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posted on 06 June 2015

China's Slowing Growth Spells Trouble for Hong Kong's Economy

Written by , GEI Associate

According to the latest HSBC report, Hong Kong Purchasing Managers' Index (PMI) fell to 47.6 in May from 48.6 in April. The reading was the lowest in over three-and-a-half years, marking the downward momentum of Hong Kong's economy.

As the HSBC report details, new business from the Mainland China fell to 40.6 in May from 46.6 in April, the steepest drop since December 2008. The deteriorating business outlook had led to reluctance among clients to commit to new expenditure. Consequently, weaker demand conditions led companies to temper their production schedules in May, with purchasing activity falling for the eleventh consecutive month. As one of China's major trading partners, Hong Kong's economy is certainly being weighed down by China's slowing economic growth.

Hong Kong PMI

Source: HSBC and Markit.

There are many factors that contribute to the downturn in demand from Mainland China. The deteriorating market conditions reduced new orders from China directly. The anticorruption campaign has also curbed the spending of many Chinese tourists in Hong Kong. Moreover, political protests as well as local resentment against the visiting crowds also added to the reduction in new business from Mainland China and tourism spending.

Meanwhile, risks to Hong Kong's economic growth remain to the downside due to the recent policy changes in Mainland China, which may especially reduce the retail sales in Hong Kong.

In order to encourage domestic consumption and bolster growth, the government cut import tariffs on selected goods by half on average in June. These import tariff cuts would limit tourist spending in Hong Kong, which has traditionally been a tax-free shopping destination for Mainland Chinese consumers. Retail sales are an important part of Hong Kong's economy. Retail sales to non-residents were around 14.3% of gross domestic product (GDP) in 2013; Mainland Chinese account for 79% of tourist spending.

The recent political tensions also led China to restrict Shenzhen residents traveling to Hong Kong to one visit a week, rather than multiple times. According to Bloomberg, Chinese day-trippers account for about 15% of retail spending in the city. This new restriction may thus reduce retail sales. The service sector would also be affected. Because of this policy change, the city, which has come to rely on Chinese visitors, may see a 5% reduction in tourist spending.

As Annabel Fiddes, an economist at Markit, said in the HSBC PMI press release:

Hong Kong's economy may struggle to recover any growth momentum in the near-term, as companies continued to shed staff and reduced their input buying in response to weaker demand conditions.

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