Insights into Hong Kong and China's post-Covid economic recovery

Fidinam Hong Kong Fidinam Shanghai News

After almost three years of a challenging zero-Covid policy and limited access to mainland China and Hong Kong, restrictions have been lifted and the borders gradually opened in early 2023.

Crossing the border between Hong Kong and mainland China started on 6 January via land points, with a daily quota in place. From 6 February all restrictions between both countries were lifted.

Although news of China opening its borders at the end of January was received globally with great enthusiasm, it was still challenging for foreigners to enter the country. However, on 15 March 2023, it was announced that China's visa authorities resumed issuance of all visa categories, as well as the resumption of group tours offered by travel agencies and online tourism agencies to a second batch of 40 destinations, including several European countries.

Hong Kong has slowly removed entry restrictions such as hotel quarantine and domestic Covid-19 restrictions since October 2022. The final Covid-19 measure was scrapped on 1 March, which was the mask mandate.

"Hello Hong Kong"

Hong Kong authorities launched the global promotional campaign, "Hello Hong Kong", on 2 February to showcase the city's return to the global stage. Part of the campaign is a giveaway of 500,000 air tickets to visitors from short- and long-haul destinations. The drive will also hand out vouchers for drinks, dining and shopping worth HK$100 million (US$12.7 million).

An extra HK$20 million boost was announced on 15 March, including discounted train tickets and dining coupons.

From April, the number of outlets where tourists can redeem their vouchers has doubled from 1,500 to about 3,000. The vouchers, each valued at HK$100 can be used in selected bars, restaurants and hotels, or at various attractions.  

Tourist arrivals into the city more than doubled from 498,689 in January to 1.46 million in February. The number of mainland Chinese visitors accounted for about 75 per cent of the total arrivals in February and soared by almost four times compared to January.

An increase in the number of international tourists is expected during the second half of the year and into early 2024. It is estimated that 20 million visitors will come to Hong Kong this year, which is a third of the peak of 65 million in 2018.

Economic recovery in Hong Kong

After a strong expansion in 2021, Hong Kong's economy saw a sharp decline in 2022 due to the fifth wave of Covid-19 infections and external factors that tightened financial conditions in the first half of 2022.

The labor market was also under pressure during the early months of the year but has shown signs of improvement since then. After rising notably to a high of 5.4% in February to April 2022, the seasonally adjusted unemployment rate fell successively to 3.4% in November 2022 to January 2023.

However, the outlook for Hong Kong's economy in 2023 is much more optimistic, with a projected rebound of 3.5% to 5.5%.  While demand from advanced economies may continue to weaken, the anticipated faster growth of the mainland Chinese economy and the lifting of cross-boundary truck movement restrictions should alleviate some of the pressure.

Retail sales in Hong Kong are also expected to rebound strongly in 2023, with projected growth of 13% to approximately HK$395 billion (US$50.3 billion) this year. The value of total retail sales in February 2023, provisionally estimated at $33.1 billion, increased by 31.3% compared with the same month in 2022. 

Economic recovery in China

In the first two months of 2023, consumption and infrastructure investment in China drove recovery from the pandemic disruption. As is the Chinese statistics bureau's custom, January and February figures are combined to avoid distortions from holidays around the Lunar New Year, when businesses take a break and workers head home for family reunions.

Industrial output in January and February was 2.4% higher than a year earlier, though less than the expected 2.6%.

Retail sales in these months jumped 3.5% from a year before, reversing a 1.8% annual fall seen in December. This result was in line with analysts' expectations. Most categories within retail sales rose, but big-ticket items of autos and home appliances saw sales decline.

The Food & Beverage sector has notably reaped benefits from the reopening, with Jan-Feb revenue surging 9.2% from a year earlier, compared with an annual 14.1% fall seen in December. Fixed asset investment rose by 5.5%, topping expectations for 4.4% growth.

China's home sales rose in February from a year earlier, the first such increase since June 2021. But property investment was still down 5.7%, reflecting the caution of home buyers and developers. It is expected that the real estate market will recover later this year, especially since March traditionally marks the peak of housing supply for the year. 

The data suggest China's recovery is broadly on track after posting one of its weakest years for growth in decades in 2022. However, shrinking exports and weakness in the property sector hold back full recovery of the country's GDP. Infrastructure investment in the two months surged 9.0% from a year before, driven by government spending aimed at supporting the economy.

China's growth target for 2023 is 5%, which new premier Li Qiang cautioned would not be easy for the country to achieve. Setting too high of a target would not be beneficial for realizing high-quality development, as Beijing has described a shift away from only focusing on rapid growth.

A private sector survey in early March (Caixin/S&P) showed a back-to-back monthly increase in activity in January and February. Service companies reported the strongest rise in new business since April 2021.

The improvements in market conditions also drove a strong increase in employment as firms started to take on additional workers for the first time in four months.

The unemployment rate in urban areas stood at 5.6% in February, slightly higher than January's 5.5%, though the change likely reflected seasonal factors as workers change jobs during the Lunar New Year holidays. Youth unemployment remained high, with 18.1% of those surveyed aged 16 to 24 out of work.  

Looking forward

As Hong Kong and mainland China emerge from the pandemic, the economic outlook for both regions is becoming more optimistic. While challenges remain, such as the ongoing impact of inflation and weaker demand from advanced economies, there are signs of resilience and growth in both regions.

While businesses and individuals adapt to a new normal, the opportunities and potential for economic recovery are significant. Moving forward, it will be important to continue to monitor these developments and adjust strategies accordingly.

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