28th February 2024 – (Hong Kong) In a pivotal move that reflects the gravity of Hong Kong’s fiscal challenges, the Special Administrative Region’s government today will unveil a new budget amidst a colossal deficit surpassing a hundred billion Hong Kong dollars. With the property market languishing, society is keenly focused on whether the government will loosen its grip on cooling measures or withdraw them entirely. The Rating and Valuation Department’s latest property price index reveals a nine-month consecutive decline, plummeting to a seven-year low. Citizens are attentive to the government’s strategies to stimulate the market and invigorate the economy, capitalizing on the opportunity of “leaning on the motherland and connecting with the world”.

In anticipation, financial officials revealed the cover of the new budget to be ‘peach colour’ at dawn, symbolizing the aspirations for Hong Kong’s year ahead. However, sources suggest the continuation of retail bond issuances, totalling at least 70 billion Hong Kong dollars, predominantly in silver bonds, along with green bonds and infrastructure bonds to support government projects. The Airport Authority’s recent 5 billion Hong Kong dollar retail bond issuance met with a positive response, recording double the subscription needed, leading the government to believe there is room to “increase the stakes” in the local retail bond market as citizens seek low-risk, stable return investments.

The issuance of bonds aims to revitalize the bond market. Academics point out that different bonds serve different purposes: green bonds are related to climate and environmental protection, silver bonds are designed to provide stable returns for the elderly, and infrastructure bonds, which are under scrutiny in light of falling land prices and the uncertainty of profitability in developing artificial islands. Moreover, the timing of issuing bonds is questioned as the US Federal Reserve has announced a potential 75 basis-point rate cut this year. Issuing bonds now could mean higher interest costs – an unnecessary move unless the government’s hand is forced by financial strain.

Economists note that the scale of the 70 billion Hong Kong dollar retail bond issuance is appropriate, supporting elderly living expenses to a degree, but caution is advised on the volume of issuance. The release of infrastructure bonds is seen as testing the waters for major projects like the Lantau Tomorrow and Northern Metropolis developments. Given the current property market slump, there is considerable reservation about infrastructure bonds, and the government is urged to deliberate carefully. The frequent issuance of bonds raises questions about its appropriateness, given the taste the government has acquired for this financial tool. While investors welcome bonds for their stable returns, especially when stock and property markets are declining, the government’s increased reliance on bond issuance could indicate a less-than-healthy long-term public finance strategy. It cannot mask fiscal issues indefinitely, and a balance must be struck between encouraging the bond market and ensuring sustainable, stable future revenue.

Post-pandemic, Hong Kong’s economic recovery has not met expectations. With locals heading north for consumption and mainland tourists favouring cost-effective ‘in-depth tours’, along with stagnant stock and property markets, the question arises: How can Hong Kong remain vibrant day and night? If today’s budget announcement confirms the deficit exceeds a hundred billion Hong Kong dollars, far above the earlier forecast of over 57 billion, the fiscal outlook appears grim. Excluding green bond revenue, it’s plausible to face a deficit for five consecutive years. The phrase ‘living beyond means’ coupled with a lack of savings strategy could be driving the surge in deficit. There’s speculation that the hundred-billion-dollar deficit might be embellished, suggesting that using bond issuance as income lays the groundwork for a ‘debt bomb’. Top accounting firms estimate the deficit to be between 110 and 150 billion Hong Kong dollars; subtracting green bond income, the projected deficit could range from 176 to 216.6 billion Hong KOng dollars. Relying solely on bond issuance reflects a government out of options, living on borrowed time and funds – hardly a sustainable approach.

As finance chief Paul Chan prepares to unveil what could be his most testing budget yet, amid economic turbulence and an unprecedented deficit, whispers of a potential removal of some property market cooling measures are circulating. Such a step is seen as a vital attempt to rejuvenate the city’s flagging property sector.

Another significant agenda item is the planned boost to the tourism sector, with an allocation of HK$971 million to the Tourism Board over the next three fiscal years. This year alone will see HK$665 million devoted to reviving an industry that previously contributed 4.5 per cent to the city’s GDP pre-pandemic. Over the three years, HK$304 million is earmarked for large-scale events, and HK$389 million is set aside to enhance the city’s allure, including a redesign of the nightly “A Symphony of Light” multimedia show on the harbourfront.

A precursor to these enhancements, monthly drone shows and fireworks are planned to invigorate the spectacle, with each fireworks display costing HK$1 million.

Meanwhile, Hong Kongers await the final details of the budget shortly, which will reveal the extent of property market interventions and the broader strategy to navigate Hong Kong’s fiscal predicament.