Hong Kong-China border reopening no quick fix for ailing city

After three long years, checkpoints at the border separating Hong Kong from mainland China are set to reopen from Sunday in a move that’s seen as having a muted impact on the city initially. 

Businesses in the city face a number of challenges, which partly stem from the lengthy closure. Wealthy mainland Chinese took their business to Singapore, which opened its borders earlier last year. Factory owners shifted manufacturing from China to countries in Southeast Asia. Local hotel and catering firms are struggling with a shortage of manpower after employees found work elsewhere. Hundreds of thousands of people left Hong Kong.

The reopening will be a slow process. There will be a limit of about 60,000 people allowed to travel into the mainland from the financial hub every day, Chief Executive John Lee said at a briefing Thursday. People traveling in either direction will need to show a 48-hour negative PCR test result, while some land border control points will stay shut for now.

The cost of separation has been huge. Natixis SA estimates Hong Kong’s economy lost $27 billion in potential growth due to the effects of the pandemic and the city’s strict Covid curbs. In 2019, there were more than 236 million passenger trips via land crossings with the mainland, which all but evaporated since. 

The city faces other struggles. Surging borrowing costs are blunting the outlook for companies. The government’s tougher stance toward civil liberties has raised questions over Hong Kong’s commitment to the rule of law. China’s economic outlook remains clouded as Covid sweeps unchecked across the country. A dropoff in global demand has dented the city’s trade, too.

The border reopening will “shore up the outlook for tourism, retail sales, and other cross-border economic activities,” said Lloyd Chan, senior economist at Oxford Economics Ltd. “However, any near-term lift to growth from cross-border reopening will likely be dampened by the resurgence in Covid cases in the mainland. We also think the boost from reopening is unlikely to offset powerful headwinds from tighter domestic financial conditions and weakening external demand.”

Chan estimates Hong Kong’s economy won’t get back to the level seen in the fourth quarter of 2018 — before pro-democracy protests rocked the financial hub and the pandemic prompted border closures — until the latter half of next year.

Some industries stand to benefit. Insurance firm Prudential Plc has been readying its systems for the border reopening, said Lawrence Lam, chief executive officer of the local unit. The firm is looking to hire an additional 2,000 financial consultants this year to meet increased demand, he said.

Wealth management firm Hywin International is preparing to organize client delegations to Hong Kong for investment forums and cultural events to facilitate further business opportunities.

“We foresee increased business volume and will expand our execution capacity,” said Nick Xiao, chief executive officer for Hywin International. 

The food and beverage sector is also upbeat about demand and expects business at bars to increase by 15-20% after the border reopens, according to Chin Chun-wing, chairman of Hong Kong Bar and Club Association. 

In 2018, mainland Chinese accounted for about 76% of the city’s total visitors.

Yet Hong Kong faces an uphill struggle to compete with Singapore, which has lured talent and capital in recent months.  

“Hong Kong’s geographic advantage was basically pretty much eliminated while we had all of these border restrictions in place,” according to Peter Stein, chief executive officer of the Private Wealth Management Association. “It gave Singapore an advantage when they opened up their border.”

While Stein says he expects business to pick up, rising interest rates are affecting risk appetite among wealthy individuals.

“I don’t hear a tremendous amount of optimism about the business outlook for 2023 just because the overall macro outlook is still looking pretty rough,” he said.

In manufacturing, the outlook also remains mixed due to the poor global economy and lost business.

No Longer Cheap

“It will be more convenient to do R&D and visit our clients in China,” said Danny Lau, honorary chairman of Hong Kong Small and Medium Enterprises Association, adding that production levels for the sector were down 30% in 2022 from a year earlier.

“A lot of orders relocated to other Southeast Asian countries,” Lau said. “Those orders won’t come back because they found cheaper places to make goods. Production in China is no longer cheap.”

Staff shortages are a chief concern among tourism-related industries in Hong Kong. The city’s jobless rate fell to 3.7% in November, down down from a peak of 7.2% in early 2021.

An exodus of residents has exacerbated the situation. In the two years through June 2022, the city’s population fell by about 216,000, or 2.8%, to 7.3 million.

“We need more manpower to serve the industry, but at this moment we have a shortage of manpower in every aspect,” said Simon Wong, president of Hong Kong Federation of Restaurants and Related Trades.

The tourism industry may not fully rebound to its pre-pandemic levels until 2024 due to limited flight capacity and staffing issues, said Fanny Yeung, executive director of the Travel Industry Council of Hong Kong.

The reopening represents a significant step forward for the city’s businesses, which faced years of disruption due to protests and Covid curbs. The economy, which likely shrank in 2022 for the third time in four years, may expand 2.5% this year, according to Thomas Shik, chief economist at Hang Seng Bank Ltd. 

But significant risks remain.

“A speedier recovery in cross-boundary businesses and traveling activities may lead to a faster growth, but it may also take time to see the effect of the policy shift, suggesting that uncertainty remains over the trajectory of growth,” Shik said. “Risks on the outlook for growth are likely to remain on the downside.” – BLOOMBERG