Does Hong Kong’s Long Economic Night Have a Dawn? (Part 1)

Hong Kong’s current economic recession began with the social unrest of 2019, then compounded by the COVID-19 pandemic and the risks of US–China confrontation. Six years on, Hong Kong’s total output has continued to hover at a low level and has still not recovered to its 2018 level. Six years of hardship — the long night stretches on — making this the longest economic recession in Hong Kong’s recorded history. Public sentiment is understandably deeply troubled.

According to a survey released by Wofoo Social Enterprises in December last year, Hong Kong’s overall happiness index stood at just 5.63 out of 10 — the lowest in nearly seven years — with the state of the economy being the factor troubling residents the most. The survey found that more than half of respondents exhibited moderate to severe depressive symptoms; the proportion with severe depression reached 30%, a record high. Under these circumstances, the public is unlikely to认同 the notion of “from order to prosperity.” Fortunately, the central and SAR governments are striving to take corresponding measures, and several bright spots have emerged in the social economy, including an unprecedented enthusiastic response to the talent admission schemes, a halt to the decline in the population, and a similar reversal in the number of regional headquarters of overseas companies in Hong Kong.

Due to space constraints, this article is divided into two parts. The first part focuses on analysing why this economic recession has been so severe; the second part will examine whether the current economic bright spots and corresponding measures are sufficient to dispel the long night of economic crisis and bring dawn.

1. Recent Hong Kong Economic Growth: Bottom of the Global Rankings

Over the six years from 2018 to 2024, Hong Kong’s real GDP (gross domestic product) fell by 0.2% — a dismal performance. Over the same period, global GDP grew by 17.4% and GDP of the world’s developed economies grew by 9.7%, far outpacing Hong Kong. Comparing the real growth rates of 41 developed economies from 2018 to 2024, Hong Kong ranked 40th (second from last); Taiwan ranked 4th with growth of 22.4%; the United States ranked 9th with growth of 15.4%; Singapore ranked 10th with growth of 15.1%; and South Korea ranked 14th with growth of 13.5%. Hong Kong stands alone in its desolation — negative growth of 0.2% — a performance too painful to watch.

Compared with other developed economies, Hong Kong’s economic weakness cannot be lumped together and blamed on COVID-19, population ageing, and stagnant labour-force growth (since other developed economies face the same conditions). Hong Kong’s particularly poor performance is believed to be affected by the following special factors:

1. The 2019 social incidents and the resulting emigration wave that followed.
2. The “China factor” has had an especially large impact on Hong Kong, including the mainland economy’s weakness in recent years and Hong Kong’s reopening pace in the later stages of the pandemic being too slow due to the mainland’s “zero-COVID” policy. However, the mainland’s recent economic stimulus measures have also had a positive impact on Hong Kong’s economy, particularly the rebound in the Hong Kong stock market.
3. Hong Kong is on the front line of US–China confrontation, with particularly high geopolitical risks.

Hong Kong has had official GDP statistics since 1961, allowing us to clearly analyse the severity of economic crises. The economic crisis that began in 2019 has dragged on for a long time — now six years — breaking the historical record since 1961.

2. This Economic Crisis Has Broken Hong Kong’s Historical Records

Looking back at history, in 1967 Hong Kong was affected by the Cultural Revolution on the mainland and riots broke out, triggering an emigration wave, a fall in residential property prices, and a political and economic crisis. However, that year the world economy was very prosperous due to the stimulus of the Vietnam War, and Hong Kong’s exports also flourished, so Hong Kong’s real total output still saw slight growth despite the crisis shock.

The 1973 oil crisis triggered a deep global recession, and Hong Kong’s economy was also affected — that year unemployment briefly reached double digits. However, real total output did not show negative growth, mainly because rapid population growth at the time supported overall economic growth.

In 1983, China and the United Kingdom began talks on Hong Kong’s future, triggering a sharp depreciation of the Hong Kong dollar and economic turbulence. However, that year coincided with the early period of the country’s reform and opening up, and Hong Kong’s exports were booming, with the city’s total output still achieving solid growth of 6%.

The 1997 Asian financial storm broke out, and in 1998 the Hong Kong dollar was attacked, triggering a financial and economic storm. That year real total output fell by 5.9% — the first annual negative growth in Hong Kong since records began in 1961. However, the SAR government quickly repelled the speculators, and the negative growth lasted only one year; two years later (2000), Hong Kong’s real total output had already surpassed the 1997 level. Subsequently, the United States’ “9/11” terrorist attacks in 2001 and the SARS epidemic in 2003, while slowing Hong Kong’s growth rate, did not push it into annual negative growth.

This economic crisis breaks all previous records for several reasons. In the past, Hong Kong’s population grew relatively quickly, which was able to support economic growth during crises; yet in the three to four years after 2019, two to three hundred thousand Hong Kong residents emigrated, becoming the main cause of economic contraction. Moreover, in the past Hong Kong’s population structure was younger, with stronger adaptability and resilience in the face of crises; today the population is rapidly ageing, and the young and highly skilled Hong Kong residents are precisely the group with the highest tendency to emigrate. Many young couples take their children to emigrate abroad, leveraging their youthful adaptability and resilience to build careers overseas, leaving behind their parents who lack such adaptability and resilience, turning Hong Kong into a city of “left-behind elderly.”

To reverse the trends of population decline and ageing, Hong Kong must import a large number of young talents in order to overcome this economic crisis. The current government talent admission schemes receiving an overwhelming response is the biggest bright spot in the crisis.

3. Government-Spending-Supported Growth Cannot Be Sustained

Hong Kong’s economic growth in recent years has been mainly supported by government spending, with the result that government fiscal deficits have piled up — a situation that simply cannot be sustained. Take the growth in the first three quarters of 2024 as an example (the fourth-quarter figures are not expected to be released until February this year). Analysing the real growth rates of the main components of GDP expenditure in the first three quarters of last year (compared with the first three quarters of 2023), during that period investment and consumption in the private sector shrank across the board (by 4% and 0.6% respectively); public-sector investment (mainly infrastructure spending) grew sharply by 15%, government consumption (mainly civil service salaries) rose slightly by 0.5%; and exports of goods and services saw moderate growth (5.7%).

In summary, during that period the local economy as a whole still grew because the increase in government spending and exports exceeded the decline in private-sector expenditure, leaving total expenditure with a small increase.

Hong Kong is a small open economy, and external demand (exports) is indispensable. However, with Trump back in office, the outlook for Hong Kong’s exports is not optimistic. Hong Kong needs to “walk on two legs”: in addition to external demand, it also needs internal demand from the private sector to maintain healthy growth. Yet in the first three quarters of last year, private-sector demand (investment plus consumption) shrank by 0.14%; during that period internal demand still grew, but it was entirely propped up by public-sector demand. Such economic growth is fundamentally unsustainable.

In addition to serious government deficits, the MTR and the Hong Kong Housing Society have also run into financial difficulties. Faced with deficits, the government cannot “close the umbrella when it rains” by drastically cutting public spending. However, the government must design a gradual, persuasive, and transparent deficit-reduction plan to restore fiscal discipline, otherwise investors will lose confidence in Hong Kong.

4. The Business Community Is Extremely Pessimistic About Hong Kong’s Future

Private-sector investment is the engine that drives Hong Kong’s productivity growth. In recent years, private-sector investment outside real estate has shrunk rapidly, falling below the level recorded since 1966. Past trends show that the share of Hong Kong’s private-sector investment in “machinery, equipment, and intellectual property products” (hereinafter referred to as “machinery and equipment” investment) in total output is closely related to Hong Kong’s political and economic risks. For example, during the decade of the Cultural Revolution (1966–1976), when mainland Chinese politics was turbulent, the share of private-sector “machinery and equipment” investment in total output (hereinafter referred to as “this share”) averaged only 7.9%; after mainland China began its reform and opening up in 1979, the share rose to 10.1% by 1980. Subsequently, as the China–UK negotiations on Hong Kong’s future triggered a serious crisis, the share fell to 8.5% in 1981 and 1982. After Deng Xiaoping’s Southern Tour in 1992, the share rebounded to a high of 14% in 1995. However, during the 1998 Asian financial storm and the 2003 SARS outbreak, the share fell back to around 10%.

Over the five years from 2019 to 2023, this share fell to an average of just 4.5% — a historical low — falling below the lows of all political and economic crises in Hong Kong since 1966. In the first three quarters of 2024, the share fell further to 3.4%, reflecting deep pessimism among Hong Kong’s business community about the outlook.

Although private-sector investment in “machinery and equipment” has fallen to a historical low, public-sector investment in this area (more than 40% of which is investment in R&D activities) has seen a substantial increase, with its share of total output rising from 1% in 2012 to a record 1.7% in the first three quarters of 2024, mainly reflecting a sharp rise in public-sector R&D investment. However, the rapid expansion of public-sector investment has not been able to pull private-sector investment along with it. Unless Hong Kong’s private-sector investment can return to healthy growth, the long night of the local economy will not see dawn.

For the sake of political correctness, many Hong Kong businesspeople know how to mouth responses to the central authorities’ calls, and know how to “tell Hong Kong’s story well” and “sing the praises of Hong Kong’s economy.” However, no matter what they say with their mouths, the body is the most honest. As the saying goes, “when there are policies from above, there are countermeasures from below” — requiring businesspeople to “show loyalty” will likely only lead to outward compliance and hidden defiance. Over time, policymakers too can easily be misled by the chorus that reports only good news and hides bad news.

5. Private Sector R&D Spending Is Not Keeping Pace with the Public Sector

“Machinery and equipment” investment includes R&D spending as well as machinery and equipment investment outside R&D activities. If we look at R&D spending alone, Hong Kong’s R&D spending in 2023 was only 1.1% of total output — far below Singapore’s 2.5% and Shenzhen’s 5%. However, in Shenzhen, 90% of R&D spending comes from enterprises and only 10% from the municipal government; in Hong Kong, more than half of R&D spending comes from the public sector. Hong Kong’s public-sector R&D spending has in fact grown very rapidly: from 2012 to 2023, the share of Hong Kong’s R&D spending coming from the public sector rose from 55.1% to 60.7%; however, the share from business firms fell from 44.9% to 39.3%. Hong Kong’s public-sector R&D spending has actually reached the level of the Shenzhen municipal government — the crux of the problem is that Hong Kong’s private-sector R&D spending has not kept pace with the increase in public-sector R&D spending.

Whether in “machinery and equipment” investment or in R&D spending, the SAR government’s active moves have not been able to effectively pull the private sector along. Innovation and technology investment is admittedly a higher-risk, long-term investment that often requires paying “tuition fees” for some time before yielding results — but the government has already paid more than ten years of tuition, with only pitifully small results.

The government must investigate in depth why its policies have not achieved the expected results: is it because the government’s investment model in innovation and technology is flawed, with R&D activities failing to translate into commercial results? Or is it because the recent high geopolitical risks have made businessmen shy away from long-term investments? Or are there other reasons?

If the government cannot seriously identify its shortcomings and find the root cause of policy ineffectiveness, it will only continue to waste public funds over the long term. Ultimately, unless the private sector seriously invests in innovation and technology activities, the long night of Hong Kong’s economy will have little chance of seeing dawn.

As mentioned earlier, Hong Kong’s economy in recent years is not entirely pitch black, and under the efforts of policymakers, notable bright spots have emerged. Due to space constraints, whether the current economic bright spots and corresponding measures are sufficient to dispel the long night of economic recession and bring dawn — that will be discussed in the next instalment.

(Translation supported by AI)

Related article:

• Does Hong Kong’s Long Economic Night Have a Dawn? (Part 2) by Yun-wing Sung