BUSINESS OUTLOOK – 2015/2016 Annual Business Survey: Market Volatility and Challenges

By Kenny Lau


The business environment in 2015 was extremely challenging for all sectors and industries in Hong Kong, and companies are much less bullish about the regional and global economy in the coming 12 months, according to AmCham’s annual year-end business outlook survey conducted in the last quarter of the year among 700 member companies of the Chamber (with a response rate of roughly 20 percent).

Describing a number of key issues and challenges facing the business community of Hong Kong in the survey, business leaders and senior executives of multinational corporations as well as small and medium-sized enterprises across an array of industries have generally pointed to a downward trend of business sentiments, although short of a bearish market or a significant contraction in the local economy. Some are “expecting to continue to grow,” but are also aware of the fact that “it will not be an easy road ahead.”

The overall assessment of Hong Kong’s business environment of the past 12 months is that it was “not great, but not unstable.” However, a drop in market confidence should never be taken lightly as it creates a squeeze in liquidity of capital, which in turn leads to a shortage of investable funds in a given market. When there is an outflow of capital, an anemic market will surely follow – a reason for AmCham’s continued emphasis on Hong Kong’s competitiveness.

Hong Kong is currently facing very strong external headwinds: a severe slowdown in the Chinese economy after a market crash in mid-2015, followed by a wild swing of the country’s currency, Renminbi or Yuan, and a hike of interest rates by the US Federal Reserve. The high cost of real estate in the local marketplace has essentially driven up the cost of doing business – and of nearly all aspects of living – in the city.

Although significant risks continue to overshadow the global economy, particularly those of China in recent months, companies are confident about Hong Kong’s role as an international financial and business center, thanks to the rule of law and an efficient tax system. A fair and open market is the backbone of Hong Kong’s renowned status in global trade and investment. Combined with a world-class transportation system, Hong Kong is well-equipped to move forward on the world stage.

As a gateway into and out of China, Hong Kong is a vital link connecting Chinese companies going global and international firms renowned for high-standard professional services in the legal, tax, accounting and finance fields. As Chinese enterprises continue to go abroad seeking investment opportunities overseas, Hong Kong is the preferred place where multinational services firms are sought for their experience and expertise in transaction of international business deals. The mission of fostering commerce should remain unchanged despite market uncertainty.

AmCham has played a critical role in advocacy and served as a bridge between the governments of Hong Kong, Mainland China and the US in the past year. In the coming 12 months, it will continue to represent members for their best interest in meetings with senior Hong Kong government officials, continue to work with US officials in Hong Kong and in Washington, DC, and continue to engage Chinese ministries and departments in a dialogue for the promotion of international trade.

Business Sentiment

Market sentiment shifts downward: a lot less bullish but not yet bearish

In assessing Hong Kong’s business environment of 2015, survey respondents have indicated worsening market conditions, with only two percent saying it was “very good” for business, a significant drop when compared to five percent just a year ago. About two-fifths of respondents (38 percent) said it was “good,” a decline of more than 10 percent from 2014, while another two-fifths (40 percent) saw business “unchanged,” an increase by six percentage points from last year. One-fifth (20 percent), as opposed to 12 percent in the previous year, said it was “unstable or getting worse.”

The outlook of Hong Kong’s business environment in the coming 12 months is also gloomy. Only two percent and 24 percent of survey respondents said they expect a “very good” and “good” year, respectively, in 2016. Last year, nearly 50 percent of those surveyed had such a level of enthusiasm about the economy. Interestingly, exactly half of all respondents (50 percent) forecast an “unchanged” business environment, signaling a sense of cautious optimism. The percentage of those who anticipated an “unstable” or “worsening” market rose from 16 percent in late 2014 to 24 percent in late 2015.

Chart 1

Hong Kong’s role as a center of international business remains intact

Although significant risks continue to overshadow the global economy, particularly those of China, companies in Hong Kong – MNCs and SMEs alike – remain relatively confident about Hong Kong’s role as a center for commerce. Regarding their business plans, one-third (33 percent) of survey respondents said they will “expand” their current operations in Hong Kong over the next three years; close to two-thirds (59 percent) said they will conduct “business as usual,” while the remaining (eight percent) will be “gradually reducing” their businesses in Hong Kong.

For multinational companies with their regional headquarters in Hong Kong, there is a predisposition to keep them in the city over the next three years, although less so than in previous years due to the rise of emerging markets in China and across Southeast Asia. Despite a trend of corporate consolidations as well as mergers and acquisitions, an overwhelming number of respondents (74 percent) said they intend to keep their regional headquarters here; while more than one-fifth (22 percent) were “not sure” whether theirs will remain, only a small minority (four percent) said “no” to the question.

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Business Infrastructure

Hong Kong is structurally sound; however, challenges become more pertinent 

On the assessment of Hong Kong’s competitiveness against those of other international cities in the region and other parts of the world, survey respondents have revealed a sense more or less the same as in previous years, while noting the city’s strengths such as low taxes as well as its weaknesses such as high costs of doing business. Others have also pointed out the rise of neighboring cities, including Shanghai and Singapore, as a threat to Hong Kong’s role and international status.

Overall, a large majority of respondents believe Hong Kong is highly competitive or at least as good as any other cities across the globe. More than three percent regard the city as the “most competitive,” while 34 percent think it is “very competitive.” Over half (51 percent) say Hong Kong is on par with other international cities; those who see a “least competitive” city comprise 12 percent, an increase by six percentage points from last year. The number of respondents who deem Hong Kong “not competitive” dropped by two percent to reach one percent.

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Core values and systems continue to provide a strong foundation

The rule of law, a strong legal and regulatory system, a simple and efficient tax system, a well-established transportation system, and a fair and open market situated as a gateway into and out of China are strong attributes to Hong Kong’s continued success in playing a pivotal role as an international center of finance and commerce. However, Hong Kong is also plagued with the high cost of real estate, a shortage of international school places, and concerns about the political system.

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Business Viability

Assessment of Hong Kong’s overall competitiveness compared to other international cities 

In the 2015 survey, member companies have pointed out a number of issues which have a direct impact on the city’s overall competitiveness, citing what has made Hong Kong an attractive place in which to do business and what has not in recent months and years.

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Advocacy & Government Relations

AmCham is the principal voice of the international business community in Hong Kong

For an advocacy agenda, survey respondents are most interested in the focus on Hong Kong’s regional role in Asia Pacific, followed by Hong Kong’s “One Country, Two Systems” regarding political governance and the rule of law, in addition to HK-China trade and economic relations. No less important are education and human resources, covering school places, talent availability, recruitment, workplace diversity, training and retention. Other issues, such as those of the environment, financial services, transportation and logistics, and information technology, are more industry-specific.

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In terms of the advocacy agenda with staff of the US Consulate General, visiting US government officials and Congressional delegates in Hong Kong and with key officials of US departments and agencies during the annual “Doorknock” trip to Washington DC, US-China bilateral relations are by far deemed the most critical issue on which AmCham can represent the business community and maintain a dialogue. Trade & investment initiatives such as the Trans-Pacific Partnership and SelectUSA are where numerous business opportunities will derive, hence a growing interest among member companies.

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China Affairs

“Gateway into China” & “Gateway out of China” 

Cities of Mainland China in which companies of survey respondents maintain a branch office(s) spread across the country. Shanghai, Beijing, Guangzhou, Shenzhen and Chengdu are where MNCs are most likely to have their corporate presence. Only about a quarter (24 percent) of companies in the survey indicate that they have no establishment of an office in China.

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Market access and fair competition in the developing markets of China are the two major areas of interest among survey respondents, while many find US-China relations equally significant to the growth prospect of their respective companies in the world’s second largest economy. Chinese enterprises going abroad seeking investment opportunities is another target area among companies in Hong Kong, particularly those engaged in professional services. Environmental protection and intellectual property rights are also viewed as issues for further discussion.

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In terms of a target city for a prospective AmCham delegation, Beijing is number one, with nearly 70 percent of survey respondents showing a great interest in establishing closer ties in China’s capital city. Shenzhen comes in second, although far behind Beijing. Noteworthy is the fact that cities in western China are gradually gaining momentum as they continue to attract foreign investment in a largely untapped market. Surprisingly, little interest is shown for Shanghai, perhaps due to a saturated market where many companies are already established.

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“One Belt, One Road” Initiative

The “One Belt, One Road” initiative, also known as the  Belt and Road initiative, is a plan by the Chinese government to create a cohesive economic zone covering southeast, central and west Asia, the Middle East, and extending to parts of Europe. Over a third (37 percent) of survey respondents believe it will have a positive impact on their businesses, while two-thirds (62 percent) think of it neutrally.

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Because the Belt and Road initiative aims to broaden trade and investment beyond international boundaries, there are many opportunities for professional services firms to “get in the game.” Nearly half (49 percent) of all respondents say their current business lines can add value to the on-going development, noting market intelligence, talent-related services, due diligence and legal expertise as areas for engagement.

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For firms in Hong Kong planning to participate in the Belt and Road initiative, a large majority (80 percent) will do so by offering their line of professional services. Others will consider establishing a joint venture with their Chinese counterparts, while a minority will tap into the market through equity investment, either by inviting Chinese enterprises to make an investment or becoming an equity investor in Chinese companies. Given Hong Kong’s tremendous experience in global trade and investment, it is not surprising that firms are taking a proactive approach of engagement in what is widely touted as one of the largest regional frameworks of economic cooperation.

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