Hong Kong’s Plan to Reverse Expat Exodus Disappoints Investors
(Bloomberg) -- Hong Kong Chief Executive John Lee’s long-awaited plan to woo back foreign talent and ease housing woes fell flat with investors, underscoring the challenge facing the financial hub as it tries to bounce back from years of turmoil.
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In his maiden policy address on Wednesday, the city leader said he would cut property duties for non-permanent residents and relax visa rules to reverse a brain drain prompted by isolationist Covid policies and a crackdown on political dissent.
His nearly three-hour speech didn’t address pandemic curbs until its final moments, and even then offered no specifics on how the city would emerge from restrictions that still subject arrivals to days of PCR tests, outdoor mask mandates, and an initial ban on visiting bars and restaurants.
Economists and investors were left disappointed, saying Lee’s proposals lacked a major policy shakeup. The Hang Seng Index closed 2.4% lower on Wednesday. A sub-index of property developers dropped 1.8% to the lowest level since 2011.
“John Lee’s maiden policy address is no game-changer to the rusted economic engine in Hong Kong,” said Alicia Garcia Herrero, Asia Pacific chief economist at Natixis SA. “The problems are identified but only with partial solutions.”
Hong Kong faces mounting competition from Singapore as a regional hub for global business and talent, as well as a growing likelihood of economic contraction for the third time in four years.
Laying out his plan to lure talent to the city, Lee said Hong Kong needs to be “more proactive and aggressive in competing for enterprises and competing for talents.”
At a later press conference, Lee acknowledged the market disappointment, while remaining optimistic about his plans.
“We shouldn’t belittle ourselves. We have our advantage,” he said. “I think it’s in our blood, it is in our DNA. With the DNA in place, all we need is an opportunity.”
Lee, who took office in July, has a tough road ahead. The economy has struggled as fallout from Covid restrictions, rising interest rates, global inflation and Russia’s war in Ukraine all pummel growth. The labor force has dropped to near-decade lows as the population ages and people leave. A growing budget shortfall has also created risks for future government spending.
Lee acknowledged many of those headwinds during his speech, echoing language used by China’s President Xi Jinping. “The world is undergoing profound changes unseen in a century,” he said, citing high inflation, interest rate hikes, geopolitical tensions and other factors as having “weakened the growth momentum of the global economy.”
Countering Singapore
Lee outlined a two-year visa program for people who bring in at least HK$2.5 million ($318,480) annually that will allow them to explore opportunities in Hong Kong. Recent graduates of the world’s top 100 universities with at least three years of work experience will also be eligible for such visas, he added.
The city will also suspend the annual quota of its current program for skilled talent and extend the limit of stay for non-local graduates from one to two years.
The proposals come two months after Singapore announced its own five-year work visa program for foreigners earning S$360,000 ($253,530) annually, citing a hypercompetitive battle for global talent.
While Hong Kong has relaxed its toughest Covid restrictions in recent weeks, chiefly ending hotel quarantine for arrivals last month, it has trailed Singapore, which in spring dropped many of its most prohibitive curbs and has been outspoken about needing to position itself as a premier financial hub and global city.
Hong Kong’s visa changes will likely target young mainland Chinese talent, Herrero of Natixis said -- though that may be challenging, given existing Covid restrictions in China. “For the rest of the world, it doesn’t make a big difference,” she added.
The university visa program, meanwhile, echoes a similar talent incentive program in the United Kingdom, which earlier this year launched a two-year visa plan for jobseekers who have graduated from top-ranked universities in the past five years.
What Bloomberg Economics Says...
Chief Executive John Lee made it clear he understands that restoring Hong Kong’s attractiveness as a global financial hub is job No. 1 for the city. The new initiatives he rolled out -- from relaxing visa rules to tax refunds for non-resident home buyers -- will help. But Lee gave no timetable for lifting the remaining Covid curbs and returning the city to pre-pandemic norms. Without this, regaining ground lost during the pandemic to Singapore and other rivals will take time.
Eric Zhu, China economist
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The city will also set aside HK$30 billion ($3.8 billion) to establish a “co-investment fund” for attracting companies to set up operations in Hong Kong, which would include an investment in their business.
Selected companies will be “examined fairly and carefully” by the board and a committee of professionals and experts, Lee said during an afternoon press conference. He added that the city will be looking at companies that have strategic value, and that tech companies will be “one of the focus areas.”
The new visa program will help extend positive momentum for the city’s labor force, said Woei Chen Ho, an economist at United Overseas Bank Ltd. Since August 2018, Hong Kong’s labor force has dropped about 5.5%, according to the latest official figures for the same month.
“Deterrence from the Covid policy remains,” she said, pointing out that mainland Chinese residents coming into the city still have to consider quarantine measures upon their return to China, which has been steadfast in its pursuit of Covid Zero.
Businesses may also be disappointed that Hong Kong did not set conditions for lifting measures that still impose some restrictions on movement for arrivals to the city, Ho said, adding that there were also no details on reopening borders with the mainland.
Property Proposals
Lee announced a plan to refund extra property stamp duties paid by non-permanent resident buyers. Once they have lived in the city for seven years -- long enough to become permanent residents -- those buyers can apply for refunds of two separate stamp duties that are each fixed at 15%. They still have to pay for another duty capped at 4.25%, which applies to all city residents.
The changes for foreign buyers could benefit the mid-to-high-end property market, according to Raymond Cheng, analyst at CGS-CIMB Securities Hong Kong Ltd., who called the savings “quite meaningful.”
But delaying a refund for seven years may also be prohibitive to prospective homebuyers, said Patrick Wong, a real estate analyst at Bloomberg Intelligence.
“The stamp-duty refund for eligible incoming talents means that they still need to pay a huge amount of money upfront for luxury home purchases in addition to the down payment,” Wong said.
Hong Kong’s property market is one of the world’s most expensive, and the sector has been slumping as a result of rising rates and a population outflow.
Secondary home prices have dropped 8% since the start of the year and are on track to approach a five-year-low. Goldman Sachs Group Inc. expects home prices to plunge 30% through 2023 from last year’s levels.
To help more people access the housing market’s costly barrier to entry, Lee also detailed a proposal to expand homeownership. He vowed to increase overall public housing production by about 50% in the coming five years.
Other details from Lee’s policy address:
The city’s stock exchange will revise the mainboard listing rules next year to facilitate fundraising, and to revitalize the Growth Enterprise Market, a market with lower listing eligibility criteria
The Hong Kong Monetary Authority is starting preparation on digital Hong Kong dollars
The city aims to attract 100 high-potential innovation and technology enterprises to boost economic value and jobs
Hong Kong will promote its fintech industry, offer tax concessions to family offices
--With assistance from Kiuyan Wong, Shawna Kwan and Catherine Ngai.
(Adds more details about the investment fund, John Lee’s press conference.)
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