Hong Kong, S.A.R.
major macro economic indicators
|2017||2018||2019 (e)||2020 (f)|
|GDP growth (%)||3.8||3.0||-1.2||-4.0|
|Inflation (yearly average, %)||1.5||2.4||2.3||2.0|
|Budget balance (% GDP)||7.5||3.4||-0.2||0.5|
|Current account balance (% GDP)||4.7||4.3||3.0||3.0|
|Public debt (% GDP)||0.1||0.1||0.1||0.1|
(e): Estimate. (f): Forecast.
- Open economy
- High-quality infrastructure
- Top-class global financial centre, airlock between China and the rest of the world
- Healthy banking system
- Anchoring of the currency to the US dollar
- Robust institutional quality and judicial system thanks to the “one country, two systems” principle
- Lack of innovation and diversification of the economy
- Exposure to slowdown in mainland China
- Mismatch between business cycles in the United States and China, as the HKD is pegged to the USD
- Real estate sector risks and housing affordability
- Rising income inequality and social discontent
- Industry has fully relocated to mainland China
Recessionary pressures will extend into H1 2020
Growth contraction is expected to continue at least into the first half of 2020. The trade war between the US and China has impacted exports, which represent over 190% of Hong Kong’s GDP, the majority of which are re-exports from mainland China. In addition, private consumption, which accounts for more than 65% of GDP, has suffered because of protracted social unrest in Hong Kong. This has ensued several months of protests, resulting in a double-digit contraction in retail sales that will continue in 2020. The service sector is also dependent on tourism revenues, which declined by -30% year on year in the second half of 2019, led by fewer Chinese tourist arrivals (75% of total). Inflation remains low and the labour market tight (unemployment rate around 2.5%). This should spur real wage growth under normal conditions, but unemployment is set to increase in 2020 in the service and retail sectors, while inflation will likely tick up slightly on higher food prices, 90% of which is imported from abroad.
Investment growth (21% of GDP) might stall on the back of weaker sentiment stemming from the trade war and ongoing protests. Credit conditions have turned more favourable, in line with three interest rate cuts by the U.S. Federal Reserve (Fed). Hong Kong has a currency board so the Hong Kong Monetary Authority (HKMA) follows monetary policy directions from the Fed. However, excess liquidity in order to avoid downside pressures on the housing market has translated into limited transmission of the three rate cuts in 2019. As a result, housing prices may correct further in 2020, which will drag further on consumption through the wealth effects. Public investment will improve, but this will only be marginal, as a number of large-scale infrastructure projects (fast speed rail to Guangzhou and the Hong Kong-Zhuhai-Macao Bridge), were completed in 2019. The government announced fiscal stimulus measures, worth USD 2.5 billion or roughly 2% of GDP. However, these constitute one-off sweeteners that will not prevent the economy from contracting further in the first half of 2020. Growth will bottom-out in the second half of 2020, even if no resolution to social unrest has been reached, on a favourable base effect.
First budget deficit since 2004, financial services remain strong
Hong Kong will register its first budget deficit, since the SARS outbreak of 2003, in the financial year ending March 2020. The main reasons include adverse economic conditions, decreased tax revenues, lower land sale income and relief measures announced during the year. A small deficit is not a serious concern in view of large reserves, representing above 20 months of expenditure. Even if spending increases, revenues from land and property sales should remain positive, provided the correction in housing prices is mild and in case the government decides to sell more stockpiles. The merchandise trade balance will deteriorate slightly, as exports contract faster than imports, but the current account balance will remain in surplus, thanks to the significance of resident and local firms’ foreign income repatriation.
In contrast to the retail sector, and notwithstanding pressures on the capital outflow front, financial services will remain dynamic. Bank balance sheets remain strong, thanks to household debt limits and regular stress tests performed by the HKMA. In addition, Hong Kong is a top global Initial Public Offering (IPO) centre and the largest financial hub in the region, with assets under management (AUMs) far exceeding those of regional competitors Singapore and Tokyo.
Tougher times ahead for the Chief Executive
Chief Executive Carrie Lam’s pro-Beijing establishment coalition lost a ruling majority in the Legislative Council (Legco) in 2019. Carrie Lam’s popularity has plummeted over the unpopular extradition bill, citizenry concerns over alleged police brutality and corruption allegations surrounding her unpopular “Lantau Tomorrow Vision”. Beijing will likely pressure the Hong Kong government into implementing changes to the school curriculum to include more “patriotic education”, a move that risks exacerbating social unrest even further. To manage discontent, the Hong Kong government will continue to target funds at youth programs and will make a genuine effort to increase the availability of social housing, both of which are good first steps in dealing with high levels of income inequality. The US passed its Hong Kong Human Rights Bill on November 2019, which poses threats to the outlook of Hong Kong in case the US Senate reverses Hong Kong’s preferential status.
Last update : February 2020
Bank transfers are one of the most popular payment instruments for international and domestic payments in Hong Kong, thanks to the territory’s highly developed banking network.
Standby Letters of Credit also constitute reliable payment methods, as the issuing bank guarantees the debtor’s credit rating and repayment abilities. Irrevocable and confirmed documentary letters of credit are also widely used, as the debtor guarantees that a certain sum of funds will be made available to the beneficiary via a bank, once specific terms agreed by the parties are met.
Cheques and bills of exchange are also frequently used in Hong Kong.
During the amicable phase, the creditor sends one or more notice letters (summons) to the debtor, in an attempt to persuade them to pay the due debts.
The Practice Directions on Mediation, introduced in 2010, set out voluntary processes that involve trained and impartial third party mediators. This helps both parties involved in a dispute to reach an amicable agreement for repayment. Debtors and creditors are usually urged to pursue this process before resorting to legal action.
The judicial system in Hong Kong comprises three distinct courts:
- the Small Claims Tribunal handles relatively small cases (of up to HKD 50,000 in a fast and efficient manner. The rules of procedure are less strict than in those of other types of courts and no legal representation is permitted;
- the District Court has jurisdiction over more substantial financial claims, ranging from HKD 51,000 to HKD 1,000,000;
- the High Court deals with much larger legal disputes and is additionally charged with handling claims of over HKD 1,000,000.
Hong Kong’s District court and High Court allow legal representation. Cases in these courts are initiated by issuing a Writ of Summons to the debtor, who then has 14 days to file a defence. The creditor is also required to file a notarised Statement of Claim. If the debtor responds to the Writ and requests a payment plan, the creditor has two weeks to reply. If the parties find it impossible to enter into an agreement, a hearing will be called for by the judge, during which a judgment is normally made. If the debtor does not respond, a default judgment can be rendered.
Enforcement of a legal decision
A domestic judgment is enforceable once it becomes final (if no appeal is lodged within 28 days). If the debtor fails to comply with the judgment, the creditor can request an enforcement order from the court. This usually entails either a garnishee order (allowing the creditor to obtain payment of the debt from a third party which owes money to the debtor), a Fieri Facias order (which enables a bailiff to seize and sell the debtor’s tradable goods), or a charging order (for seizing and selling the debtor’s property to satisfy the debt).
Foreign judgments are enforced under the Foreign Judgments (Reciprocal Enforcement) Ordinance. Decisions issued in a country with which Hong Kong has signed a reciprocal treaty (such as France or Malaysia) only need to be registered and then become automatically enforceable. Where no such treaty is in place with a country, enforcement can be requested before the court, via an exequatur procedure.
An Arrangement on Reciprocal Recognition and Enforcement of judgments in Civil and Commercial Matters (REJA) was concluded with the People’s Republic of China in 2006. This makes judgments rendered in Mainland China or in Hong Kong automatically enforceable by the courts of the other contracting party.
The only formal insolvency procedure under the Companies Ordinance Act is liquidation.
Out-of court proceedings
The law does not provide for formal procedures for restructuring company debts. Restructuring proceedings therefore need to take place through informal “workouts” or a scheme of Arrangement.
A workout is an out-of-court agreement made between a debtor company and its major creditors for the rescheduling of its debts. This proceeding can be initiated at any time. Restructuring plans are usually recommended by a committee which is chaired by a lead creditor. The courts are not involved and the process is entirely voluntary. Once a plan has been agreed, the company continues to operate and is managed under the terms of the arrangement. This procedure does not provide legal protection from creditors.
Scheme of Arrangement
A Scheme of Arrangement is a statutory, binding compromise reached between a debtor and its creditors. It must be accepted by all classes of creditors. A court reviews the plan, before sanctioning the convening of separate meetings with creditors. The scheme must be approved by the court, at least 50% of creditors in terms of number and 75% of creditors in terms of value of debts. An administrator is appointed to implement the scheme.
Liquidation can be voluntary or compulsory. It involves selling the debtors’ assets in order to redistribute the proceeds to creditors and dissolve the company. Voluntary liquidation can be either a member’s voluntary liquidation (MVL), or a creditors’ voluntary liquidation (CVL). In both cases, company directors lose control and a court-supervised liquidator is appointed.
Creditors can initiate a compulsory liquidation by filing a winding-up petition with the courts on the grounds of insolvency. An MVL is a solvent liquidation process whereby all creditors are to be paid in full and any surplus distributed among the company’s shareholders. CVLs are insolvent liquidations.
Regulatory Update on Insolvency regime
The Hong Kong Government Gazette’s Companies (Winding Up and Miscellaneous Provisions) Ordinance 2016 (“Amendment Ordinance”) entered into force on February 13, 2017. These updates were introduced in order to increase protection for creditors and to streamline and improve regulations under Hong Kong’s corporate winding-up regime.