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2023 economic outlook

It is New Year’s Day today. Taking this opportunity, I wish everyone a happy new year, good health, a cheerful life and success in work! Welcoming the new year, we are embarking on a new journey and working hard towards new goals.

As we embark on a new journey, we have seen many enlightening developments. Where the epidemic has lasted for three years, the world is now returning to normalcy; the anti-epidemic work of the HKSAR Government has also entered a new stage with adjustments continuously made. For example, most of the testing arrangements for inbound persons have been removed recently. As I visited shopping malls recently, I ran into tourists from time to time, and could feel that the retail market sentiment was improving. As for the Mainland, measures such as testing for inbound persons and centralised quarantine would also be cancelled starting 8 January. The relaxation of quarantine measures in the Mainland and Hong Kong would support cross-boundary flows of people and goods. It is expected that the number of tourists visiting Hong Kong would rebound significantly this year. Cross-boundary land transport volume and air cargo handled by the Hong Kong International Airport would also improve significantly. This will provide greater impetus for recovery in Hong Kong’s exports, tourism, retail and catering sectors.

The steady economic progress of the country provides the greatest support to Hong Kong’s development. The Central Economic Work Conference held in mid-December 2022 emphasised the need to stabilise growth, employment and prices. It also gave priority to restoring and expanding domestic demand, and set clear goals for the country’s economic policies in the coming year. This installs much confidence in the parties concerned as they could clearly understand the direction of the country’s economic development and plan their business.

The Mainland has earlier adopted a series of monetary policy tools and introduced fiscal measures to stimulate the economy, including lowering the reserve requirement ratios twice, lowering the one-year and five-year loan prime rates by 15 and 35 basis points respectively; new tax and fee reductions to a scale reaching RMB 4 trillion; and adding RMB 500 billion in special local government bonds issuance on top of the newly increased RMB 3.65 trillion set at the beginning of last year. These measures are gradually bearing fruit. It can be expected that the Mainland’s economy will resume rapid growth later this year and provide an important driving force for global economic growth.

Nonetheless, given global macroeconomic trends, there are still many uncertainties and factors that may restrict development. One key variable is the monetary policy of the US Federal Reserve. Although inflation rate in the US has fallen from a high of 9% to around 7% recently, the continued stringency in the labour market may pull up wages, which may cloud the outlook of inflation.

Looking back at 2022, the US Federal Reserve has raised interest rates seven times in a row in order to curb inflation there, and the federal funds rate target has been raised significantly from 0-0.25% to 4.25-4.5%. The market expects that interest rates will increase further to around 5.1% this year, and the peak level may eventually be higher. Where the impact of sharply interest rate rises on the economy unfolds gradually, it is still not clear whether the US economy can have a “soft landing” this year.

The challenges facing the European economy are even more severe. Energy supply shortages stemming from the Russia-Ukraine conflict have not only affected people’s daily lives, hindered industrial production and disrupted supply chains, but also have caused the inflation rate in the euro area and the UK to soar to over 10%. The European Central Bank and the Bank of England take lowering inflation rates back to target levels as their primary goal, and have clearly indicated that they will continue to raise interest rates to achieve the goal. The tightening of monetary policy will further weaken the European economy. Europe may face “stagflation” this year, with low growth and high inflation.

Under such circumstances, I am still cautiously optimistic about the economic situation in Hong Kong this year and hold a relatively positive attitude. I earnestly hope that the strong momentum of development will create stronger impetus to the economy’s recovery.

The three major driving forces of the Hong Kong economy all present elements that warrant optimism. The gradual return to normalcy around the world and the relaxation of quarantine requirements in the Mainland are expected to support Hong Kong’s merchandise exports. Business travellers and tourists from all over the world are expected to resume more frequent travels, and together with the resumption of a series of international events this year, Hong Kong’s visitor arrivals are expected to rebound strongly this year. As for local consumption, in addition to benefiting from the increase in the number of tourists, the catering and retail industries will also gain from the bold adjustment of local anti-epidemic measures and the improved atmosphere arising from the society’s returning to normalcy, which together will help stimulate people’s willingness to spend. Thanks to the low base effect in the first quarter of last year, it is expected that domestic consumption will rebound significantly in the first quarter this year, on a year-on-year basis.

Fixed investment will benefit from the aforementioned favourable factors, coupled with a more optimistic overall economic outlook and improved social atmosphere. However, against the backdrop of rising global interest rates and overall borrowing costs, it is necessary to watch if the investment atmosphere would be swayed by the mood of the market.

On asset prices, having been affected by the macro situation, Hong Kong’s stock market fell by 15% last year, which was the largest drop in percentage since 2011. The market is generally optimistic that Hong Kong’s stock market will recover on the grounds that the economy will improve this year. We will continue to reinforce and speed up the development of the financial markets in Hong Kong. Along the directions of continuously deepening the mutual access regime and actively promoting the internationalisation of the RMB, we hope to make the financial sector, including Hong Kong’s stock market, more vibrant and with a wider variety of products. This will allow the market to develop more widely, deeply and comprehensively.

On the property market, the negative effects of continuing rate hikes around the world and the weak economy on the property market last year were evident. The US raised interest rates by a total of 4.25 percentage points last year, and the one-month Hong Kong Interbank Offered Rate (HIBOR) rose from 0.3% to close to 5% in the same period. The actual interest rate of mortgage loans which are pegged to HIBOR rose to the cap; and the effective interest rate of new mortgage loans also rose from 1.6% at the beginning of last year to 3.125-3.625%. In the first eleven months of last year, the transaction volume of Hong Kong’s residential property market fell by 38%. Index of the Rating and Valuation Department indicated that property prices dropped by 13.8% during the same period. Looking to this year, the US’ cycle of interest rate hike has not yet ended, and mortgage rates in Hong Kong may continue to rise along with market rates, thus affecting the property market. However, other than interest rates, changes in the epidemic situation, economic conditions, housing supply and market sentiment will also impact on the property market. In fact, the market generally expects that the resumption of cross-boundary people movement with the Mainland will help boost property market sentiment. Above all, orderly adjustments to the property market in Hong Kong have not created any major impact on or systemic risk to Hong Kong’s financial system or economic fundamentals. We will continue to closely monitor market changes.

2023 is a year that would allow us to be cautiously optimistic and enthusiastic in new developments. It is also time when Hong Kong must actively seek to accelerate development. During this critical period of change, we need to hold a historical perspective that goes beyond economic cycles. We also need a clear understanding of national and global development trends, and work hard to promote better integration of a “capable government” and an “efficient market”. We are working at full steam to facilitate the work of “competing for talents and enterprises”, as well as vigorously creating land and enhancing infrastructure to inject energy into Hong Kong’s development and expand development capacity, so that Hong Kong can seize the opportunities from the momentum of the recovery to the greatest extent, speed up development, and reach a higher new level.

January 1, 2023


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