’s needs, the sector must actively invest in developing this area.” Tang hoped to see more frequent interaction between the sector and the government, such that a better balance between privacy protection and digital development can be achieved.
Tang saw that the economy situation of Hong Kong, in general, is less hard hit when compared to other countries. “Hong Kong is simultaneously affected by the volatility of foreign trade and the Mainland’s economy. Although the recent tensions between China and the US have caused many uncertainties, Hong Kong is still playing its important role of a financial center, thanks to its robust legal system.” Tang believed Hong Kong shall purse a new direction for growth and a new position. Over the past few years, about 80% of the companies listed in Hong Kong involve Mainland capital. Investors also attach more importance to the Southeast Asia market. He reckoned that the future positioning of Hong Kong may turn to the financial center for Asia.
Expanding domestic demand is a contingency measure
On the other hand, COVID-19 has also brought much impact to the economy of China. February, for example, saw a historic high in the urban unemployment rate. Tang highlighted that as the Mainland has strong population movement, employment in the urban area is rather complicated. The actual unemployment rate should be higher that what the numbers tell. He reckoned that the industrial and service sectors would require a large volume of workers. The recovery of these two industries would help much in the employment rate and economic recovery.
“China is actively launching various policies to support companies in resuming work and production. With its vast territory and gigantic population, expanding the domestic demand and consumption can increase spending and boost employment.” Tang quoted the tourism sector as another example, pointing out that while the pandemic is global in nature, the expansive geography of China makes it possible to drive domestic tourism.
High-end industries shall be developed in the long run
Tang quoted the observation of Professor Enrico Moretti of the University of California, Berkeley: in the US, when a hi-tech company fills a job vacancy, five more new opening is created. Tang thought that this observation is just applicable in China. He emphasized that expanding the domestic demand and resuming work and production would only be a short-term contingency measure. For long-term economic recovery to take place, the key is to develop the high-end technology industry.
