Opinion

Coronavirus recovery: invest rainy day savings to boost Hong Kong’s economy

The Hong Kong government might want to consider diversifying its economy by using part of the savings earmarked for rainy days. Beyond cushioning the negative impact of Covid-19 on SMEs and households, it is one more reason to spend.

By: and Date: August 6, 2020 Topic: Global economy and trade

This article originally appeared in the South China Morning Post.

Hong Kong’s GDP declined by 9 per cent in the second quarter, but this figure should be read in the context of a worldwide collapse in GDP growth during the Covid-19 pandemic. Singapore’s economy, probably the most similar to Hong Kong in terms of structure, experienced a much bigger decline during the same period.

Both economies are similarly open, which means the restrictions in international mobility stemming from measures taken to control the pandemic have halted the economy. In addition, increasing strategic competition between the United States and China has hurt both Singapore and Hong Kong, with more noticeable consequences but a smaller economic deceleration for the latter.

Hong Kong’s economic performance in 2020 comes after an already difficult 2019. The city was in recession while virtually the rest of Asia was growing positively before the pandemic hit.

Last year’s recession did not prompt a clear policy response from the government, though. A series of tiny fiscal stimulus packages added up to less than 1 percentage point of GDP. Meanwhile, nothing was done on the monetary and exchange rate side, given Hong Kong’s tight link to the US dollar through a currency board regime.

The pandemic has brought about a bolder stimulus package, but it is still limited compared to most developed economies. Things need to change, and quickly.

It seems clear that additional government support is both warranted and desperately needed. One key objective should be to support small and medium-sized enterprises so they can retain their workers.

The second objective is to protect households’ consumption levels so the retail sector – or at least part of it – can survive the shock of a longer period without customers. The need for an additional stimulus package can be understood in the context of the further reduced domestic mobility we should expect in the third quarter, similar to what happened in Singapore in the second quarter with the circuit-breaker measures and corresponding economic downturn.

In addition, the possible extension of quarantine rules for international travellers until the end of the year could be the final nail in the coffin for Hong Kong retailers and, thereby, retail employment.

On the positive side, the financial sector has proved extremely resilient amid the difficulties Hong Kong is experiencing. Even if finance continues to be relatively shielded thanks to the large number of IPOs and bond issuances since 2019, though, the reality is that one sector – no matter how important – cannot solve the problem.

This is because the gains from the financial sector may not be able to cover declines in the retail and hospitality sectors, among others. More importantly, Hong Kong does not have the redistribution mechanisms through fiscal policy to do so.
Finance can slow the larger collapse in Hong Kong’s overall economic activity, which is welcome news, but it cannot help those in other sectors. This dualism is worrying for two reasons. It could exacerbate Hong Kong’s income distribution problems, as well as making the Hong Kong economy excessively dependent on a single sector – finance.

This is why the Hong Kong government might want to consider diversifying its economy by using part of the large fiscal savings accumulated for rainy days. Beyond cushioning the negative impact of Covid-19 on SMEs and households, it is one more reason to spend.
One example which comes to mind is the €750 billion (US$881.2 billion) recovery fund recently set up by the European Union. The fund aims to “save the day” by supporting the sectors most severely hit by the pandemic as well as “save the future” by investing in high-productivity sectors. The EU has chosen green energy and digitisation among its investment targets.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read about event More on this topic
 

Past Event

Past Event

Is China’s private sector advancing or retreating?

A look into the Chinese private sector.

Speakers: Reinhard Bütikofer, Nicolas Véron and Alicia García-Herrero Topic: Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 18, 2022
Read about event More on this topic
 

Upcoming Event

May
25
14:30

How can we support and restructure firms hit by the COVID-19 crisis?

What are the vulnerabilities and risks in the enterprise sector and how prepared are countries to handle a large-scale restructuring of businesses?

Speakers: Ceyla Pazarbasioglu and Guntram B. Wolff Topic: Macroeconomic policy
Read article More on this topic More by this author
 

Podcast

Podcast

The cost of China's dynamic zero-COVID policy

What does zero-COVID mean for both China and the global economy?

By: The Sound of Economics Topic: Global economy and trade Date: May 11, 2022
Read about event More on this topic
 

Past Event

Past Event

From viruses to wars: recent disruptions to global trade and value chains

How have events in recent years impacted global trade and value chains and how can we strengthen these against future disruptions?

Speakers: Dalia Marin, Adil Mohommad and André Sapir Topic: Global economy and trade Date: April 27, 2022
Read article More on this topic More by this author
 

Opinion

China’s Covid policy to be year’s largest economic shock

Beijing’s ‘dynamic zero-Covid’ policy could devastate the domestic economy, but the effects will also be felt globally.

By: Alicia García-Herrero Topic: Global economy and trade Date: April 26, 2022
Read article More by this author
 

Podcast

Podcast

What to expect from China's innovation drive?

How much has China progressed technologically?

By: The Sound of Economics Topic: Digital economy and innovation, Global economy and trade Date: April 6, 2022
Read article More on this topic
 

Blog Post

Is the private sector retreating in China? Not among its largest companies

Though private ownership does not free companies from the pervasive influence of the Communist Party, China’s private and state sectors are not equivalent; China’s largest firms are growing faster than their state-owned counterparts.

By: Tianlei Huang and Nicolas Véron Topic: Global economy and trade Date: April 5, 2022
Read article Download PDF More on this topic
 

Working Paper

The private sector advances in China: The evolving ownership structures of the largest companies in the Xi Jinping era

This paper documents recent structural changes in China’s corporate landscape, based on company level data, providing a complementary perspective to that of official Chinese statistics.

By: Tianlei Huang and Nicolas Véron Topic: Global economy and trade Date: April 5, 2022
Read article More on this topic More by this author
 

Opinion

Early Warning Brief: China’s contorted response to Russia sanctions

The spectre of a democratic Russia aligned with the West is probably a more serious concern for Beijing than what it risks losing by supporting Russia, which is exactly why China has arrived at its contorted position on the current military conflict in Ukraine.

By: Alicia García-Herrero Topic: Global economy and trade Date: April 1, 2022
Read article More on this topic More by this author
 

Opinion

Rallying Chinese markets will not be a quick fix for Beijing

Top official makes rare intervention to reassure investors but progress to resolve problems will be difficult.

By: Alicia García-Herrero Topic: Global economy and trade Date: March 25, 2022
Read article More on this topic More by this author
 

Opinion

China can see the limits of bailing out Russia's economy

Beijing will support Moscow as long as it does not fall foul of Western sanctions.

By: Alicia García-Herrero Topic: Global economy and trade Date: March 16, 2022
Read article More on this topic
 

Blog Post

Six reasons why backstopping Russia is an increasingly unattractive option for China

China has too much to lose from aligning with Russia over Ukraine.

By: Nicolas Véron and Alan Wm. Wolff Topic: Global economy and trade Date: March 15, 2022
Load more posts