Hong Kong’s tough new restrictions in the face of the Omicron outbreak are likely to weigh on the city, presenting problems for it as a regional hub for foreign multinationals and discouraging fresh inflows in the short term, experts have warned.

“We are seeing some capital leaving Hong Kong as reflected in a weaker Hong Kong dollar," said Alicia García Herrero, chief economist for Asia Pacific at Natixis Corporate and Investment Banking.

"I would imagine that not only Omicron, but most importantly, delays in initial public offerings and issues on the dollar bond market, especially high yield due to the demise of China’s real estate, will discourage new inflows. 

“Omicron clearly does not help in terms of supporting inflows as it only extended the border closure, and makes it even tighter,” she told AsianInvestor.

Alicia García Herrero, 
Natixis CIB

Hong Kong reported its first local Omicron cases in the final hours of 2021, putting a brake on the planned border reopening with Chinese mainland before the Chinese New Year.

In a rare move, the Hong Kong government substantially tightened social and travel restrictions immediately, including banning flights from eight countries. G7 members Unites States, France, Canada, and United Kingdom are on the list in effect from Jan 8 to 21.

Fitch Ratings on Jan 7 warned that Hong Kong government’s sudden tightening of restrictions on travel and social activity in response to the Omicron outbreak could pose downside risks to the city’s economy and credit metrics. It currently estimates the Hong Kong economy will expand by 3% in 2022 with a rating of AA-.

“We believe the tightening of restrictions on international arrivals will create further obstacles to the territory’s ability to serve as a regional headquarters for foreign multinationals, a trend which has taken shape since 2019,” Fitch said.

“Over the longer term, we believe the economic impact of any diversion of multinational business operations will be largely offset by firms from the mainland, which are likely to further increase their presence,” it said.

Bernard Chan

In regard to Hong Kong’s “zero tolerance” of local cases and tight border control with foreign countries, Bernard Charnwut Chan, convenor of Hong Kong’s Executive Council – the top policy advisory body to the chief executive – stressed that as an international city, international arrivals and activities are equally important to Hong Kong, and he agreed that heavy quarantine was turning people away.

He thinks it’s possible to cut hotel quarantine time for international arrivals gradually, from current 21 days to 14, and even further to seven days, if the incubation period of the virus is decreasing, and the city’s vaccination rate, especially among the elderly – now only about 20% - largely improves, Chan said during a panel discussion of the Asian Financial Forum on Tuesday.

LOW EXPECTATIONS

In the latest report this week, Morgan Stanley has lowered Hong Kong’s growth forecast for 2022 to 2.5% from 3% to reflect the impact of tightened social distancing measures and delayed border reopening with Chinese mainland.


 

“Before Omicron’s wave reached Hong Kong, our GDP growth forecast was already below consensus - 2.8% as opposed to 3% consensus. We will need to lower it further if the Omicron wave gets extended during Chinese New Year, and also because we expect it to delay the opening up with China. If the latter no longer starts in the second quarter, we may need to lower growth to 1% or even lower. This is a big shock for Hong Kong, which will probably close 2021 with a growth rate of 6.5%,” said Natixis CIB’s García Herrero.

Hyde Chen,
Haitong International

The delay in quarantine-free travel with China will dampen the near-term outlook for cross-border leisure travel and business, as well as Hong Kong’s retail sector, Fitch also pointed out.

Noting the impact on the retail sector, Hyde Chen, head of investment strategy of asset management with Haitong International, thinks the impact on the capital market is likely to concentrate only on the sectors with high exposure to local retail and consumption in the short term, not to the overall market. 

“We expect markets to gradually look beyond the fear of the virus and focus on the economic fundamentals. Global central bank policies and Chinese government’s policy response to stabilise the economy are bigger drivers to the capital market, in our view,” Chen told AsianInvestor.

Sharing similar views, Michael Wu, Morningstar’s senior equity analyst said they did not expect capital markets and overall investment activities to be impacted.

“This was illustrated in 2020 and 2021 as investment activities continued,” Wu said.

Acknowledging that the fifth wave of outbreak is challenging the economy, Hong Kong Financial Secretary Paul Chan Mo-po said on Sunday’s blog that the government will continue to analyse and evaluate how to properly allocate resources to provide appropriate support to the economy.

Hong Kong’s next annual budget will be announced on Feb 23. The city reported about 52 local Omicron cases as of Wednesday.