Hong Kong eyes 2024 turnaround amid strong headwinds

With the SAR failing to meet its GDP goal for 2023 amid a placid IPO and property market, FinanceAsia looks at the challenges and opportunities for the city.

December 19, 2023

For Hong Kong, downgrades, geopolitical tensions, continuing high interest rates, poor stockmarket returns and underwhelming gross domestic product (GDP) were the hallmark features of 2023.

2024, meanwhile, could bring even greater volatility.

Earlier in December, Moody’s rating agency downgraded the outlook on Hong Kong's credit rating to negative from stable following a similar change for China – the first time Hong Kong had lost its "stable" rating outlook since January 2020.

Also, the Hong Kong government expects the Special Administrative Region (SAR) to post 3.2% growth in gross domestic product (GDP), narrowing an earlier forecast of 4 to 5%.

The GDP outlook for 2024, according to a Bloomberg survey of economists, the economy is seen expanding 2.7% which is lower than an earlier estimate of 3%. Economists at Natixis, for example, expect the SAR to see 3.4% growth in 2023 and 2.8% in 2024.

While Hong Kong financial secretary Paul Chan has pointed to ‘external factors’ such as high interest rates and a lacklustre financial market as the reason for the weaker consumption figures, some analysts say the issues could run deeper.

The latest report by the Asian Corporate Governance Association shows Hong Kong sinking four places on its Corporate Governance Watch ranking – from second to sixth place in in the Asia Pacific – in one of the biggest shakeups in the rankings in 20 years.

The authors say that while Hong Kong traditionally has had a somewhat scrappy corporate governance environment, it has, until recently, been undperpinned by a solid institutional framework.

However, much of this has changed since the last CG Watch two years ago.

Weighted voting rights and secondary listings have altered the landscape, the report says, and investor protection has weakened. Other problems associated with the independence of the judiciary and the media are also set to weigh on Hong Kong’s outlook.

“We expect more of the same in 2024 given the current policymaking trajectory of Hong Kong’s capital market reform,” head of research at ACGA Jane Moir told FA.

“It would be refreshing if Hong Kong shifted its focus away from attracting as many listings as it can, to the quality of the market. With every new initiative to lay down the mat for new types of offerings—from dual class shares and SPACs to ‘specialist’ tech firms—guardrails for minority shareholders are increasingly being dropped,” she added.

Interest rates

In terms of macro effects such as interest rates, Paul McSheaffrey, senior banking partner, Hong Kong, KPMG China, told FA the number and amount of interest rate cuts in the US in 2024 would likely be less than many people were expecting. 

Hong Kong’s rates generally move in lockstep with the US Federal Reserve’s given the Hong Kong dollar’s peg to the greenback.

“The US Fed will likely keep rates higher, for longer and be sure that inflation in the US is under control rather than lower interest rates too soon,” he said. “In terms of the Hong Kong market, prime lending rates will probably not change too much. 

“While we have seen some rises in prime rates in last 12 months, they tend to be more stable than market interest rates. We can expect deposit rates to come down if market rates decrease. For the banking sector in Hong Kong, any cut in interest rates, as long as it is not too drastic, is likely to be positive as banks tend to benefit in a falling interest rate environment although a very low-rate environment is not good for bank’s profitability.”

Other macro effects, such as Hong Kong’s tighter links with mainland China are likely to be a mixed blessing.

Moody’s in its downgrade of Hong Kong’s credit rating cited the "tight linkage between the credit profiles" of the finance hub and China as the "principal driver" of Hong Kong's negative rating outlook.

“Following signs of reduced autonomy of Hong Kong's political and judiciary institutions, notably with the imposition of a National Security Law in 2020 and changes to Hong Kong's electoral system, Moody's expects further erosion of the (city's) autonomy of political, institutional and economic decisions to continue incrementally,” it said.

"This ongoing process is currently reflected in Moody's assessment of the quality of Hong Kong's executive and legislative institutions."

Nevertheless, Hong Kong is likely to benefit from any stimulus measures that Beijing will likely roll out over 2024 to boost the world’s second-largest economy and investors remain poised.

With President Xi Jinping focused on reining in an over-leveraged property sector (which underpins a quarter of China’s GDP) measures to stabilise the mainland economy are hotly anticipated.

IPOs

Analysts say portfolios, while currently underweight in China stocks, could turn quickly on the back of any stimulus, with a consequent knock-on to Hong Kong’s currently underwhelming IPO market.

Capital Market Services Group (CMSG), Deloitte China, is one set of analysts expecting a rebound in Hong Kong’s IPO market in 2024 which, in 2023, has so far seen around 65 IPOs raising approximately HK$46 billion ($5.9 billion) as against 84 new listings raising HK$99.6 billion in 2022 - a 23% drop in the number of IPOs and a 54% decline in proceeds raised. However, there have been a flurry of deals this week as companies scramble to hit the year-end deadline.

“Funds are likely to be redirected amid increased market liquidity and improved market valuations following an end to the US interest rate hike cycle in 2024,” Deloitte said in a press release, adding that more than 80 IPOs slated for 2024 would raise more than HK$100 billion.

“Hong Kong’s pipeline of more than 90 listing applicants, including specialist technology companies, de-SPAC transactions and delayed large offerings from 2023, and the potential launch of GEM reform, will help support the market recovery.”

Deloitte says listings from international companies, and by Chinese companies due to a slowdown in the A-share IPO market, could also drive the market, something that would be much welcomed by incoming Hong Kong Stock Exchange (HXEX) chief executive Bonnie Chan who takes up the reins in May 2024. 

Ultimately, however, much will depend on Hong Kong’s ability to salvage its reputation as the region’s honest broker in terms of corporate governance.

Moir says that despite concerns over the independence of its judiciary and press freedoms, conditions which are unlikely to change in the long term, “there are ample opportunities for Hong Kong to improve its corporate governance ranking”. 

“It could level the playing field for investors by giving more opportunity for redress: take class action reform off the shelf, revisit ‘no win, no fee’ litigation structures, lower the barriers for shareholder proposals, make it easier to nominate directors,” she told FA.

She also suggested addressing the "longstanding investor afflictions such as the general mandate and the lack of an open electronic voting platform. It would help if policymakers looked through an investor lens, rather than an issuer one.”

Whithout a doubt, Hong Kong still possesses certain solid fundamentals which will keep the city an attractive location for many businesses. 

“Hong Kong is still a leader in the region on enforcement of securities law. The SFC is a well-respected regulator with a solid range of powers at its disposal and a healthy budget,” she said.

“Hong Kong also historically gets points for having a decent rulebook on fundamentals such as disclosure of substantial ownership, share pledges and price-sensitive information."

There are a number of other positives. 

The number of visitors to Hong Kong is returning to close to pre-pandemic levels, the city's population has returned to around 7.5 million people and there is low unemployment of around 3%. In addition, large investments into the likes of cargo infrastructure from DHL show there are signs that the SAR could yet bounce-back to prove its critics wrong once again.

With additional reporting by Andrew Tjaardstra.

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