By Kenny Lau
In comparison to the business environment of Hong Kong throughout 2015, that of 2016 did not fare any better in most cases, according to findings from AmCham’s year-end business outlook survey. Conducted in the last quarter of the year among 700 member companies (with more than 1250 invitations and a response rate of roughly 10 percent), the survey revealed that while Hong Kong’s current real GDP growth remains in positive territory – expected at 1.5 percent for 2016 – it is also lower than that of the past five years. The cost of doing business, meanwhile, far outpaces the level of profits today.
In 2016, Hong Kong, like many other Asian economies, had to endure a number of external shocks, including the US presidential election in November and the UK’s historic vote to leave the European Union in June, which continues to have an impact on financial markets and the dynamics of international relations globally. It is therefore no surprise that a larger percentage of businesses operating in Hong Kong said the market in 2016 was “unstable or worse,” and only a few said it was a “good” year. It is also no surprise that the business outlook of 2017 reflects a market far less bullish.
The number of companies expecting the business environment in the coming 12 months to be “unstable” or “worsening” has risen sharply, from 24 percent in late 2015 to more than 37 percent in late 2016. Companies are also expecting to see far greater change in the business environment of 2017 than they did a year ago. On the positive side, some remain cautiously optimistic about the local economy and anticipate a “good” or a “very good” year of business. The overall business climate, in short, is anticipated to be extremely challenging for all sectors and industries.
The good news is: Hong Kong is still deemed a commercially viable and competitive city on the global stage despite a slight drop in optimism. Nearly 30 percent in the survey believe Hong Kong is very competitive, and roughly two-thirds say Hong Kong is no less competitive than any other international city. In highlighting Hong Kong’s attributes, business leaders and senior executives of multinational corporations always point out a simple and efficient tax system, a sound legal and regulatory system, world-class infrastructure and well-established transportation links.
The high cost of real estate, limited availability of international school places, air pollution, and uncertainty in the political system, on the other hand, threaten Hong Kong’s competitiveness. Survey respondents find the impact of Hong Kong’s political development and government leadership on the business environment particularly pertinent, suggesting an erosion of confidence in Hong Kong as an international business center.
As a gateway to China, the city has an important role to play in connecting Chinese companies and international firms. The “One Belt, One Road” initiative – China’s plan of commercial engagement which covers more than 60 countries and 62 percent of the world’s population – is an example of the vast opportunities for professional services firms beyond the legal, tax, accounting and finance fields. With world-class infrastructure and talent, Hong Kong is a conduit linking the region to the rest of the world.
Market sentiment drops further downward in a gradual slide over the past five years
In comparison with Hong Kong’s business environment of 2015, 2016 was no better. More than a quarter of survey respondents (28 percent) called the local market “unstable or worse” – it was only 20 percent last year. Those who felt little change dropped from 40 percent in 2015 to 36 percent in 2016; about 30 percent of respondents said it was a “good” year, a decline of roughly 8 percent from 2015 (and more than 18 percent from 2014). Surprisingly, more than 5 percent – a jump from 2 percent in 2015 – categorized 2016 a year of “very good” business environment.
The outlook of the local business environment for 2017 reflects a market far less bullish. More than 37 percent said they expect it to be “unstable” or “worsening,” a sharp rise from 24 percent a year ago. A little more than 30 percent said it will likely remain “unchanged” in the coming 12 months – a drop by 20 percent from 2016 and an indication of a fast-evolving market for local businesses. Despite a greater sense of cautiousness about the economy, 31 percent and one percent of respondents said they anticipate a “good” and a “very good” year, respectively, in 2017.
Hong Kong remains a hub of regional headquarters doing global businesses
Hong Kong remains a strategic center of international business as indicated by the vast majority of companies seeking to either continue or expand their business in the city over the next three years. According to the survey, 31 percent will “expand” their operation; 62 percent will continue as usual; and 7 percent will gradually reduce their business. It is also indicated that Mainland China as a growth market is simply too important to ignore, hence a strong desire to “deeply connect with PRD at a business level while maintaining Hong Kong’s best traditions.”
Hong Kong is a major city of regional headquarters for multinational companies – a status not expected to change drastically over the next few years. Some 70 percent of survey respondents revealed an intention to keep their regional headquarters here; 22 percent weren’t so sure; and 9 percent simply answered “no” to the question. Nevertheless, more companies are seeking alternatives outside of Hong Kong today. In fact, Hong Kong has scored slightly lower in various global economic indices, and other cities – such as Singapore – are catching up very quickly.
Hong Kong is deemed a competitive international city despite slight drop in optimism
While survey respondents generally see Hong Kong as a commercially competitive city in which to do business, they also believe it has fallen slightly behind others on the global stage.
More than 3 percent in the survey believed Hong Kong is the “most competitive” global city, while another 27 percent said it is “very competitive.” Interestingly, those who felt the same way last year comprised over 36 percent as opposed to only 30 percent this year. Meanwhile, 62 percent (51 percent in 2015) said Hong Kong is on par with other international cities; those who saw a “least competitive” city were 9 percent (12 percent in 2015).
In assessing Hong Kong’s competitiveness against other major cities around the globe, a large majority of respondents said the city ranks above the average in terms of being a platform for business operation – largely because of a simple and efficient tax system, a sound legal and regulatory system in addition to well-established transportation links and infrastructure. The high cost of office and housing rent, limited availability of international school places, and uncertainty in the political system are reasons for a decline in competitiveness.
A strong foundation of core values is Hong Kong’s key pillar
Rule of law, a sound legal and regulatory system, a simple and efficient tax system, a well-established transportation system, and a fair and open market uniquely positioned as a gateway to China are all key to Hong Kong’s commercial success. The high cost of real estate, limited international school places, and growing concerns about the local political system are issues making Hong Kong a less attractive place in which to live and do business.
Assessment of Hong Kong’s overall competitiveness vs. other international cities
The unique aspects of Hong Kong in the form of strengths and weaknesses have remained strikingly unchanged over the past five years. What has notably changed in the past year is a growing concern about the impact of Hong Kong’s political development and government leadership on the business environment – which is directly linked to the city’s overall competitiveness.
- Rule of law
- Tax system
- Ease of doing business
- Employment opportunities
- Gateway to China
- Transportation links
- International exposure
- Cost of doing business
- Cost of office rentals
- Affordability of housing
- Air quality/pollution
- International school places
- Political system/stability
- Quality of life/environment
- Education/talent development
Top areas of concern regarding Hong Kong’s business environment in 2017
- Government leadership & bureaucracy
- Economic & financial development
- Political stability
- Overall cost of doing business
- Legal & regulatory system
- Freedom and the rule of law
- Hong Kong-China relations
- Talent pool
ADVOCACY & GOVERNMENT RELATIONS
The principal voice of the international business community in Hong Kong
In terms of the Hong Kong advocacy agenda, survey respondents (66 percent) are most interested in a focus on the impact of Hong Kong’s political development on the business climate – a concern closely tied to the issues of: “One Country, Two Systems,” political governance, and the rule of law (54 percent). Education and human resources, including talent availability, recruitment and professional training, are emphasized by well over half of all respondents. Hong Kong’s regional role in Asia Pacific – a topic on the very top of the list in 2015 – fell to fourth place, followed by an environmental agenda.
In terms of the US advocacy agenda, US-China bilateral relations are by far the most pressing issue, according to 70 percent of survey respondents. 63 percent believed more advocacy work is necessary as a result of the US presidential election in 2016, whereas cybersecurity (39 percent), US trade and investment initiatives (36 percent), and regional security (28 percent) continue to be some of the most critical issues on which AmCham can be a voice for the business community.
Hong Kong businesses expand in the growing marketplace in cities across China
Shanghai (69 percent), Beijing (60 percent), Guangzhou (40 percent), Shenzhen (34 percent) and Chengdu (23 percent) are major cities of Mainland China where companies of survey respondents have one or more branch offices; only a quarter of surveyed companies do not have a presence in any of the Chinese cities. The fact that over 75 percent of companies associated with AmCham Hong Kong have established a corporate office in China signifies the importance of the existing Hong Kong-China economic relations.
For the China advocacy agenda, market access (46 percent) is a key area of interest for a dialogue with various government officials in different regions. Fair competition (38 percent), US-China relations (38 percent), and Chinese companies going global (38 percent) are also seen as significant prospects to the growth of many companies here in Hong Kong.
To facilitate market access to the growing China market, many are interested in joining a delegation to Shanghai (59 percent), Beijing (53 percent) and Shenzhen (34 percent). The levels of interest in Beijing has subsided while the levels of interest in Shanghai, Chengdu and Chongqing have increased significantly. This is in sharp contrast to the findings in 2015 and indicates a shift of focus to high potential and untapped markets.
“One Belt, One Road” Initiative
The “One Belt, One Road” initiative – also known as the Belt and Road initiative comprising the “Silk Road Economic Belt” and “21st Century Maritime Silk Road” – is China’s plan of commercial engagement covering more than 60 countries and 62 percent of the world’s population in the Middle East, Southeastern, Central and Western Asia, as well as parts of Europe. About 22 percent of survey respondents said it has had a positive impact on their business; over 76 percent believed it hasn’t had any impact; and less than 2 percent spoke negatively about the strategy.
The Belt and Road initiative is noted for real business implication beyond international boundaries. In terms of being a part of the development of China’s ambitious commercial undertaking, nearly half of survey respondents said their current line of business can serve as a super connector in the form of professional services. Services which companies can provide include market intelligence (29 percent), talent services (16 percent) and due diligence (16 percent).
The initiative can provide a tremendous window of opportunity for companies from a diverse range of sectors in Hong Kong. Among firms seeking to play a part in the Belt and Road initiative, many will do so by offering professional services to new investors (40 percent), some will expand existing business on their own (36 percent), and others will welcome Chinese equity investments (17 percent) or establish new subsidiaries/joint ventures (15 percent). Large professional services firms are particularly well positioned to access the potential markets.