You're listening to Asia Centric from Bloomberg Intelligence, the podcast that pulls back the curtain on global business so you can invest better across the Asia Pacific rim. I'm John Lee in Hong Kong and.
I'm Katy Dmitriyeva. Hong Kong's economy still feels like it's in recovery mode from the pandemic. The residential property market is now down for a fifty year in a row. The retail sector is still adjusting from changing consumer and tourism patterns, and some business leaders question if it can ever really return to the city that it was before.
Is Hong Kong's economic problem structural and what will it take to revive the city's confidence.
Here to discuss all things Hong Kong is Gary, senior economist at ne Texas CIB Gary. Welcome to Asia Centric.
Hello everyone, thanks for having me today. Gary.
Hong Kong's retail sales plummeted by almost fifteen percent in April versus a year ago. Detail sales are likely to be down for the whole of this year, and this is despite the fact that mainland tourists seem to be returning to the city. What's driving all the weakness.
Well, I would attribute this to a few factors, and of course the most mentioned factor in the news is probably this trend of a lot of Hong Kong residents spanning overseas. It could be across the broader et engine in the Greater Bay region, or it could be in a somewhere a bit farer like Japan Thailand. I think it's quite a clear trend. But of course, at the same time, it's also about this changing consumer spending pattern
from a lot of Chinese tourists towards Hong Kong. And it's not only about the recovery of quantity because right now it's only around sixty percent of the twenty nineteen level, but it's also about how they spend, because people do not only look for a very shopping centric model nowadays. So I think these two factors are definitely the one that's basically hurting Hong Kong's retail sector at the moment.
So are they going to come back?
Well, I think it is indeed quite challenging because if we look at the behavior of a lot of Chinese tourists nowadays, first the currency is quite weak, and secondly, if you look at global inflation it has been rising, you know, probably more than fifteen percent since twenty nineteen. So for Chinese tourists, a lot of expense overseas has become way more expensive. So we do see a booming
domestic tourism, and in Hong Kong. I think it also faced the same deniamer in because it's picked to the usd things that's got more expensive here, So when they actually come to Hong Kong, they will probably feel the prices are also quite expensive compared to what they see locally.
So I think this is definitely very challenging. Actually, I would say I do not expect the number to come back to the pre bettermic level or even twenty eighteen level, which was the golden age of all these tourists inflow in probably the next five or maybe even ten years.
So Gary, just to clarify on a urine basis, there's more mainland tourists coming into Hong Kong, but they're just spending less.
I would say that the behavior has changed, and because if you look at the income growth in China over the past three years, it could be because of pandemic or different regulative changes. Basically, people do not feel as optimistic about the future for income growth, so that has not only affected local consumption but also about how they
behave when they go to other places as well. And second, of course, is also about what kind of tourists that Hong Kong is able to attract because of the rise of a lot of Chinese social media and also the changes of how people travel and what they do nowadays, and a lot of time they don't only come and shop, they actually try to spend in a very minimum way, try to with a different part of the city, which is not a bad thing, but when you look at
it from the economic perspective, if people do not spend, then of course the real impact on the over growth will be lower.
I guess that's why all the luxury stores are still kind of looking empty these days.
Yes, I mean it's very interesting if you look good maybe times great in Couseway Bay, or if you look at Harber City Insult. In the past, you would often see a very long qute of many Chinese students lining up to get what they want, especially in the luxury sectors. But nowadays I would say this a phenomenon has become quite rare. Even if there is a line I do expect that the per capital spending will be less than before.
Gary, what about your first point? You mentioned that a lot of Hong Kong residents are traveling to mainland China. Is this over the weekend? Can you elaborate on this phenomenon.
Actually, I would say it's too voted. If you look at the estimate of how much Hong Kong is being changing or even for longer trip, we are talking about somewhere close to sixty seven billion Hong Kong dollars, which is around fifteen percent of Hong Kong retail salves in twenty twenty three. Definitely, it is a huge number. It's probably not fully a new trend. But the problem here is that, well, there has always been a residence spending
across the border because it's cheaper and et cetera. But I think Hong Kong also loses the middle class that supposedly to be the stabilized to the economy because right now, even though there could be a different source of talent program attracting another type of population into Hong Kong, their behavior will be different. They may be a bit more willing to go across the border. The Shenghen or spend
the weekend in the Greater Bay. So I do feel that there's a structural change in the middle class in
Hong Kong, which also contributed to that problem. But beyond that, of course, there are more people traveling across the border to spend I would say that right now it's probably more about the weekend trips, but increasingly when people get bored of all this activity, that wouldn't be surprised that there could be trips in a longer duration, which basically means that Hong Kong will need to fight harder to retain this sort of consumption.
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So we talked about tourism, We talked about travel. What about other parts of the economy. The housing sector has always been a big one here, very expensive. Can we talk a bit about that. I know the sector has been down now for a fifth year in a row. It seems like things aren't picking up well.
I'm a little bit more optimistic on the residential side more than the commercial real estate, and of course, unless we see interest rate coming down or further relaxation of different stamp duties and policies, and I think it's a bit hard to really see a rebound in home pricess for now, and especially when we start to see more new supply from all these developers that they're all dying for cash, that they need to offload the unit for
the cash flow. So basically it means that we will probably see more transaction, there will be some demand, but that will not be enough to actually revert the downward trend that we see so far. So as long as there are people in the city them that someone will
eventually buy some homes. But on the commercial side, it's a bit checkier simply because again that's a very huge amount of supply coming and Hong Kong is also affected by a lot of work from home arrangement or basically companies trying to cut course moving to other non prime location. I think all of this means that there could be ongoing stocklishness in the commercial rare states, especially in the
officers space. So for that, I'm not too optimistic and I think it will at least take another five years to see the recovery.
Of the cycle. Gary, I'm just going to throw out some numbers based on CBRE data. The city has a seventeen percent vacancy rate and this is for office property. Now, there's two buildings in central Hong Kong that have just about to be completed. That's a Chum Kong Center too, and there was a news report saying that it's only going to have ten percent occupancy. Now, this is a brand new waterfront building. Next to that, there's the Henderson
and that has a forty percent vacancy. These numbers are pretty terrible. Is it due to the weakness in the financial sector.
Yes, I would say so. And I think one of the key challenge that Hong Kong loses nowadays is really about the loss of animal spirit. And when I say animal spirit, it means that it may not be totally tied to the real economic data that people see. Ba's really about a lot of investors or household They make the decision based on what they expect. So if they expect that the income will not be that optimistic. If corporate expected well, maybe they will be affected by your
politics in terms of recent et cetera. Then they make the decision based on what they think about the future, not really about you know that there could be some spotlight in the Hong Kong economy, but that it's not
enough to revert that sentiment. So with that in place, I think it's really reflect the loss of confidence broadly in this sector in the corporate world that in the past may be Hong Kong is able to capture more of the foreign direct investment coming into Asia, but now they need to share with other leading cities around the Asia Pacific region. It could be Sydney, Singapore, Tokyo and
even in the Middle East. So definitely, I think this is one of the core challenge that Hong Kong is facing, and I feel that unless there is stronger growth momentum that corporates feel optimistic that they can make more money in the city. I feel it's very hard to see the vacancy rate declining in the short run.
What do you think are the main things that are keeping people from moving here? You know, if you want to fill up these office buildings, you need to have people. You need to have companies moving here. If you want more residential transactions, you need to have people moving here. So what are the kinds of things that executives may be thinking about when choosing whether to relocate here or to another place.
Well, with that, I would start with the positive side first, and of course I think in Asia it's very hard to find a place with a very low Texas free capital flows. I think all of these are still advantages that Hong Kong has. But at the same time, especially after the last i would say four years of COVID and also geopolitical tensions, for a lot of senior executives or for decision makers in different sort of companies, they
will have the risk management in mind. So Hong Kong is definitely a market that they won't want to give up because it's still the best gateway to China. But if we start to see some of the global macro trend changing, for example, if the Chinese economy continue to decelerate, and if we start to see India or Asking growing quicker, there is a natural economic momentum pushing this company to
actually focus more on the non China market. So I think with that it really depends on how competitive Hong Kong can be in the future. And beyond that, of course, I do think geopolitical risks is also a major concern as well, because I think the hardest part about is it's very hard to really measure the downside scenario or how worse can it be, And of course a lot of time people would overestimate the worst scenario, but this
is what they look into right now. So I think these two factors definitely holding back the recovery of the Hong Kong corporate sector.
So these days executives are seeing Hong Kong as just another Chinese city, another Beijing, another Shanghai. Is that fair to say?
Well, I think for a lot of sectors, Hong Kong is still the best location to be if they want to assess the China market. But at the same time, there is also a trend that some companies would prefer to either have their office in Shanghai or Beijing just to get a closer access to their customer or if they want to allocate more resources to Usian and India than of coursing appos the natural choice. So a lot of analysts would compare Hong Kong and Singapore, which of
course is to city that pretty much are like. But at the same time, Hong Kong's competitor is not only about single bore, it's also about other Chinese cities as well. But I would say that it still depends on the sectors.
For some of the sectors related to consumption, maybe they would for closer on shore access, But for finance, I still think that Hong Kong would have the advantage because China still has the capital control, the taxes law in Hong Kong is still have a more internationally aligned legal system. So yes, they are challenges, but the challenges may be a bit different in different sectors.
So Gary, you did touch upon some of the policy measures going forward. What can the authorities do to revive Hong Kong's retail sector its property market?
Well, I think for retail services indeed quite a challenging job, and of course there's something that the Hongkong government cannot control. For example, if the US interest remain elevated, then probably
Hong Kong will follow. Based on the monetary system, which means the US dollar and Hong Kong dollar would be strong, then everything will be expensive in Hong Kong, so that would probably deter part of the tourists, especially it was from China, because basically still eighty percent of Hong Kong
source of tourists. So I would say that a lot of problem Hong Kong face nowadays in the retail sector is structural and it's actually under like a period of change that it will need to have some reform either on an industry level or even from the government level in terms of longer term planning in repositioning Hong Kong in the region. It should no longer be only a shopping centers in the past, because there's a change in
what tourists or different houses of want. It will need to find the niche or anything that is unique to actually attract people to come here that they cannot be found elsewhere. But for now, I do feel that a lot of policies that we see seems to be just a revamp of what has happened in the past few years. For example, when you see the firework that will be shown in a very high frequency, this is not something
that is unique to me. I mean, there are many examples that Hong Kong can look at Japan, Korea, even Singapore, they all have their own niche.
In the gary. You are, of course an economist, what's your economic forecast on Hong Kong.
Well, in twenty twenty four, Hong Kong will still be able to achieve growth rate of around two point eight percent, which is not too much a bad number. However, I think the biggest problem nowadays is that even the growth number may seem okay, which is mainly supported by the
psysical recovery of the global export sector. But if you look at consumption, if you look at investment, those are really not performing that well, which basically means that if we step away from growth into income and wealth accumulation or even you know, look at equity market, et cetera, there could be a gap between growth versus and what is really going on and what investors or household and
corporate actually feel. So I think that it will probably take a while for their confidence to recover, and that would probably not come this year.
How much longer do we have to wait?
It really depends on when Hong Kong would be able to regain its niche in a lot of sectors. And for example, which is also unfortunate that in the financial
sector well. Definitely, Hong Kong has performed quite well in the past of attracting a lot of Chinese or even foreign capitals into the city, but it has also been hit by a lot of regulative changes in China would happen to be in real estate and in internet platforms, et cetera, and which happened to be the biggest sectors or at least one of the biggest ones in the
Hong Kong financial market. So I feel that a lot of changes has happened in the past few years, and it will really take I would say another maybe two years to actually see the gradual recovery that Hong Kong would have, because if the old growth engine and model is gone, then it will take time to actually diversify and create a new one. So I think it's interesting to see the Home government trying to push for the
diversification towards non China market. So I think this is probably something that it would take time to be up. And going back quickly to the real estate question, which I've actually forgot to answer, I think for residential market, I think we will begin to see some recovery probably sometime early next year, simply because there would be more people coming to Hong Kong, even though as we discuss,
the popular structure may change a bit. As long as people are in the city, they will need the place to live. But for commercial space, I really think that it will take a long time.
Maybe a big picture question, should we be thinking about Hong Kong as trying to get back up to what it was before or is your sense as an economist that this place is just going to change. It's going to change, and it might be something in ten years time, but won't necessarily go back to sort of the Hong Kong of twenty eighteen, the peak Hong Kong.
As you said, Actually, if you look at the Hong Kong economic history, there has been a few times that it has undergone massive economic transformation. In the past, it wasn't manufacturing hub, and then you know there's a gradual development into finance and logistics and et cetera. So I do think that Hong Kong is actually undergoing another economic transformation. But how successful it will be what really depends on, you know, how the government is able to provide supportive
policies to diversify the economy. And I still think that the question advantage of Hong Kong is still on finance, but whether you can find other source of growth under the current environment to diversify from the old engine towards the growth momentum. I think this is key. And even if you look at other sectors like logistics and consumption, they all feel different sort of challenges. That a bit of discussion on tech, but I think there could be
closer collaboration with etcetera. But I still think that the core advantage of Hong Kong is to use this road not only to connect with the Chinese capital, but it's really about the global capital. It may not necessarily be from the West, but let's say RCN or Middle East and etcetera. So I think where the Hong Kong will retain its road as an international sector will depend on how it can actually interact with global capital, not only on China.
Gary, before I let you go, we did talk about a lot of Hong Kong residents going over the border to spend their money in the mainland. When was the last time you went to the mainland and where did you spend your money on?
Well, I was in Guangzhou. I feel ago. I think the wipe there is really basically seeing a lot of people in the shopping mall, which I haven't seen in Hong Kong for a while. And of course if you ask me, I think the accommodation course is quite cheap there. And then also about the foot quality and the related surfaces, so I think it's very hot for Hong Kong to
compete on prices. So if you ask me, I think one key point that the Hong Kong retail industry should really taken is really about improving the quality.
And a lot of our listeners are actually based outside of Hong Kong. Can you give them some indication of how much cheap Root is in terms of hotels restaurants than it is in Hong Kong.
Okay. Of course, generally speaking, if you're talking about a five style hotel in Hong Kong in the normal time, you're talking about somewhere around three thousand Hong Kong dollars per night, and it will probably be around one thousand to one thousand, five hundred integrated bay. And in terms of the foot or like generally decatering surfaces, then I can basically cater a meal or for people with quite nice food for around one and R and B and for Hong Kong. I think that will only be the
cost for two people, which is only for our data. Okay, But having said that, I do want to say that one of their findish that I find is that Hong Kong we tried to be in a different sort of hub, but definitely the cocktail is still greater in Hong Kong than other cities in China.
That's you've got and what's your favorite cocktail?
We need to talk after this recording.
It's been an interesting dive into Hong Kong's economy and the structural challenges. Thank you Gary for joining asia Centric.
Thank you very much.
I'm John Lee calling in from Hong Kong.
And I'm Katadmitrieva here in Hong Kong.
This podcast was also produced by Clara Chen and you've been listening to the asia Centric podcast