Hong Kong’s Financial Hub Struggles With Market Decline

Stock Market Decline, Outlook Downgrade Cloud Hong Kong’s Recovery Story

Uncertainties continue to hover above Hong Kong’s recovery narrative as the economy is set to end the year with a double-digit contraction in its stock market index.

As of Dec. 22, the Hang Seng Index has declined 16.6% year over year, lagging its counterparts in Tokyo and Mumbai, and making it one of the largest decliners globally. Last Dec. 6, credit ratings agency Moody’s revised its outlook on Hong Kong to negative from stable, marking the first time the city has lost the stable outlook since the pandemic. Moody’s, which affirmed the city’s Aa3 rating, attributed the outlook revision to Hong Kong’s "tight political, institutional, economic and financial linkages between [with] the mainland.” The agency also changed its outlook on China to negative from stable a day earlier.

“That linkage manifests itself in the political and institutional arena, given the close relationship inherent in the ‘One Country, Two Systems’ policy; in the economy, given the very strong trade links between the two; and in the financial system, given Hong Kong's banking system's involvement in the mainland and role as a conduit for finance flows into the regional and global financial systems,” Moody’s said.

The Hong Kong government responded to Moody’s downgrade, saying the city’s economic and financial ties with the mainland “should not be a rating constraint,” but “a source of strength for Hong Kong's long-term development."

"As pointed out by the Ministry of Finance, the implication of the real estate market adjustment is manageable and the local Government debt issue have been put under control with positive results. The mainland is progressing towards high-quality development, and the country is fully capable of deepening reforms on a sustained basis, and weather risks and challenges,” it said in a statement.

“Looking ahead, the mainland economy has immense development resilience and potential, and its long-term bright prospects have remained unchanged,” the Hong Kong government added.

With the reopening of its borders post-pandemic, revival of tourism, and return of economic activities, Hong Kong has been attempting to stage a significant rebound, following years of economic and political headwinds, notably the street protests between 2019 and 2020 and COVID-19.

Citing a "difficult external environment,” the government cut the GDP growth forecast for 2023 to 3.2%, from 4.0% to 5.0%. Click here to know more about the government’s latest economic assessment.

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