Hong Kong Economic and Trade Office, San Francisco
Hong Kong
HK's resilience will prevail

Financial Secretary Paul Chan
2019 was an unsettling and unforgettable year for Hong Kong. Our economy was fraught with uncertainties due to the US-China trade tension. However, no one could have predicted that social unrest and turbulence would break out in the middle of the year, hitting our already slowing economy and even dragging it into recession.

Going through a rather difficult year, it is perhaps natural that we hear international investors asking every now and then whether Hong Kong remains an ideal destination for investment. I am here to tell you that, despite all the challenges, Hong Kong's institutional strengths and our underlying fundamentals and competitiveness remain strong and intact. A telling example of that is the stability and orderly operation of our financial market. As a matter of fact, if you look at our stock market, banking system, fund flow, the HKD to USD peg, you might not get an inkling that we went through such a testing time, both as a society and as an economy.

This notwithstanding, the social unrest and turbulence have indeed revealed some deep divisions in our society, which could only be mended by engaging people of different political stances and backgrounds in the community with the aim of rebuilding mutual trust. Meanwhile, reviving our economy is no less important.

While these were made the primary tasks of the Government stepping into 2020, before we could embark on the conciliatory and rebuilding work ahead, we already found ourselves faced with the serious threat of the coronavirus epidemic. The rapid transformation of the epidemic into a pandemic on a worldwide scale caught many off guard. And more unpredictable is the devastating and far-reaching impact of the pandemic brought on to the regional and global economy.

On the coronavirus situation in Hong Kong. I'm pleased to say that our multi-pronged strategy has been among the most effective in the region, and around the world, to date. Our efforts have been spotlighted by the global media. Earlier this month, CNN noted that Hong Kong's success provides, and I quote, "hard-earned lessons to other cities around the world now looking to relax restrictions."

Mandatory home quarantine is an integral part of our overall strategy. And innovation and technology have played a key role in this. We have developed a monitoring system using Bluetooth low energy wristbands paired with a dedicated mobile app and geo-fencing technology. The app has enabled the monitoring of close to 90,000 individuals under home quarantine in Hong Kong.

Governmental agencies in more than 10 countries and regions have made reference to our experience in designing and implementing a similar system.

We have also created an interactive digital map and dashboard to keep the public informed of the pandemic situation. Open data in machine-readable format and application programming interfaces are also available for those looking to conduct their own analysis or develop websites, mobile apps and other programs.

We have also initiated local mask production. Twenty production lines run by 15 Hong Kong companies will soon begin supplying the Government with nearly 34 million made-in-Hong Kong masks a month. They will also make available more than seven million masks a month to the local consumer market.

It is also encouraging to see researchers at six local public hospitals, together with the University of Hong Kong, announcing the results of their research into a three-drug cocktail for treating the coronavirus. The encouraging results were published earlier this month in The Lancet medical journal and picked up by news media around the world.

The above achievements are in fact important testament to Hong Kong's commitment to promote innovation and technology (I&T) development as the growth engine of our economy. We have introduced a number of policies and allocated over US$13 billion dollars over the years to support a series of measures for I&T development.

Meanwhile, the Guangdong-Hong Kong-Macao Greater Bay Area development provides a unique opportunity for Hong Kong to work with neighboring cities to develop the bay area into an international I&T hub, each leveraging on their respective advantages. With our top-notch universities, technological research and development (R&D), a robust intellectual property regime, extensive international connection as well as our status as an international financial center, Hong Kong can play its part by pooling together the innovation resources from around the world to support I&T development in the bay area.

Right now, we need all the good news we can get. That's certainly the case with the world economy. Just last month, the International Monetary Fund forecast a global contraction of three per cent this year.

Even assuming the pandemic peaks in this second quarter, we would still be faced with the worst recession since the Great Depression of the 1930s.

The United States and the euro area are expected to see particularly painful contractions: 5.9% and 7.5%, respectively.

As for Hong Kong, with our small and open economy, we can hardly emerge unscathed. With both external and domestic demand taking a big hit in the first quarter of the year, Hong Kong is facing its most severe economic recession in decades.

Real GDP in the first quarter contracted 8.9%, year on year. That's worse than we experienced in the aftermath of the 1997-98 Asian financial crisis and the 2008-09 global financial crisis.

Reflecting serious disruptions to regional supply chains and related trading, Hong Kong's goods exports fell 9.9%, year on year.

Travel restrictions brought inbound tourism to a standstill, partly contributing to a record decline of 37.8% in exports of services for the first quarter.

Our private consumption also collapsed, dropping more than 10%, a single-quarter record.

As for investment, I think you know the answer. It plunged 14.3%, amid grim business sentiment and sluggish construction activity.

It seems inevitable that the global economy will remain weak in the near term.

Which means that the three locomotives of the Hong Kong economy – exports, consumption and investment – are unlikely to show much improvement for the time being.

We're now expecting a contraction for the year, anywhere from 4% to 7%. And that's a situation we have not seen in decades.

What is indeed worth noting is that the few global market turbulences in the past, including the 2008 Global Financial Crisis, were mostly triggered by financial turmoil, which subsequently dealt a blow to the real economy. The severe situation we are now facing is different. In response to the rapid spread of the COVID-19, countries have adopted stringent social distancing measures to reduce people contacts, restrict international and domestic travel, and even resort to city lockdowns. These measures took a heavy toll on consumption, reduced demand for goods and services, and disrupted production, trade and supply chains etc. In other words, for this time the COVID-19 has hard hit the real economy, weighing subsequently on the financial sector.

The impact of the pandemic on our real economy is in fact distressingly visible. Companies across a wide spectrum of sectors are suffering, with cash flow a severe concern; many are even facing pressure to shut down. Workers are losing their jobs. Those who are not are being forced to take no-pay leaves or pay cuts.

Thankfully, Hong Kong can turn to our fiscal reserve, prudently built and managed over the years, to finance essential expenditures. We have adopted an expansionary fiscal stance and have made the optimal use of our reserves to implement counter-cyclical measures.

Our objective is to support enterprises, safeguard jobs, stimulate the economy and relieve some of the burden weighing down on the people of Hong Kong.

To date, we have announced relief measures all designed to achieve the above objectives, worth more than US$37 billion through the two rounds of Anti-epidemic Fund and my 2020-21 Budget. That's equivalent to about 10% of our GDP.

Adding in the four rounds of support measures introduced in the second half of 2019, the cushioning effect on the Hong Kong economy works out to about 5% of our GDP. That's essential assistance for both companies and the people of Hong Kong.

On supporting enterprises, the measures we have put in place primarily aim at lowering their operation costs and easing their cash flow problems by leveraging on the capital, professional knowledge and experience of the banking industry to provide small and medium-sized enterprises (SMEs) with loans with Government guarantee of different sizes.

Under the Anti-epidemic Fund, we have made substantial adjustments to our SME Financing Guarantee Scheme (SFGS): first, increasing the maximum facility amount under the 80%, 90% and 100% guarantee products; second, relaxing the application eligibility so that more affected enterprises could apply; thirdly, providing concessionary interest rate to relieve the burden of enterprises.

As for specific sectors hardest hit by the pandemic and the stringent social distancing measures put in place by the Government, such as retail, catering and tourism, we have provided enterprises in these sectors with targeted assistance with a view to tiding them over the difficulties and keeping their businesses going.

On safeguarding jobs, we have made this the key element in our second round of Anti-epidemic Fund announced in early April. It is particularly crucial that in the current economic situation measures are to be implemented to avoid large-scale unemployment, for the occurrence of which could in turn further weaken the gross demand and trigger a downward spiral for the economy.

There are a number of wide-ranging initiatives in the Anti-epidemic Fund designed to preserve employment and assist the self-employed. But central to the fund is the US$10.4 billion Employment Support Scheme, which provides wage subsidy to eligible employers such that job retention can be achieved and redundancy can be avoided within the shortest time frame.

Some 220,000 self-employed people will also be granted a one-off lump sum subsidy of US$1,000.

On relieving peoples' burden, there are various measures in my Budget seeing to that, most notably the cash payout scheme. To ease a bit of the financial stress afflicting so many in Hong Kong, and to boost local consumption, I have pledged US$1,300 to every Hong Kong permanent resident, 18 and over. Incurring an expenditure of about US$9 billion, the initiative will benefit about 7 million people.

There are, let me add, many other support and subsidy measures available beyond the Anti-epidemic Fund and Budget initiatives.

And we will continue to closely monitor the social and economic situation in Hong Kong, responding quickly and comprehensively, to issues and needs as they arise.

Of course, such all-consuming commitment comes with a price. The consolidated deficit for our 2020-21 financial year may exceed US$36 billion.

This will reduce our fiscal reserves from some US$141 billion to somewhere between US$100 billion and US$116 billion. That's still equivalent to 14 to 15 months of government expenditure.

It's a huge sum of public money. But these are exceptional measures taken under unique circumstances. And they will not imperil our long-term fiscal position. Ladies and gentlemen, we are, and we will remain, fiscally healthy.

Apart from the above-mentioned fiscal policies and measures rolled out in response to the COVID-19, our Hong Kong Monetary Authority (HKMA) has also introduced a number of measures on the monetary side. First, they have lowered the Countercyclical Capital Buffer ratio and the level of regulatory reserves, further releasing around HK$700 to HK$800 billion of lending capacity in total.

Second, the HKMA also announced the reduction in the issuance size of Exchange Fund paper in order to increase the overall Hong Kong dollar liquidity of an amount of HK$20 billion in the interbank market. HKMA has also arranged repo transactions with the US Federal Reserve to provide additional liquidity of US dollars for the local market, thus reducing the cost of capitals.

Thirdly, we have taken good advantage of our unique position as regulators to co-ordinate how banks can best support the local economy.

The Banking Sector SME Lending Coordination Mechanism – a coalition comprising banks, the Monetary Authority and our Mortgage Corporation – has rolled out four rounds of measures to relieve the cash flow pressure on tens of thousands of businesses and personal customers.

The measures include principal payment holidays for residential mortgages and corporate loans, Government-backed SME loan guarantee schemes, and emergency loans for customers most affected by the outbreak, just to name a few.

As for banking stability, our capital and liquidity buffers, built up over the past decade, have kept Hong Kong's banks resilient during this testing time.

Indeed, our banks are among the most well-capitalized and liquid in the world. The average capital adequacy ratio of banks incorporated in Hong Kong exceeds 20%, while the average liquidity coverage ratios of major banks are above 160%.

Stress tests done by the Hong Kong Monetary Authority demonstrate that the ample capital and liquidity positions of our banks can withstand extreme economic scenarios.

Despite the coronavirus epidemic, total loans and deposits in our banking system still register modest increases this year to date. That, ladies and gentlemen, is a mark of confidence in Hong Kong banking.

We will continue to work closely with banks to ensure that they are in the best position to support our economy.

For more than 100 days now, Hong Kong – its businesses, its people and its government – have been united in a fierce fight against the virus. I have no doubt that our innovation, resilience and profound commitment to Hong Kong will prevail.

Looking ahead, I also remain confident in Hong Kong’s economic prospects. With the epidemic in the Mainland gradually coming under control, its economy is expected to bounce back relatively quickly. The Mainland will still be the most important engine of global economic growth. Asia, though also affected by the pandemic but to a lesser extent, may continue to see higher growth than that of other regions.

As we have all witnessed, although the US-China trade tension has disrupted the global supply chain, Asia as an emerging region has benefitted as a whole from this changing pattern. Therefore, even if the demand in Europe and US may become weaker in future due to the impact of the pandemic, trade in Asia would remain strong. In fact, over the past decade, the shift of the world economic gravity from West to East has been an obvious and unstoppable trend, with the Mainland and developing Asia contributing more than 60% of the global growth. As income in these Asian economies gradually increases and the middle-class population expands, Asia has presented itself as a huge consumer market.

And where does Hong Kong stand in this? With our unique position as the international trade and financial center, logistics center and aviation hub in the region, alongside with our professional services and high-quality service industries, we stand to benefit from the enormous opportunities Asia has to offer. In addition, the Guangdong-Hong Kong-Macao Greater Bay Area also provides Hong Kong with abundant opportunities for development, especially in the areas of financial services and innovation technology.

Financial Secretary Paul Chan gave these remarks at Citi's Pan-Asia Regional Investor Conference on May 19.


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