The recent tariff escalation between the United States and China has already been forecasted to present a significant risk to Hong Kong’s projected economic growth of 2% for 2025, according to George Leung Siu-kay, a senior advisor at Hang Seng Bank.
While Leung claimed that the economic performance of Hong Kong is unlikely to fall to pandemic levels, due to the US market’s involvement in only 6% of the business conducted by local enterprises, it’s clear that the prospect of a trade war between China and the United States would compound the weakness of Hong Kong’s economy over the months ahead.
Owing to a string of deficits, policymakers in Hong Kong have been struggling to formulate ways of generating revenue within an economy that’s failing to overcome the pressures it’s facing.
With an expected shortfall of HK$100 billion ($12.9 billion) for the fiscal year that ended in March, local officials have been mulling over raising the low taxes that have made Hong Kong an attractive location for tourists and residents.
While Hong Kong had traditionally relied on its property sector to recover lost revenues through low income taxes and a lack of consumption levies, shrinking house prices and rising deficits in the post-pandemic recovery have prompted a protracted downturn.
With house prices falling to their lowest levels since 2016 in recent months, the timing of the special administrative region’s associate director of investment promotion at Invest Hong Kong, Charles Ng’s visit to India in April has been poignant.
The visit has been based around fostering investment and innovation ties between Hong Kong and India, and is an example of the resilience that’s being shown as tariff unpredictability looms over the region.
The Dollar as a Western Connection
The Hong Kong dollar (HKD), which has been pegged to the US dollar since 1983 through the Linked Exchange Rate system, has meant that the administrative region imports its monetary policy from the United States.
This means that the currency permits capital inflow and outflow through offshore renminbi (CNH) clearing, differentiated from onshore renminbi (CNY), which is subject to stricter capital controls.
As a result, Hong Kong has long positioned itself as a location for renminbi internationalization and offshore renminbi-priced ‘dim sum’ bonds issued in Hong Kong by Chinese and international companies.
With streamlined regulatory outlooks paving the way for Hong Kong to launch a stablecoin in the near future, the prospect of other emerging markets using their own stablecoins for dollarization purposes further weakens the region’s unique balance between East and West fiscal outlooks.
However, with local company registration in Hong Kong reaching a record 1.46 million at the end of 2024, it’s clear that the region’s position as a gateway between the East and West has been a major draw for business registration in a bustling Asian economy.
Hong Kong’s Western connections mean that evidence of cooling trade tensions between the US and China will directly benefit the 2025 outlook for the region’s economy. It’s likely to have a lasting impact on any economic growth over the months ahead.
Confidence in Hong Kong Trade
Other analysts have suggested that Hong Kong could be in a position to thrive as a more neutral presence amid tariff uncertainty between the United States and China.
According to George Leung, a senior adviser to Hang Seng Bank’s chief executive office, the capital being withdrawn from US markets could ultimately benefit the administrative region.
Notably, Hong Kong’s ‘gilded signboard’, which serves as a free port amid an uncertain geopolitical backdrop, Leung believes, can attract more foreign businesses to use the city as a hub for their operations in Asia because Hong Kong wouldn’t undergo sudden or severe changes to its policy or position on trade.
The resilience of the Hang Seng, Hong Kong’s stock market index, which has rallied more than 11% off the back of tariff-related lows at the beginning of April, illustrates the optimism that’s sweeping the region in the face of trade uncertainty.
Trade to Decide Growth
Despite lingering optimism that Hong Kong can continue growing in the face of the unpredictability of tariffs, the city’s fiscal shortfalls and troubled housing market mean that positive momentum is essential in 2025.
With close ties to both the East and West, Hong Kong’s future is likely to be best protected by a swift end to the United States and China’s trade war and a return of international business confidence in the region.
Although nothing’s certain in the age of Trump 2.0, it appears to be in everyone’s interests that the current trade outlook is quickly cooled on a global scale.
