HK Leader May Focus on Economy, Liquor Tax Cut in Speech

(Bloomberg) -- Hong Kong’s leader is expected to make bolstering the economy a priority in an annual speech this week, using it to lay out an agenda that includes a potential cut to a liquor tax and possible measures to strengthen the city’s status as a finance center.

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Chief Executive John Lee will deliver his policy address on Wednesday at 11 a.m. with an expected focus on bringing back the city’s mojo after a pandemic slump. China’s slowdown and geopolitical uncertainties have also weighed on the almost $400 billion economy, which depends heavily on moving goods and money between its giant Chinese neighbor and the rest of the world.

Lee has set his sights on boosting the economy after cementing Beijing’s authority over the former British colony with a national security law. He introduced the legislation this year to silence dissent he blamed for hampering business, although the move risked worsening tensions with Western governments that criticized it for muzzling open discussion.

Lee vowed to seek innovation and changes as he invited public opinion for his third policy report prior to its delivery to the Legislative Council this week. He said the theme of the address this year is “reform for development and building our future together” at a regular press briefing on Tuesday.

High among the city’s list of headwinds are an ailing real estate sector and sluggish consumption. China’s recent stimulus bonanza and the US Federal Reserve’s interest-rate cuts may provide some relief, although these factors are largely out of officials’ hands in the city of about 7 million people.

“I don’t think there should be a lot of new policies that shock Hong Kong,” said Ronald Chan, chief investment officer at Hong Kong-based Chartwell Capital Ltd. “I am generally positive about the opportunities ahead but whether these opportunities will instantly jumpstart or boost the economy would be hard to say.”

Lee will look to attract more investors by revamping a HK$2 billion ($258 million) Innovation and Technology Venture Fund, according to the South China Morning Post. The newspaper, citing unidentified sources, also reported additional measures to diversify the economy with measures including boosting the medical and biotechnology sector.

When it comes to the property market, Lee has few obvious policy options. His administration in February already removed most home purchase curbs, and Lee announced cuts to property buying taxes in his 2023 address. Prices picked up slightly earlier this year before continuing a decline to the lowest since 2016.

For stock investors, any proposals will likely provide little solace. Lee last year slashed the stamp duty on stock trading to boost liquidity, but the city’s benchmark Hang Seng Index remains one of the worst-performing major equity gauges globally since the end of 2020.

A wave of bankruptcies points to eroding business finances. Retail sales and tourist arrivals remain below levels before the pandemic, a period that saw the city’s image take a hit from draconian quarantine measures and a crackdown on the pro-democracy political opposition.

Seeking to burnish its reputation as a premier destination for nightlife and dining, Hong Kong planned to lower the amount of tax it levies on spirits, Bloomberg News previously reported. If implemented, the move may help rekindle sales for restaurants and retailers struggling with the drop in consumption, which makes up more than half of economic growth.

What Bloomberg Intelligence Says...

“This year’s policy address may be focused on reviving the economy through key pillars of tourism, trade and finance. Potential measures such as the alcohol tax reduction and hosting more mega events fit into a broader theme of reviving tourism and consumption in the city. In terms of housing, the policy address may focus on the subdivided housing issue, but overall given that all home buying restrictions, or ‘spicy’ measures, have been just removed recently, it is not clear how much more policy the government will provide in the near term.”

— Marvin Chen, analyst

This, however, may also come down to whether Beijing can revive China’s growth momentum, as the city’s tourism and services sectors are closely linked to sentiment across the border. Much also depends on the pace of rate cuts by the Fed as the city’s currency is pegged to the US dollar.

If China’s policy stimulus “can effectively bring growth back on track, retailers and the broader services sector would likely be the biggest beneficiaries across the Asia region,” economists at Bank of America said. China’s demand makes up nearly 10% of total value across the city’s service sector, they said in a research note, citing OECD data.

Samuel Tse, an economist at DBS Bank, said that Hong Kong is in a period of “soft recovery” as lower rates and the boost from China’s additional stimulus flows through.

“We are not looking at a V-shaped recovery, of course, because all this rebound hinges on the movement of equity markets, which hinges on the policies in mainland China,” Tse said.

Talent attraction has been a top challenge for Hong Kong, after thousands of expats left the city following the strict Covid pandemic curbs. Tse expects Lee to focus on policies that make it easier for foreign workers to move to Hong Kong.

--With assistance from Twinnie Siu and Alfred Liu.

(Updates with Lee’s comments in fourth paragraph)

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