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Through Iris Pan

Prospects for Hong Kong are mixed in 2022

The border between Hong Kong and mainland China may reopen with a limited quarantine period if Covid cases disappear. This should increase economic activity in Hong Kong. Further border opening measures depend on the Covid infection rate in Hong Kong and mainland China.

Unfortunately, the new year has started with a new wave of Covid and a tightening of social distancing measures. 1Q22 activity will be affected. The government still has the option of providing subsidies to some of the worst-hit industries, but the distribution of a new round of consumer vouchers looks highly uncertain.

As Shenzhen’s Yantian Port is affected by Covid from time to time, some of the logistics throughput has been re-routed through Hong Kong, which helps Hong Kong’s port throughput no longer drop during global cargo delays.

GDP growth is expected to be more moderate at 3.3% for 2022 compared to 6.3% in 2021 (which was mainly a base effect phenomenon). Growth prospects are very much dependent on Covid. Hong Kong is a service-based economy and has no manufacturing activity, which is a positive in the current supply chain disruption environment. Goods and food are delivered normally, as many of them come from mainland China.

Hong Kong census

Source – Hong Kong Census and Statistics Department, ING

Hong Kong labor market faces challenges

The job market will again face the challenges of the tightening of Covid measures from mid-January. Many people will live on 80% of their usual salary on government subsidies if their industries are affected by social distancing measures. The Covid could spread again even if this wave subsides. Consequently, the job market will remain fragile, leading to a gloomy outlook for catering and other retail businesses.

The wealthy are not immune to this uncertainty either. The stock market index fell 14% in 2021, while house rents fell nearly 10%, meaning lower incomes for people living on rental income. This could continue into 2022, as zero Covid measures have deterred some expats from staying in Hong Kong, leading to lower demand for rental apartments.

Retail sales and unemployment

Hong Kong Census and Statistics Department, ING

Source – Hong Kong Census and Statistics Department, ING

Hong Kong as an international financial center is its greatest strength

Loan growth is expected to accelerate this year. The loan-to-deposit ratio fell from 82.60 in May to 85.74 in November 2021. Loans over three months past due accounted for 0.5% of total loans at the end of 3Q21, which was fairly stable over the year, but up from 0.46% at the end of 2020. We expect delinquent loans to remain stable for most of 2022 if social distancing measures do not continue for another trimester.

Some Hong Kong banks have lent to mainland mortgage borrowers. They should have stocked up. Overall, mainland-related lending (non-commercial finance) contracted 0.2% year-over-year in 3Q21. This drop is due to default events of real estate developers on the continent. We expect mainland-linked lending to gradually pick up in 2022 as property developer default issues subside.

At the national level, residential mortgage lending increased between 2020 and 2021 as the real estate market partially recovered. This demand comes from both self-consumption and investments.

Mainland China-related trade finance grew by 34% in 2021, a result of both a strong yuan and a low interest rate environment in Hong Kong. This should last at least 1H22. But as the interest rate differential between China and Hong Kong will gradually narrow in 2022, trade finance growth may not keep pace.

Mainland Linked Loans in Hong Kong

HKMA and ING Mainland-linked non-commercial finance loans contributed over 90% of all mainland-linked loans in Hong Kong in 2021

Source – HKMA, ING

Mainland-related non-commercial financial loans accounted for more than 90% of all mainland-related loans in Hong Kong in 2021

Government subsidies should reduce the number of company liquidations

Turning to financial markets, defaults by mainland Chinese property developers did not fuel large market movements in Hong Kong, illustrating that only a few financial institutions are involved in default events.

In mid-January, the government provided subsidies to some industries affected by the latest wave of Covid, which should reduce the number of company liquidations. The government still has ammunition to distribute more subsidies this year if the Covid wave persists, although it is hard to imagine that the government will be able to distribute the same amount of subsidies if Covid persists for years. Approved government subsidies for Covid are HKD 250 billion, or about 8.7% of GDP in 2021. The government had used 80% of it at the time of writing.

Delivery services and online shopping will be the main spending channels. This at least helps the retail sector to some extent.

The linked exchange system

Federal funds rate affects HKD and HKD interest rates

Federal funds rate affects HKD and HKD interest rates

Source – CEIC, ING

Fiscal and monetary policies and HKD exchange rate

Tax expenditures will increase because of Covid. Another HK$250 billion in Covid relief government spending is unlikely, but a smaller amount between HK$50 billion and HK$100 billion is still possible, and is also more manageable for the government.

For monetary policy, HKD interest rates will closely track their USD counterpart. As the Fed rises, HKD interest rates will rise and the HKD is expected to approach USD 7.85 HKD as the US Dollar strengthens.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.