Tse Kwok Leung Photo: Li Qiaoyi/GT

Editor's Note:

In an exclusive interview with Global Times reporter Li Qiaoyi (GT) on the sidelines of the Belt and Road Summit in Hong Kong on Thursday, Tse Kwok Leung (Tse), head of Policy and Economic Research at Bank of China (Hong Kong), gave an insight into the economic situation in Hong Kong since protests broke out in June. Tse served as an associate member of the Central Policy Unit of the Government of the Hong Kong Special Administrative Region (SAR) between February 2013 and February 2015.

GT: How have the protests impacted Hong Kong's economy? 

Tse: Hong Kong's economic performance has been on a downward spiral since the start of last year. The city's GDP expanded by 4.6 percent in the first quarter of last year. The figure registered merely 0.6 percent in the second quarter of this year. This is the overall trend. Excluding the protests, Hong Kong's economy has already been under downward pressure due to multiple factors including global slowdown, protectionism and the China-US trade war. Major economies including China and the US have all been undergoing a slowdown. It is difficult to single out the protests as a factor to measure how big the impact it has had on the local economy. 

Hong Kong currently confronts a combination of the two factors, the trade war and the protests. But the impact they have is of varying scale. The protests have impacted the three sectors relating to inbound travel - catering, retailing and hospitality. The contraction in the three sectors has been worsening every month. The number of inbound travelers shrank by about 40 percent in August. The three sectors hire 220,000 people in Hong Kong. And if the current contradiction continues, I reckon Hong Kong's unemployment rate will rise quickly. Some tourism agencies and hotels have asked their employees to take unpaid leaves to handle the predicament. This might be workable in the short term, but if the incident continues toward a lasting issue, and eventually evolves into layoffs, the unemployment rate would quickly climb.

This would have an obvious impact on employment. On a larger scale, trade and logistic might also be a concern, owing to a duo of the trade war and the protests. If the number of inbound tourists continues downward, consumption would be affected. As a consequence, Hong Kong's food imports, for instance, will decline, meaning especially air freight will take a hit, as a majority of imported food is transported to the city via air rather than sea freight. 

Hiring in trade and logistics sectors totals more than 700,000. This means jobs in the five sectors in fact add up to nearly 1 million, one-third of Hong Kong's employment population. 

Hong Kong's unemployment rate stood at 2.2 percent prior to the 1997 Asian financial crisis, but the reading soared to 6 percent in one year. A surge in unemployment rate would weigh greatly on the city's consumption confidence at large.  

Therefore the current situation is relatively grave. It is generally believed that the city's economy would post zero growth in the third quarter. The economy's performance in the fourth quarter would be contingent upon the development of the situation. If the protests can't be quelled quickly, the sluggishness will continue into the fourth quarter. A good scenario for the local economy for the whole year would be a mild growth, but there is a chance of the economic growth falling into negative territory throughout the year.

GT: How big is the shockwave that the unrest has sent to Hong Kong's financial sector?

Tse: For the time being, the protests are yet to have an apparent impact on the financial field, as the financial sector is now mostly internet-powered and operational on a global basis. Hong Kong's stock market is currently rather stable. Compared with the peak in March, the Hang Seng Index shed a maximum of 16 percent when hardest hit by the protests. The index has rebounded lately, having declined slightly over 10 percent from this year's high. Also, the index is still higher compared with the same point last year. As such, the financial market remains stable. 

The financial market, especially the stock market, can most effectively reflect investors' confidence. Hong Kong is yet to see any capital flight. The aggregate balance of Hong Kong's banking system holds at around HK$54 billion ($6.91 billion). The Hong Kong dollar remains weak, but it is yet to weaken to 7.85 against the US dollar. In a sign of financial market stability, it is believed that the protests are merely a short-term turbulence and a solution to tackle the issue will be eventually found. International investors, in particular, still hold faith in the nation's basic principles and the "one country, two systems," Hong Kong people administering Hong Kong and a high degree of autonomy. They believe Hong Kong will ultimately solve the problem based on its own legal framework. 

In another sign, nearly 80 percent of daily turnover of listed firms in the Hong Kong stock market is related to domestic businesses and nearly 70 percent of the market capitalization belongs to domestic firms. Investors actually consent that China's economy and society at large is stable, which is a significant stabilizer of Hong Kong's development. Otherwise, it would be unexplainable that while people appear to be roiled by the protests, the financial market is still stable. Hong Kong has endured frequent challenges since 1980s when the domestic economy was not strong enough and had a lesser influence on the Hong Kong market. When turbulence swept across Hong Kong at that moment, its financial market was subject to big swings with its stock and property markets falling as much as 30 to 40 percent.

But the market expansion of insurance services, especially life insurance, that mainly plan to attract domestic clients has been affected. I bet if the city's overall market gradually rebounds, there will be a demand rebound. The key lies in the demand: Whether the demand that hasn't come to Hong Kong shifts to other regions such as Southeast Asia or remains in the mainland? There has yet to be a market shift. There's still no place in the Asia-Pacific region that can replace Hong Kong's position as an international financial hub.

GT: Will other international institutions follow suit after Fitch Ratings downgraded Hong Kong's credit ratings for the first time in 24 years?

Tse: It's unpredictable whether other institutions would follow suit. But Fitch's move is unjustified. As the foreign-currency issuer default rating is supposed to be mostly based on the issuer's repaying capability. If Hong Kong's foreign exchange reserves faced massive capital flight and its forex reserves were depleted while its debts piled up, a downgrade of its rating would be reasonable. But Hong Kong is nowhere near this scenario. 

The city retains fiscal health, with HK$54 billion in the aggregate balance of its banking system. Including the money hoarded in the city; bills and notes issued by the Hong Kong Monetary Authority and the city's fiscal reserves, Hong Kong's entire aggregate balance and reserves hit more than HK$3 trillion. Judging by fiscal health, I believe the city is the world's best or one of the best. I don't know of any other economy that has higher fiscal reserves to GDP ratio than Hong Kong. In this context it's undoubtedly untenable to ratchet down Hong Kong's credit rating.

GT: Hong Kong's finance chief has recently announced a raft of measures to support small and medium-sized businesses. How would you evaluate the effectiveness of the measures and what kind of targeted efforts are still required?

Tse: The SAR government took it fairly seriously this time around. It has been quite proactive in dealing with the current economic downturn. The moves are in the right direction. The employment issue is a big concern. To ensure employment, the top priority would be propping up small and medium-sized enterprises (SMEs). What the Hong Kong SAR can do under a market-oriented mechanism to support SMEs is to provide them with financing guarantee. The measure is not new and has proved effective. Commercial banks including Bank of China (Hong Kong) all support and actively act in concert with the financing guarantee scheme in hopes of tiding SMEs over. This is truly targeted.

Other than that, some additional measures are needed. Under the current circumstances, private investment might be frozen or take a wait-and-see attitude, just like those prospective insurance buyers from the mainland. Therefore, the main priority would be ramping up public investment.

The SAR government should raise spending on infrastructure such as housing in order to drive public investment. It's not the case that that SAR government doesn't want to do it, but under the current framework, the appropriation of funds for investment won't validate until being passed by the Legislative Council. A tug of war between the administrative authorities and the Legislative Council would slow down the process. The SAR government is supposed to resort to some unconventional measures to overcome the problem. This suggests the appliance of market-oriented tactics to address the funding problem, thereby kicking start some public projects in a fastest possible manner. 

Furthermore, there needs to be more positive publicity of the city, especially in overseas market. Some media outlets including sections of the Western press have run some biased coverage, intentionally and unintentionally portraying Hong Kong as an unsafe place during the protests. But is the city that unsafe? It's actually not that grave. The real situation should be portrayed. 

Positive publicity and unbiased reporting is conducive to beefing up the international society's confidence in Hong Kong. So far as I'm concerned, the SAR government has plans in this regard. As for the decline in the tourism sector, an overseas marketing campaign is in the pipeline. The SAR government will allocate some funds to the Hong Kong Tourism Board to start out the overseas marketing campaign.

Over the medium- to long-term, it's very important to push for development of start-ups. The city needs to take up the opportunity offered by the Guangdong-Hong Kong-Macao Greater Bay Area, integrating itself into the prosperity of the start-up community in the Greater Bay Area. The development of start-ups can improve Hong Kong's industrial structure, develop high added value sectors and provide young generations with better employment opportunities.

Additionally, start-up development could fit the city better into the Belt and Road Initiative (BRI). I suppose Hong Kong should put more resources into its incorporation into the BRI, giving full play to the city's advantages. The SAR government could lead local businesses, especially SMEs, to explore the international markets such as Southeast Asia, South Asia and Africa.

As measured by internationalization, Hong Kong retains strength that is unrivaled by any other domestic cities. The city's integration into the BRI can therefore offer local SMEs and young generation of entrepreneurs new growth opportunities.

GT: How to better dissect the links between Hong Kong's economy and that of the mainland?

Tse: On the basis of the principle of "one country, two systems," the relationship between Hong Kong and the Greater Bay Area or Shenzhen and any other cities in the mainland is an offshore market versus an onshore market. I think the fundamental relationship won't and shouldn't be changed. 

The two are in a cooperative relationship marked by complementary and reciprocity. Hong Kong has its unique advantages. Through the process of building the Greater Bay, everyone needs to insist upon the principle of complementary and reciprocal cooperation. There is a view that Hong Kong needs to be rescued, but I reckon it's incorrect.

As an international metropolis that is free and open and full of vitality, Hong Kong is always unique. It is a platform for funding and company operations, which is open to the entire world. 

Shenzhen now grows at a faster pace, while Hong Kong's growth slows, which is not a concern. Hong Kong's economy is comparatively mature. Even if other domestic cities such as Dongguan in South China's Guangdong Province post a GDP higher than Hong Kong, it shouldn't be seen as a sign of worry, as it doesn't stand for anything. Hong Kong's value doesn't rest with its GDP, but its function.

In terms of function, Hong Kong and other cities in the Greater Bay Area, particularly some central cities including Macao, Guangzhou and Shenzhen, will be complementary in the long run.