Hong Kong Special Administrative Region (SAR) - Economy

The Fitch Ratings agency on 06 September 2019 downgraded Hong Kong's credit rating to AA from AA-plus and said its outlook for its rating is "negative", meaning more downgrades could be on the way if the situation deteriorates. "Months of persistent conflict and violence are testing the perimeters and pliability of the 'one country, two systems' framework that governs Hong Kong's relationship with the mainland, underscored by mainland officials taking a more public stance on Hong Kong affairs than at any time since the 1997 handover," Fitch said in a statement. "Ongoing events have also inflicted long-lasting damage to international perceptions of the quality and effectiveness of Hong Kong's governance system and rule of law, and have called into question the stability and dynamism of its business environment," it added.

Hong Kong became a Special Administrative Region (SAR) of the People's Republic of China (PRC) on July 1, 1997. Hong Kong’s status since reverting to Chinese sovereignty is defined in the Sino-British Joint Declaration (1987) and the Basic Law. Under the concept of “One Country, Two Systems” articulated in these documents, Hong Kong will retain its political, economic, and judicial systems for 50 years after reversion. Hong Kong pursues a free market philosophy with minimal government intervention. The Hong Kong Government (HKG) welcomes foreign investment, neither offering special incentives nor imposing disincentives for foreign investors.

According to HKG statistics, 3,835 regional operations of overseas companies were registered in Hong Kong in 2013. The U.S. has the largest number of regional headquarters and offices in Hong Kong (822 companies), followed by Japan (729 companies), and the United Kingdom (335 companies). The major lines of business of the regional headquarters include wholesale/retail; import/export; finance and banking; manufacturing; professional, business, and education services; information technology services; and transportation, storage and courier services.

Hong Kong has proven in past economic crises to be exceptionally resilient. Dominant and sustained drivers of economic growth include private consumption (retail), logistics and business services, real estate development (bolstered by ongoing public infrastructure works), and tourism. Hong Kong has benefited from continued economic integration with mainland China’s strong economy. In particular, Beijing’s policy of opening its service sector and gradually expanding the scope of the offshore Renminbi (RMB – the PRC’s currency) market in Hong Kong and the sustained high numbers of mainland Chinese visitors have strengthened Hong Kong’s economy.

Hong Kong's well-established rule of law is applied consistently and without discrimination. There is no distinction in law or practice between investments by foreign-controlled companies and those controlled by local interests. Foreign firms and individuals are allowed freely to incorporate their operations in Hong Kong, register branches of foreign operations, and set up representative offices without encountering discrimination or undue regulation. There is no restriction on the ownership of such operations. Company directors are not required to be citizens of, or resident in, Hong Kong. Reporting requirements are straightforward and are not onerous.

Hong Kong remains an excellent destination for U.S. investment and trade. Despite a population of less than eight million, Hong Kong is America’s ninth-largest export market, its sixth-largest for agricultural products, and fourth for beef. Hong Kong's economy, with its world-class institutions and regulatory systems, is based on competitive financial and professional services, trading and logistics, and tourism. It is the world's most services-oriented economy, with the service sector accounting for more than 90% of its nearly US$275 billion GDP in 2013. Hong Kong hosts a large number of regional headquarters and regional offices. Close to 1,400 U.S. companies are based in Hong Kong, and more than half are regional in scope. Finance and related services companies, such as banks, law firms, and accountancies, dominate the pack. Seventy of the world's 100 largest banks have operations here.

Hong Kong has a free trade agreement (FTA) with Mainland China, called the Closer Economic Partnership Arrangement (CEPA), which provides tariff-free export to Mainland China of Hong Kong-origin goods and preferential access for specific services sectors. Signed in 2003, CEPA has gradually expanded every year thereafter. Following the 10th phase, announced in August 2013, service providers in 48 sectors (e.g., logistics, distribution) now enjoy preferential treatment on the Mainland. U.S. and other foreign firms engaged in substantive business operations in Hong Kong over the past three to five years are eligible to take advantage of most CEPA concessions to enter the Mainland market. The HKG plans to achieve “basic” service sector liberalization between Hong Kong and Guangdong Province by the end of 2014 and between Hong Kong and all of Mainland China by the end of 2015.

The Hong Kong & Shanghai Banking Corporation (HSBC) is Hong Kong's largest banking group. With its majority-owned subsidiary Hang Seng Bank, and 166 branches, the group controls more than 30.5 percent of Hong Kong dollar deposits. The Bank of China (Hong Kong) is the second-largest banking group, controlling 14.9 percent of Hong Kong dollar deposits throughout 215 branches. Thirty-five U.S. "authorized financial institutions" operate in Hong Kong. Most banks in Hong Kong maintain U.S. correspondent relationships. The Hong Kong Stock Exchange’s total market capitalization rose by 9.5 percent during 2013 to US$3.1 trillion, with 1,643 listed firms as of year-end 2013. Hong Kong’s stock exchange ranked second in Asia after Tokyo, and sixth in the world in terms of capitalization. Hong Kong Exchanges and Clearing Limited (HKEx), a listed company, operates the stock and futures exchanges.

In the 1970s, nearly half of Hong Kong's labor force were industrial workers when manufacturing thrived in Hong Kong. During the 1980s, Hong Kong's finance, shipping, trade and logistics and service industries started to boom. Since then, the economic landscape began to change amid subsequent industrial upgrading. Due to the hollowing out of the manufacturing industry, the wealth gap in Hong Kong widened and the class division worsened. Despite the prosperity of finance, trade and tourism in recent years, more than 1.37 million people are living below the poverty line in Hong Kong, home to more than 7 million.

Working career options are now limited, leaving little hope for the youngsters to move up the social ranks. As a result, Hong Kong's social class has largely been solidified in the 21st century, with the richest people dominated by property developers and their families. The Gini coefficient, which measures the inequality of income distribution, reached a new high of 0.539 in 2016, far above the warning level of 0.4, according to data by the HKSAR government's Census and Statistics Department. The greater the number toward one, the more inequal in income distribution. Though the HKSAR government tried to narrow the wealth gap, many people in Hong Kong said they are not sharing the fruits of economic prosperity, the young and those low-income groups in particular.

It is not easy to be middle class in Hong Kong, one of the world's most expensive cities. To join the rank, a household needs to earn at least 55,000 HK dollars, or 7,000 U.S. dollars, a month, according to Paul Yip Siu-fai, a senior lecturer at the University of Hong Kong. About 10 percent of the households in the city are up to the rank. Earning that much can be counted as rich in many parts of the world. But in Hong Kong, the money is still tight if you have a child to raise and elderly to support.

For nine straight years, housing in Hong Kong has been ranked as the least affordable in the world. Housing is the biggest burden for the average middle-class resident. The cost of having a child is another headache in Hong Kong, where pricey extra-curricular activities and private tutoring are considered necessary to win in the fierce competition. From 2004 to 2018, the property price increased by 4.4 fold, while income stagnated, statistics show. From 2008 to 2017, average real wage growth in Hong Kong was merely 0.1 percent, according to a global wage report by the International Labor Organization. Homeownership dropped from 53 percent to 48.9 percent from 2003 to 2018.

Fears of descending to the low-income group are real for the middle class. Many think they belong to the middle class only in education and cultural identity, but their living conditions are not much better than the impoverished.