Hong Kong, S.A.R.

Lingering weak consumption, coupled with uncertain export outlook

Hong Kong’s economy lost some steam in 2024 as domestic consumption softened after its initial post-Covid rebound. Despite a durably steady labour market, household consumption patterns are undergoing structural shifts that may continue to damp spending appetite among both locals and tourists in 2025. For one, improved transportation networks and the development of the one-hour living circle in the Greater Bay Area (Guangdong, Hong Kong and Macao) have encouraged more residents to spend their weekends in mainland China, leading to an outflow of consumer activity. Additionally, visa exemptions for mainland tourists in several Southeast Asian countries have further diverted tourist inflows. As a result, retail sales of tourism-dependent products such as clothing, footwear, and jewelry have only recovered to 60-70% of pre-pandemic levels. On a positive note, spending on services may recover modestly in 2025, supported by government efforts to host mega-events and the opening of a new stadium.

Net trade in goods emerged as a key growth driver in 2024 but is likely to provide less support in 2025. The strong performance in goods trade in 2024 was fueled by improving external demand, while electronic products orders from mainland China and ASEAN grew significantly amid the ongoing global tech cycle recovery. However, trade across Asia has slowed since mid-2024, and concerns over escalating trade tensions have grown. Hong Kong’s heavy reliance on re-exports, particularly with mainland China, also leaves the city vulnerable to risks from a potential Tariff War 2.0. On 1 February 2025, the Trump administration announced it was imposing an additional 10% tariff on imports from Hong Kong, raising Hong Kong’s trade-weighted average duty rate in the US market from approximately 1% to 11%. Simultaneously, the “de minimis” duty exemption –which allows small parcels valued at USD 800 or less to enter the US duty-free – is at risk of being permanently revoked for both mainland China and Hong Kong. This comes as the US Postal Service works to establish mechanisms for collecting tariffs on small packages. These measures could lead to smaller net exports for Hong Kong as well as reduced transit trade volume, particularly with mainland China. At the same time, net exports of services continue to be weighed by a faster recovery in outbound tourism than inbound tourism. Recently, however, there has been modest improvement, supported by a rebound in inbound tourism and financial services. Visitor numbers have risen as the central government in Beijing made improvements to its individual travel scheme and increased duty-free limit for mainland tourists. At the same time, initial public offering activities have also picked up recently, thanks to a combination of policy support from mainland regulators, an easing of the interest-rate environment and local stock listing reforms. These developments are likely to result in services exports becoming less of a drag on growth in the coming quarters.

Gross capital formation improved in 2024 as monetary conditions eased. Interbank rates in Hong Kong have fallen significantly since late 2023, driven by expectations of US Federal Reserve rate cuts, as the city’s base rate moves in lockstep with the US federal funds rate due to the Hong Kong dollar-US dollar peg. However, the recovery in investment may face headwinds in 2025 from delays in Fed rate cuts and rising geopolitical uncertainties amid ongoing US-China tensions. Meanwhile, the sluggish real estate market, with land sale premiums falling well below government targets for two consecutive fiscal years, suggests that the recent rebound in construction spending may be short-lived. Public investment is also likely to be restricted by revenue shortfalls caused by lacklustre land sales.

Reserves help cushion public deficits

Hong Kong’s fiscal balance is expected to record another deficit in FY2024 (April 2024 to March 2025), driven by persistent weakness in the property sector and a slowdown in domestic demand. The decline in land premium revenues and stamp duty collections has outweighed efforts to reduce expenditures. In response to mounting budgetary pressures, the FY2024 budget has excluded most pandemic-related measures such as consumer vouchers, public rental housing discounts, and electricity subsidies, which were seen in earlier budgets. Since FY2019, Hong Kong has recorded deficits in four out of the past five fiscal years, leading to a significant reduction in fiscal reserves. Reserves have fallen by approximately 37.4%, from a peak of HK$1.2 trillion at the end of March 2019 to HK$733.2 billion at the end of March 2024. Despite this, fiscal reserves remain robust at around 30% of GDP, providing a sufficient buffer to manage deficits and maintain low public debt levels. This could allow for continued deficit spending in FY2025 to support economic recovery but delay fiscal consolidation. Without monetary policy independence, Hong Kong’s fiscal policy is likely to remain proactive, focusing on targeted support for SMEs and the trade sector that could suffer from weak private consumption and external shocks. On the revenue side, the 2024 Policy Address suggests the government’s near-term priority remains on expanding tax concessions for funds and family offices to attract capital inflows, despite the growing need to broaden the tax base and enhance revenue sustainability.

Hong Kong’s current account has maintained a robust surplus, remaining close to double digits as a percentage of GDP. This strength is primarily driven by sizable primary income surpluses which have been bolstered by higher coupon income from portfolio investments amid elevated global interest rates. In 2024, the goods deficit narrowed due to lower imported commodity prices and subdued domestic demand. However, it may widen again in 2025 as the pace of goods exports slows. Meanwhile, the services surplus has narrowed post-reopening, as outbound tourism recovered faster than inbound tourism. Recently, however, there has been modest improvement, supported by a rebound in inbound tourism and financial services. Overall, Hong Kong’s sustained current account surplus should provide a strong buffer against external shocks and enable the financial center to continue accumulating external financial assets.

Tight political control

Hong Kong's political scene has profoundly changed since the passing of the National Security Act and the mass resignation of opposition lawmakers in 2020. Radical changes to the electoral system, in particular the reduction in the proportion of directly elected legislators in the Legislative Council (LegCo), have eradicated political pluralism, disempowering opposition parties that once advocated greater autonomy for Hong Kong. With no opposition in the LegCo, the political stability of the current government, which has been led by John Lee since May 2022, is expected to go unchecked until the next elections in 2025 and beyond. Tighter controls over the political system, reinforced by upcoming local security legislation aimed at discouraging objections to central government influence over local politics and hindering public debate on politically sensitive issues, make widespread protests such as those seen in 2019 and 2020 an unlikely option.

Foreign reactions to these developments in Hong Kong's political landscape have been mostly negative, with G7 foreign ministers expressing "serious concerns" about the Special Administrative Region's electoral changes. Since the National Security Act, the US has deemed Hong Kong and mainland China to be one and the same customs territory and has imposed sanctions on some local officials.

Payment

Bank transfers are one of the most popular payment instruments for international and domestic payments in Hong Kong, thanks to the territory’s highly developed banking network.

Standby Letters of Credit also constitute reliable payment methods, as the issuing bank guarantees the debtor’s credit rating and repayment abilities. Irrevocable and confirmed documentary letters of credit are also widely used, as the debtor guarantees that a certain sum of funds will be made available to the beneficiary via a bank, once specific terms agreed by the parties are met.

Cheques and bills of exchange are also frequently used in Hong Kong.

Debt Collection

Amicable phase

During the amicable phase, the creditor sends one or more notice letters (summons) to the debtor, in an attempt to persuade them to pay the due debts. The Practice Directions on Mediation, introduced in 2010, set out voluntary processes that involve trained and impartial third party mediators. This helps both parties involved in a dispute to reach an amicable agreement for repayment. Debtors and creditors are usually urged to pursue this process before resorting to legal action.

Legal proceedings

Ordinary proceedings

The judicial system in Hong Kong comprises three distinct courts:

The Small Claims Tribunal handles relatively small cases (of up to HKD 75?000 in a fast and efficient manner. The rules of procedure are less strict than in those of other types of courts and no legal representation is permitted;

The District Court has jurisdiction over more substantial financial claims, ranging from HKD 75,100 to HKD 3,000,000;

The High Court deals with much larger legal disputes and is additionally charged with handling claims of over HKD 3,000,000. 

Hong Kong’s District court and High Court allow legal representation. Cases in these courts are initiated by issuing a Writ of Summons to the debtor, who then has 14 days to file a defence. The creditor is also required to file a notarised Statement of Claim. If the debtor responds to the Writ and requests a payment plan, the creditor has two weeks to reply. If the parties find it impossible to enter into an agreement, a hearing will be called for by the judge, during which a judgment is normally made. If the debtor does not respond, a default judgment can be rendered.

Enforcement of a Legal Decision

A domestic judgment is enforceable once it becomes final (if no appeal is lodged within 28 days). If the debtor fails to comply with the judgment, the creditor can request an enforcement order from the court. This usually entails either a garnishee order (allowing the creditor to obtain payment of the debt from a third party which owes money to the debtor), a Fieri Facias order (which enables a bailiff to seize and sell the debtor’s tradable goods), or a charging order (for seizing and selling the debtor’s property to satisfy the debt).

Foreign judgments are enforced under the Foreign Judgments (Reciprocal Enforcement) Ordinance. Decisions issued in a country with which Hong Kong has signed a reciprocal treaty (such as France or Malaysia) only need to be registered and then become automatically enforceable. Where no such treaty is in place with a country, enforcement can be requested before the court, via an exequatur procedure.

An Arrangement on Reciprocal Recognition and Enforcement of judgments in Civil and Commercial Matters (REJA) was concluded with the People’s Republic of China in 2006. This makes judgments rendered in Mainland China or in Hong Kong automatically enforceable by the courts of the other contracting party.

Insolvency Proceedings

OUT-OF COURT PROCEEDINGS

The law does not provide for formal procedures for restructuring company debts. Restructuring proceedings therefore need to take place through informal “workouts” or a scheme of Arrangement.

FORMAL PROCEEDINGS

The main formal procedures for companies in financial difficulties in Hong Kong are as follows:

A scheme of arrangement.

Appointment of receivers.

A members’ voluntary liquidation (which is only available for a company which is still solvent) but may be used where, for example, an entity is itself solvent but is part of a wider group which is in financial difficulty.

A creditors’ voluntary liquidation.

A compulsory liquidation.

Hong Kong legislation also contains a procedure which allows the directors of a company to commence a voluntary liquidation without holding a shareholders’ meeting.

Scheme of Arrangement

A Scheme of Arrangement is a statutory, binding compromise reached between a debtor and its creditors. It must be accepted by all classes of creditors. A court reviews the plan, before sanctioning the convening of separate meetings with creditors. The scheme must be approved by the court, at least 50% of creditors in terms of number and 75% of creditors in terms of value of debts. An administrator is appointed to implement the scheme.

Appointment of receivers

An application for the appointment of a receiver by the Court is made by summons to a Judge of the High Court of Hong Kong following a procedure set out in the Rules of the High Court of Hong Kong. Note that a Master of the High Court of Hong Kong also has the power to appoint a receiver where the appointment of the receiver is made by way of equitable execution against a judgment debtor.

As regards the appointment of receivers out of Court, the procedure for appointment will normally be set out in the relevant security document. A receiver appointed under the statutory power implied into mortgages of land must be appointed in writing. In order for the appointment of a Receiver out of Court to be valid, the receiver must accept his appointment.

Liquidation

Liquidation can be voluntary or compulsory. It involves selling the debtors’ assets in order to redistribute the proceeds to creditors and dissolve the company. Voluntary liquidation can be either a member’s voluntary liquidation (MVL), or a creditors’ voluntary liquidation (CVL). In both cases, company directors lose control and a court-supervised liquidator is appointed.

Creditors can initiate a compulsory liquidation by filing a winding-up petition with the courts on the grounds of insolvency. An MVL is a solvent liquidation process whereby all creditors are to be paid in full and any surplus distributed among the company’s shareholders. CVLs are insolvent liquidations.

Last updated:February 2025