Speaker 1: You're listening to Asia Centric from Bloomberg Intelligence, the podcast
Speaker 1: that pulls back the curtain on global business so you
Speaker 1: can invest better across the Asia Pacific rim. I'm John
Speaker 1: Lee in Hong Kong and.
Speaker 2: I'm Katy Dmitriyeva. Hong Kong's economy still feels like it's
Speaker 2: in recovery mode from the pandemic. The residential property market
Speaker 2: is now down for a fifty year in a row.
Speaker 2: The retail sector is still adjusting from changing consumer and
Speaker 2: tourism patterns, and some business leaders question if it can
Speaker 2: ever really return to the city that it was before.
Speaker 1: Is Hong Kong's economic problem structural and what will it
Speaker 1: take to revive the city's confidence.
Speaker 2: Here to discuss all things Hong Kong is Gary, senior
Speaker 2: economist at ne Texas CIB Gary. Welcome to Asia Centric.
Speaker 3: Hello everyone, thanks for having me today. Gary.
Speaker 1: Hong Kong's retail sales plummeted by almost fifteen percent in
Speaker 1: April versus a year ago. Detail sales are likely to
Speaker 1: be down for the whole of this year, and this
Speaker 1: is despite the fact that mainland tourists seem to be
Speaker 1: returning to the city. What's driving all the weakness.
Speaker 3: Well, I would attribute this to a few factors, and
Speaker 3: of course the most mentioned factor in the news is
Speaker 3: probably this trend of a lot of Hong Kong residents
Speaker 3: spanning overseas. It could be across the broader et engine
Speaker 3: in the Greater Bay region, or it could be in
Speaker 3: a somewhere a bit farer like Japan Thailand. I think
Speaker 3: it's quite a clear trend. But of course, at the
Speaker 3: same time, it's also about this changing consumer spending pattern
Speaker 3: from a lot of Chinese tourists towards Hong Kong. And
Speaker 3: it's not only about the recovery of quantity because right
Speaker 3: now it's only around sixty percent of the twenty nineteen level,
Speaker 3: but it's also about how they spend, because people do
Speaker 3: not only look for a very shopping centric model nowadays.
Speaker 3: So I think these two factors are definitely the one
Speaker 3: that's basically hurting Hong Kong's retail sector at the moment.
Speaker 2: So are they going to come back?
Speaker 3: Well, I think it is indeed quite challenging because if
Speaker 3: we look at the behavior of a lot of Chinese
Speaker 3: tourists nowadays, first the currency is quite weak, and secondly,
Speaker 3: if you look at global inflation it has been rising,
Speaker 3: you know, probably more than fifteen percent since twenty nineteen.
Speaker 3: So for Chinese tourists, a lot of expense overseas has
Speaker 3: become way more expensive. So we do see a booming
Speaker 3: domestic tourism, and in Hong Kong. I think it also
Speaker 3: faced the same deniamer in because it's picked to the
Speaker 3: usd things that's got more expensive here, So when they
Speaker 3: actually come to Hong Kong, they will probably feel the
Speaker 3: prices are also quite expensive compared to what they see locally.
Speaker 3: So I think this is definitely very challenging. Actually, I
Speaker 3: would say I do not expect the number to come
Speaker 3: back to the pre bettermic level or even twenty eighteen level,
Speaker 3: which was the golden age of all these tourists inflow
Speaker 3: in probably the next five or maybe even ten years.
Speaker 1: So Gary, just to clarify on a urine basis, there's
Speaker 1: more mainland tourists coming into Hong Kong, but they're just
Speaker 1: spending less.
Speaker 3: I would say that the behavior has changed, and because
Speaker 3: if you look at the income growth in China over
Speaker 3: the past three years, it could be because of pandemic
Speaker 3: or different regulative changes. Basically, people do not feel as
Speaker 3: optimistic about the future for income growth, so that has
Speaker 3: not only affected local consumption but also about how they
Speaker 3: behave when they go to other places as well. And second,
Speaker 3: of course, is also about what kind of tourists that
Speaker 3: Hong Kong is able to attract because of the rise
Speaker 3: of a lot of Chinese social media and also the
Speaker 3: changes of how people travel and what they do nowadays,
Speaker 3: and a lot of time they don't only come and shop,
Speaker 3: they actually try to spend in a very minimum way,
Speaker 3: try to with a different part of the city, which
Speaker 3: is not a bad thing, but when you look at
Speaker 3: it from the economic perspective, if people do not spend,
Speaker 3: then of course the real impact on the over growth
Speaker 3: will be lower.
Speaker 2: I guess that's why all the luxury stores are still
Speaker 2: kind of looking empty these days.
Speaker 3: Yes, I mean it's very interesting if you look good
Speaker 3: maybe times great in Couseway Bay, or if you look
Speaker 3: at Harber City Insult. In the past, you would often
Speaker 3: see a very long qute of many Chinese students lining
Speaker 3: up to get what they want, especially in the luxury sectors.
Speaker 3: But nowadays I would say this a phenomenon has become
Speaker 3: quite rare. Even if there is a line I do
Speaker 3: expect that the per capital spending will be less than before.
Speaker 1: Gary, what about your first point? You mentioned that a
Speaker 1: lot of Hong Kong residents are traveling to mainland China.
Speaker 1: Is this over the weekend? Can you elaborate on this phenomenon.
Speaker 3: Actually, I would say it's too voted. If you look
Speaker 3: at the estimate of how much Hong Kong is being
Speaker 3: changing or even for longer trip, we are talking about
Speaker 3: somewhere close to sixty seven billion Hong Kong dollars, which
Speaker 3: is around fifteen percent of Hong Kong retail salves in
Speaker 3: twenty twenty three. Definitely, it is a huge number. It's
Speaker 3: probably not fully a new trend. But the problem here
Speaker 3: is that, well, there has always been a residence spending
Speaker 3: across the border because it's cheaper and et cetera. But
Speaker 3: I think Hong Kong also loses the middle class that
Speaker 3: supposedly to be the stabilized to the economy because right now,
Speaker 3: even though there could be a different source of talent
Speaker 3: program attracting another type of population into Hong Kong, their
Speaker 3: behavior will be different. They may be a bit more
Speaker 3: willing to go across the border. The Shenghen or spend
Speaker 3: the weekend in the Greater Bay. So I do feel
Speaker 3: that there's a structural change in the middle class in
Speaker 3: Hong Kong, which also contributed to that problem. But beyond that,
Speaker 3: of course, there are more people traveling across the border
Speaker 3: to spend I would say that right now it's probably
Speaker 3: more about the weekend trips, but increasingly when people get
Speaker 3: bored of all this activity, that wouldn't be surprised that
Speaker 3: there could be trips in a longer duration, which basically
Speaker 3: means that Hong Kong will need to fight harder to
Speaker 3: retain this sort of consumption.
Speaker 1: Asia Centric is produced by Bloomberg Intelligence, where more than
Speaker 1: five hundred experienced analysts and strategists work around the clock
Speaker 1: to bring you timely, world class research. Our coverage spans
Speaker 1: two hundred market industries, currencies, commodities and industries, as well
Speaker 1: as over two thousand equities and credits. If you like
Speaker 1: what you hear, don't forget to subscribe and chair.
Speaker 2: So we talked about tourism, We talked about travel. What
Speaker 2: about other parts of the economy. The housing sector has
Speaker 2: always been a big one here, very expensive. Can we
Speaker 2: talk a bit about that. I know the sector has
Speaker 2: been down now for a fifth year in a row.
Speaker 2: It seems like things aren't picking up well.
Speaker 3: I'm a little bit more optimistic on the residential side
Speaker 3: more than the commercial real estate, and of course, unless
Speaker 3: we see interest rate coming down or further relaxation of
Speaker 3: different stamp duties and policies, and I think it's a
Speaker 3: bit hard to really see a rebound in home pricess
Speaker 3: for now, and especially when we start to see more
Speaker 3: new supply from all these developers that they're all dying
Speaker 3: for cash, that they need to offload the unit for
Speaker 3: the cash flow. So basically it means that we will
Speaker 3: probably see more transaction, there will be some demand, but
Speaker 3: that will not be enough to actually revert the downward
Speaker 3: trend that we see so far. So as long as
Speaker 3: there are people in the city them that someone will
Speaker 3: eventually buy some homes. But on the commercial side, it's
Speaker 3: a bit checkier simply because again that's a very huge
Speaker 3: amount of supply coming and Hong Kong is also affected
Speaker 3: by a lot of work from home arrangement or basically
Speaker 3: companies trying to cut course moving to other non prime location.
Speaker 3: I think all of this means that there could be
Speaker 3: ongoing stocklishness in the commercial rare states, especially in the
Speaker 3: officers space. So for that, I'm not too optimistic and
Speaker 3: I think it will at least take another five years
Speaker 3: to see the recovery.
Speaker 1: Of the cycle. Gary, I'm just going to throw out
Speaker 1: some numbers based on CBRE data. The city has a
Speaker 1: seventeen percent vacancy rate and this is for office property. Now,
Speaker 1: there's two buildings in central Hong Kong that have just
Speaker 1: about to be completed. That's a Chum Kong Center too,
Speaker 1: and there was a news report saying that it's only
Speaker 1: going to have ten percent occupancy. Now, this is a
Speaker 1: brand new waterfront building. Next to that, there's the Henderson
Speaker 1: and that has a forty percent vacancy. These numbers are
Speaker 1: pretty terrible. Is it due to the weakness in the
Speaker 1: financial sector.
Speaker 3: Yes, I would say so. And I think one of
Speaker 3: the key challenge that Hong Kong loses nowadays is really
Speaker 3: about the loss of animal spirit. And when I say
Speaker 3: animal spirit, it means that it may not be totally
Speaker 3: tied to the real economic data that people see. Ba's
Speaker 3: really about a lot of investors or household They make
Speaker 3: the decision based on what they expect. So if they
Speaker 3: expect that the income will not be that optimistic. If
Speaker 3: corporate expected well, maybe they will be affected by your
Speaker 3: politics in terms of recent et cetera. Then they make
Speaker 3: the decision based on what they think about the future,
Speaker 3: not really about you know that there could be some
Speaker 3: spotlight in the Hong Kong economy, but that it's not
Speaker 3: enough to revert that sentiment. So with that in place,
Speaker 3: I think it's really reflect the loss of confidence broadly
Speaker 3: in this sector in the corporate world that in the
Speaker 3: past may be Hong Kong is able to capture more
Speaker 3: of the foreign direct investment coming into Asia, but now
Speaker 3: they need to share with other leading cities around the
Speaker 3: Asia Pacific region. It could be Sydney, Singapore, Tokyo and
Speaker 3: even in the Middle East. So definitely, I think this
Speaker 3: is one of the core challenge that Hong Kong is facing,
Speaker 3: and I feel that unless there is stronger growth momentum
Speaker 3: that corporates feel optimistic that they can make more money
Speaker 3: in the city. I feel it's very hard to see
Speaker 3: the vacancy rate declining in the short run.
Speaker 2: What do you think are the main things that are
Speaker 2: keeping people from moving here? You know, if you want
Speaker 2: to fill up these office buildings, you need to have people.
Speaker 2: You need to have companies moving here. If you want
Speaker 2: more residential transactions, you need to have people moving here.
Speaker 2: So what are the kinds of things that executives may
Speaker 2: be thinking about when choosing whether to relocate here or
Speaker 2: to another place.
Speaker 3: Well, with that, I would start with the positive side first,
Speaker 3: and of course I think in Asia it's very hard
Speaker 3: to find a place with a very low Texas free
Speaker 3: capital flows. I think all of these are still advantages
Speaker 3: that Hong Kong has. But at the same time, especially
Speaker 3: after the last i would say four years of COVID
Speaker 3: and also geopolitical tensions, for a lot of senior executives
Speaker 3: or for decision makers in different sort of companies, they
Speaker 3: will have the risk management in mind. So Hong Kong
Speaker 3: is definitely a market that they won't want to give
Speaker 3: up because it's still the best gateway to China. But
Speaker 3: if we start to see some of the global macro
Speaker 3: trend changing, for example, if the Chinese economy continue to decelerate,
Speaker 3: and if we start to see India or Asking growing quicker,
Speaker 3: there is a natural economic momentum pushing this company to
Speaker 3: actually focus more on the non China market. So I
Speaker 3: think with that it really depends on how competitive Hong
Speaker 3: Kong can be in the future. And beyond that, of course,
Speaker 3: I do think geopolitical risks is also a major concern
Speaker 3: as well, because I think the hardest part about is
Speaker 3: it's very hard to really measure the downside scenario or
Speaker 3: how worse can it be, And of course a lot
Speaker 3: of time people would overestimate the worst scenario, but this
Speaker 3: is what they look into right now. So I think
Speaker 3: these two factors definitely holding back the recovery of the
Speaker 3: Hong Kong corporate sector.
Speaker 2: So these days executives are seeing Hong Kong as just
Speaker 2: another Chinese city, another Beijing, another Shanghai. Is that fair
Speaker 2: to say?
Speaker 3: Well, I think for a lot of sectors, Hong Kong
Speaker 3: is still the best location to be if they want
Speaker 3: to assess the China market. But at the same time,
Speaker 3: there is also a trend that some companies would prefer
Speaker 3: to either have their office in Shanghai or Beijing just
Speaker 3: to get a closer access to their customer or if
Speaker 3: they want to allocate more resources to Usian and India
Speaker 3: than of coursing appos the natural choice. So a lot
Speaker 3: of analysts would compare Hong Kong and Singapore, which of
Speaker 3: course is to city that pretty much are like. But
Speaker 3: at the same time, Hong Kong's competitor is not only
Speaker 3: about single bore, it's also about other Chinese cities as well.
Speaker 3: But I would say that it still depends on the sectors.
Speaker 3: For some of the sectors related to consumption, maybe they
Speaker 3: would for closer on shore access, But for finance, I
Speaker 3: still think that Hong Kong would have the advantage because
Speaker 3: China still has the capital control, the taxes law in
Speaker 3: Hong Kong is still have a more internationally aligned legal system.
Speaker 3: So yes, they are challenges, but the challenges may be
Speaker 3: a bit different in different sectors.
Speaker 1: So Gary, you did touch upon some of the policy
Speaker 1: measures going forward. What can the authorities do to revive
Speaker 1: Hong Kong's retail sector its property market?
Speaker 3: Well, I think for retail services indeed quite a challenging job,
Speaker 3: and of course there's something that the Hongkong government cannot control.
Speaker 3: For example, if the US interest remain elevated, then probably
Speaker 3: Hong Kong will follow. Based on the monetary system, which
Speaker 3: means the US dollar and Hong Kong dollar would be strong,
Speaker 3: then everything will be expensive in Hong Kong, so that
Speaker 3: would probably deter part of the tourists, especially it was
Speaker 3: from China, because basically still eighty percent of Hong Kong
Speaker 3: source of tourists. So I would say that a lot
Speaker 3: of problem Hong Kong face nowadays in the retail sector
Speaker 3: is structural and it's actually under like a period of
Speaker 3: change that it will need to have some reform either
Speaker 3: on an industry level or even from the government level
Speaker 3: in terms of longer term planning in repositioning Hong Kong
Speaker 3: in the region. It should no longer be only a
Speaker 3: shopping centers in the past, because there's a change in
Speaker 3: what tourists or different houses of want. It will need
Speaker 3: to find the niche or anything that is unique to
Speaker 3: actually attract people to come here that they cannot be
Speaker 3: found elsewhere. But for now, I do feel that a
Speaker 3: lot of policies that we see seems to be just
Speaker 3: a revamp of what has happened in the past few years.
Speaker 3: For example, when you see the firework that will be
Speaker 3: shown in a very high frequency, this is not something
Speaker 3: that is unique to me. I mean, there are many
Speaker 3: examples that Hong Kong can look at Japan, Korea, even Singapore,
Speaker 3: they all have their own niche.
Speaker 1: In the gary. You are, of course an economist, what's
Speaker 1: your economic forecast on Hong Kong.
Speaker 3: Well, in twenty twenty four, Hong Kong will still be
Speaker 3: able to achieve growth rate of around two point eight percent,
Speaker 3: which is not too much a bad number. However, I
Speaker 3: think the biggest problem nowadays is that even the growth
Speaker 3: number may seem okay, which is mainly supported by the
Speaker 3: psysical recovery of the global export sector. But if you
Speaker 3: look at consumption, if you look at investment, those are
Speaker 3: really not performing that well, which basically means that if
Speaker 3: we step away from growth into income and wealth accumulation
Speaker 3: or even you know, look at equity market, et cetera,
Speaker 3: there could be a gap between growth versus and what
Speaker 3: is really going on and what investors or household and
Speaker 3: corporate actually feel. So I think that it will probably
Speaker 3: take a while for their confidence to recover, and that
Speaker 3: would probably not come this year.
Speaker 2: How much longer do we have to wait?
Speaker 3: It really depends on when Hong Kong would be able
Speaker 3: to regain its niche in a lot of sectors. And
Speaker 3: for example, which is also unfortunate that in the financial
Speaker 3: sector well. Definitely, Hong Kong has performed quite well in
Speaker 3: the past of attracting a lot of Chinese or even
Speaker 3: foreign capitals into the city, but it has also been
Speaker 3: hit by a lot of regulative changes in China would
Speaker 3: happen to be in real estate and in internet platforms,
Speaker 3: et cetera, and which happened to be the biggest sectors
Speaker 3: or at least one of the biggest ones in the
Speaker 3: Hong Kong financial market. So I feel that a lot
Speaker 3: of changes has happened in the past few years, and
Speaker 3: it will really take I would say another maybe two
Speaker 3: years to actually see the gradual recovery that Hong Kong
Speaker 3: would have, because if the old growth engine and model
Speaker 3: is gone, then it will take time to actually diversify
Speaker 3: and create a new one. So I think it's interesting
Speaker 3: to see the Home government trying to push for the
Speaker 3: diversification towards non China market. So I think this is
Speaker 3: probably something that it would take time to be up.
Speaker 3: And going back quickly to the real estate question, which
Speaker 3: I've actually forgot to answer, I think for residential market,
Speaker 3: I think we will begin to see some recovery probably
Speaker 3: sometime early next year, simply because there would be more
Speaker 3: people coming to Hong Kong, even though as we discuss,
Speaker 3: the popular structure may change a bit. As long as
Speaker 3: people are in the city, they will need the place
Speaker 3: to live. But for commercial space, I really think that
Speaker 3: it will take a long time.
Speaker 2: Maybe a big picture question, should we be thinking about
Speaker 2: Hong Kong as trying to get back up to what
Speaker 2: it was before or is your sense as an economist
Speaker 2: that this place is just going to change. It's going
Speaker 2: to change, and it might be something in ten years time,
Speaker 2: but won't necessarily go back to sort of the Hong
Speaker 2: Kong of twenty eighteen, the peak Hong Kong.
Speaker 3: As you said, Actually, if you look at the Hong
Speaker 3: Kong economic history, there has been a few times that
Speaker 3: it has undergone massive economic transformation. In the past, it
Speaker 3: wasn't manufacturing hub, and then you know there's a gradual
Speaker 3: development into finance and logistics and et cetera. So I
Speaker 3: do think that Hong Kong is actually undergoing another economic transformation.
Speaker 3: But how successful it will be what really depends on,
Speaker 3: you know, how the government is able to provide supportive
Speaker 3: policies to diversify the economy. And I still think that
Speaker 3: the question advantage of Hong Kong is still on finance,
Speaker 3: but whether you can find other source of growth under
Speaker 3: the current environment to diversify from the old engine towards
Speaker 3: the growth momentum. I think this is key. And even
Speaker 3: if you look at other sectors like logistics and consumption,
Speaker 3: they all feel different sort of challenges. That a bit
Speaker 3: of discussion on tech, but I think there could be
Speaker 3: closer collaboration with etcetera. But I still think that the
Speaker 3: core advantage of Hong Kong is to use this road
Speaker 3: not only to connect with the Chinese capital, but it's
Speaker 3: really about the global capital. It may not necessarily be
Speaker 3: from the West, but let's say RCN or Middle East
Speaker 3: and etcetera. So I think where the Hong Kong will
Speaker 3: retain its road as an international sector will depend on
Speaker 3: how it can actually interact with global capital, not only
Speaker 3: on China.
Speaker 1: Gary, before I let you go, we did talk about
Speaker 1: a lot of Hong Kong residents going over the border
Speaker 1: to spend their money in the mainland. When was the
Speaker 1: last time you went to the mainland and where did
Speaker 1: you spend your money on?
Speaker 3: Well, I was in Guangzhou. I feel ago. I think
Speaker 3: the wipe there is really basically seeing a lot of
Speaker 3: people in the shopping mall, which I haven't seen in
Speaker 3: Hong Kong for a while. And of course if you
Speaker 3: ask me, I think the accommodation course is quite cheap there.
Speaker 3: And then also about the foot quality and the related surfaces,
Speaker 3: so I think it's very hot for Hong Kong to
Speaker 3: compete on prices. So if you ask me, I think
Speaker 3: one key point that the Hong Kong retail industry should
Speaker 3: really taken is really about improving the quality.
Speaker 1: And a lot of our listeners are actually based outside
Speaker 1: of Hong Kong. Can you give them some indication of
Speaker 1: how much cheap Root is in terms of hotels restaurants
Speaker 1: than it is in Hong Kong.
Speaker 3: Okay. Of course, generally speaking, if you're talking about a
Speaker 3: five style hotel in Hong Kong in the normal time,
Speaker 3: you're talking about somewhere around three thousand Hong Kong dollars
Speaker 3: per night, and it will probably be around one thousand
Speaker 3: to one thousand, five hundred integrated bay. And in terms
Speaker 3: of the foot or like generally decatering surfaces, then I
Speaker 3: can basically cater a meal or for people with quite
Speaker 3: nice food for around one and R and B and
Speaker 3: for Hong Kong. I think that will only be the
Speaker 3: cost for two people, which is only for our data. Okay,
Speaker 3: But having said that, I do want to say that
Speaker 3: one of their findish that I find is that Hong
Speaker 3: Kong we tried to be in a different sort of hub,
Speaker 3: but definitely the cocktail is still greater in Hong Kong
Speaker 3: than other cities in China.
Speaker 1: That's you've got and what's your favorite cocktail?
Speaker 2: We need to talk after this recording.
Speaker 1: It's been an interesting dive into Hong Kong's economy and
Speaker 1: the structural challenges. Thank you Gary for joining asia Centric.
Speaker 3: Thank you very much.
Speaker 1: I'm John Lee calling in from Hong Kong.
Speaker 2: And I'm Katadmitrieva here in Hong Kong.
Speaker 1: This podcast was also produced by Clara Chen and you've
Speaker 1: been listening to the asia Centric podcast