Seven Indicators Forecast Great Challenges for Hong Kong’s Economy

Dr Chi-pui Ho and Dr Cynthia Cao

21 August 2024

In my previous article in this column last month, I point out from the start that utilizing economic time series, clear diagrams and tables, coupled with relevant theories, is conducive to providing a full picture of local economic development (see 【Note】). In this article, I will analyse the overall performance in the following seven categories: logistics and transport, gross domestic product (GDP), prices, labour market, industrial sectors, demographic structure, and economic outlook indicators. Future challenges in each category will be presented, with data illustrated by charts.

Falling container throughput and surging land transport

With its strategic location, deep natural harbour, and well-established container transport facilities, Hong Kong has developed into one of the busiest ports in the world and a major entrepot in Asia. At the turn of the 21st century, the “front shop, back plant” model boosted transhipments from the Pearl River Delta Economic Zone through Hong Kong to overseas markets, spurring the growth of its container throughput. Since the 2010s, however, significant development of Mainland ports has reduced the need for transhipment of goods through Hong Kong to Mainland cities, thus gradually decreasing its sea freight throughput (see Figure D1).

In terms of air traffic, Hong Kong boasts wide-ranging geographical advantages. Coupled with an expansive air transport network and a premier international airport, these factors have enabled it to become a primary air freight hub in the region. Leveraging the “front shop, back plant” model of the neighbouring Pearl River Delta Economic Zone, the city’s air freight throughput has recorded an upward trend. That said, in recent years, facing competition from airports (particularly those in the Mainland), Hong Kong International Airport must enhance operational efficiency, optimize cargo facilities, and adopt state-of-the-art technologies, and strengthen connectivity in order to maintain its status as a dominant aviation hub.

As for passenger traffic, Hong Kong, being an international metropolis, relies heavily on air travel to connect with the rest of the world. The importance of this is reflected in the remarkable growth over the years. However, in the wake of the COVID-19 pandemic, air passenger volume has yet to return to pre-pandemic levels.

Surrounded by water on three sides, Hong Kong has a widespread maritime network that facilitates connections with nearby regions. This has historically expedited the increase in cross-border waterborne transport in the past, especially at the Hong Kong-Macau Ferry Terminal. Since the opening of the Hong Kong-Zhuhai-Macao Bridge in 2018, Hong Kong has registered a slowdown in cross-border sea passenger throughput, which has remained at low levels after the pandemic.

Land infrastructures such as the Shenzhen Bay Bridge, the Guangzhou-Shenzhen-Hong Kong Express Rail link, and the Hong Kong-Zhuhai-Macao Bridge have facilitated land links between Hong Kong and the Chinese Mainland. The number of cross-border passengers has continued to rise since the beginning of this century and has quickly rebounded after the coronavirus pandemic.

Stable economic growth and low inflation

Productivity, a robust labour force, and a business-friendly environment have sustained the long-term growth of GDP per capita For decades (see Figure E1A), placing Hong Kong among the cities with the highest living standards worldwide. Since 1997, Hong Kong’s GDP per capita has climbed by an average of around 2% each year. Similarly, private consumption as well as imports and exports have shown comparable growth trends.

Under the linked exchange rate system, the Hong Kong dollar is pegged to the greenback and has benefited from the prudent US monetary policy. Consequently, Hong Kong’s inflation rate has remained low and stable. Since 2010, the overall Consumer Price Index has expanded by an average of 0.2% on a monthly basis. Expenses on housing, food, transport, water, and electricity are the main contributors to the overall Consumer Price Index (see Figure F1A).

Since the 1980s, the focus of Hong Kong’s economic development has shifted from manufacturing to finance, logistics, and professional services, spelling the downward spiral of various traditional industries. The local labour market now demands a more educated workforce with new skills.

Thanks to economic stability in the 2010s, unemployment and underemployment remained at 3% to 4% and 1% to 2% respectively while population ageing led to a decline in labour force participation rate (see Figure G1B). The rise in wages has been lower than the economic growth in Hong Kong. From 1999 to the present, the real wage indices and the real payroll indices have risen by only around 30% whereas the real GDP has soared by around 100%.

In light of the above trends, Hong Kong needs to find solutions to the labour shortage caused by an ageing population and the income inequality resulting from stagnant wage growth. A series of labour welfare-related issues will also pose immense challenges to the labour market.

Plummeting share of the tourism industry

The four pillar industries of Hong Kong are financial services, tourism, trading and logistics, as well as professional and producer services. Professional and producer services encompasses a wide range of industries, including law, accounting, information technology, advertising, engineering, architectural design, and surveying services.

Since the 2010s, financial services has played a steadily important role in terms of contributions to GDP. In contrast, the significance of trade and logistics has experienced a downward trend. Severely disrupted by the coronavirus pandemic, tourism’s share of GDP has plunged from 5% pre-pandemic to less than 1% in recent years (see Figure H3A).

As for other sectors, the cultural and creative industries have shown exciting development, maintaining a share of GDP at around 5%. Medical services, education services, innovation and technology, testing and certification services, environmental industries, air transport, as well as sports and related activities have each seen their share of GDP hovering below 5%.

The local population continues to rise steadily and has now reached over 7.5 million. As an international financial centre, Hong Kong has been attracting talent from all over the world to work and live here.

Hong Kong prides itself on being one of the global cities with the highest average life expectancy. With ever-improving healthcare services and standards of living, the average life expectancy of Hongkongers is 85 years. Owing to a declining birth rate and higher life expectancy, the local population has been speedily ageing (see Figure I1). On the other hand, Hong Kong’s overall education level has been progressively rising.

Regarding marriage and divorce rates, with changes in social norms, expanded educational and employment opportunities for women, and a rise in the age at first marriage, marriage rates have shown a declining trend since the 1970s. In comparison, divorce rates have accelerated, indicating a change in attitudes toward and acceptance of divorce in society. Meanwhile, as a result of the upward cost of living, work pressure, changing family expectations, etc., Hong Kong’s birth rate has markedly declined from 3.5 children per woman in the 1970s to 0.75 children per woman in 2023, far below the replacement level.

Business indices signal caution

When it comes to future economic growth, large institutions regularly release an array of indicators for different sectors to reference, including the following five that track Hong Kong’s economic development.

The “Report on Quarterly Business Tendency Survey”, conducted by the Hong Kong SAR Government’s Census and Statistics Department, presents the business confidence and expectations of companies in various sectors. Positive signs indicate overall bright prospects while negative signs indicate overall bleak prospects.

The Census and Statistics Department also publishes the “Report on Monthly Survey on the Business Situation of Small and Medium-sized Enterprises”, which presents diffusion indices on business receipts of these enterprises by comparing their expectations of their business situation in the coming month with the current situation. A reading above 50 indicates that the business condition is generally favourable while a reading below 50 reflects the opposite.

The “Standard Chartered Hong Kong SME Leading Business Index” is undertaken independently by the Hong Kong Productivity Council. As a composite index to gauge the performance of SMEs in Hong Kong, its calculations are based on different economic indicators with a weighted average. These indicators encompass retail sales value, industrial production index, and export volume.

An upward trend in the composite index indicates improving economic performance of SMEs. In contrast, a falling trend suggests that their economic performance is under pressure, pointing to an economic downturn or a business environment facing unfavourable factors.

The “Hong Kong Trade Development Council’s Export Index” assesses the sentiments and expectations among Hong Kong exporters. When the index is higher than 50, it reflects an overall optimistic outlook on exports. Conversely, when it is lower than 50, it indicates an overall pessimistic outlook.

The “S&P Global Purchasing Managers’ Index of Hong Kong”, based on surveys of purchasing managers across various industries, reflects economic performance through new orders, employment, and output. When the index is higher than 50, it indicates expanding economic activity. When it is lower than 50, it indicates economic contraction.

All in all, in recent years, companies across various industries in Hong Kong have been cautious about the business environment and export outlook. This highlights the multiple geopolitical challenges ahead, the changing consumption patterns of Mainland tourists, and the mounting competition from neighbouring regions.

【Note】: Ho, Chi-pui, “Analysing Hong Kong’s Property Market with Data”, 17 July 2024; “Analysing Hong Kong’s Financial and Tourism Markets with Data”, 18 July 2024; Hong Kong Economic Journal

Dr Maurice Tse and Mr Clive Ho

28 August 2024

In this day and age, when social media is all the rage and artificial intelligence (AI) along with digital transformation are advancing in leaps and bounds, the rampant production and dissemination of information can influence personal behaviour and investment decisions. The phenomenon may also potentially incite panic in society and the market, giving rise to a credibility crisis. In January 2024, the World Economic Forum declared misinformation and disinformation as the greatest short-term risks worldwide.

How can inaccurate information and deceiving information be so alarmingly destructive? The answer lies in the fact that, when deployed with conspiracy theories, such information can come across as fully credible, leaving the general public completely at its mercy. With the world being constantly flooded with information that is hard to verify, political polarization becoming increasingly prevalent, and the global economic downturn showing no sign of abating, rumours and conjectures abound. These range from conspiracy theories about currency wars to allegations that the US moon landing was faked.

The steep price of hocus-pocus

Time is of utmost importance in financial investment. Even within the infinitesimal span of a few milliseconds, a single news update or social media post can trigger price fluctuations in the market. In 2019, Roberto Cavazos, a professor at the University of Baltimore’s School of Business in the US, and the cybersecurity company CHEQ jointly published a research report (see 【Note 1】). The publication drew attention to the fact that every year, stock market losses resulting from fake news amount to US$39 billion. Investors’ decisions influenced by misinformation sustain losses of around US$17 billion on an annual basis (see Figure).

For companies targeted by disinformation attacks, their annual expenditure on reputation management reaches approximately US$9.54 billion. Their annual expenditure on addressing false information in the healthcare sector is around US$9 billion, with the greatest costs incurred in measures to combat fake news about the anti-vaccine campaign and climate change. Global losses induced by disinformation amount to a total of US$78.2 billion.

Financial losses for many in pump and dump schemes

It is widely known that political election campaigns are not immune to disinformation. Research shows that approximately US$300 million is spent annually on phoney political ads. During the 2020 US presidential election, at least US$200 million was spent on fake news. As also indicated by researchers, their estimates only illustrate the basic direct costs. The real underlying costs far exceed the estimated figures.

Of the journalists surveyed in a report released by the US Pew Research Centre in 2022, 26% of the respondents indicate that they have unknowingly reported news containing disinformation. In their opinion, identifying disinformation is more and more challenging, especially as the advancement of AI technology facilitates the spread of false information. According to a 2023 survey conducted by the insurance company Nationwide, 34% of American non-retiree investors aged between 18 and 54 have been influenced to make investments based on misleading financial information (e.g. pump and dump schemes) found on the internet or social media. Not only have investors suffered losses but the market’s credibility has also been undermined as a result.

As mentioned in the research study by Arcuri et al. published in the Journal of Economics and Business in 2023 (see 【Note 2】), some investors might be unable to agree on the true value of a company due to their failure to distinguish between real and fake news. Consequently, the target company’s stock price dances to the tune of disinformation. The study analyses fake news originating from overseas but released in America and Europe from 2007 to 2019. In terms of stock returns, the findings demonstrate that unfavourable fake news generates substantial short-term negative impacts while favourable or neutral news has minimal impacts.

Conspiracy theories bleeding into economics

What is even worse, under the echo-chamber effect of social media, all sorts of unverifiable conspiracy theories have gained wide currency and approval. One notable example is the allegation that the government of an economic power has been tampering with its GDP, inflation, and employment figures to window-dress the domestic economy. As a matter of fact, this absurd way of thinking does not hold water because such large-scale economic data require rigorous statistical methods, involving input from countless independent statisticians and scholars.

All statistical reports must be meticulously reviewed by economists and analysts from around the world, making it virtually impossible to conceal any major frauds. Should investors fall for such conspiracy theories and make irrational decisions, e.g. hoarding commodities or abandoning the stock market altogether, the long-term growth of their investment portfolios could be compromised.

Furthermore, there are also conspiracy theorists who claim that the central bank of another economic power is harbouring a secret agenda to benefit a few at the expense of the majority by manipulating interest rates and the monetary policy. This rumour is nothing but ridiculous. Under strict supervision, the central bank’s operations are extremely transparent, with all its comprehensive reports and meeting minutes made public. Allegations of the so-called secret agenda are not only utterly groundless but simply do not square with the accountability mechanisms in place. If investors are misled into bypassing traditional investment channels or making rash decisions, national financial stability and growth could be jeopardized.

Despite the fact that allegations of insider trading and stock market manipulation are also common, security trading regulators in leading markets are generally dedicated to combating these irregularities. Given the immense scope and complexity of the stock market, it is extremely unlikely that a small number of individuals could control it systematically. While factors influencing market dynamics are many, including economic data, business performance, and geopolitical risks, investors misled by disinformation could lose their faith in the market or even withdraw from investment activities. They may, therefore, miss wealth-creation opportunities in the stock market, particularly those for long-term asset gains.

There is yet another group of conspiracy theorists known as the “gold bugs”. They claim that with the imminent collapse of the traditional fiat currencies (for instance, the US dollar) and the emergence of economic recession or hyperinflation, gold is the only safe-haven asset.

They also believe that central banks and national governments attempt to suppress gold prices through manipulation in order to prevent the general public from abandoning traditional currencies. Although gold is indeed an asset with intrinsic value, it is by no means immune to market fluctuations, nor is it likely to offer the kind of stable returns produced by diversified investments.

This group of conspiracy theorists obviously overlook the reality that gold prices are shaped by a basket of factors, ranging from supply and demand to investor sentiments and the macroeconomic environment. The view that governments suppress gold prices is not only baseless but also dismissive of the transparency of the gold market and the extent to which the market is regulated. Investors misled by this conspiracy theory may become exceedingly reliant on gold. Failing to diversify their investments will only increase their investment risks and limit their potential returns.

Setting the record straight to safeguard against losses  

So long as social media or other platforms keep being the fertile ground for churning out distorted information and the general public continue to have knee-jerk reactions to news, the global economy will remain susceptible to constant risks of deception. By taking advantage of potential panic, conspiracy theorists undermine ordinary people’s logical reasoning and analytical abilities, leaving them as sitting ducks for brainwashing and outrageous rumours. Hence, whenever we come across sensational articles attempting to manipulate readers’ emotions with expressions such as “hot off the press”, “breaking news”, “going viral”, or other similar clickbait headlines, we should be ultra-alert and beware of malicious disinformation.

As the saying goes, “Lies repeated a thousand times will become truth.” That is why critical thinking starts with us. Before forwarding a message, we should ensure the source is reliable, the content is reasonable or objective, and the views are based on facts or science. These basic criteria can help us to sort out signal from noise. Not only can investors benefit from this, but the impact of heavy losses incurred by disinformation on the world’s economy can also be mitigated.

【Note 1】: Cavazos, R., and CHEQ. 2019. “The Economic Cost of Bad Actors on the Internet: Fake News in 2019”.
【Note 2】: Arcuri, M.C., Gandolfi, G., and Russo, T. May-June 2023. “Does fake news impact stock returns? Evidence from US and EU stock markets”. Journal of Economics and Business vol.125-126.

Prof. Yanhui WU
Professor in Economics
Professor in Management and Strategy

企業怎應對氣候變化和自然災害風險

隨着全球溫度變暖，極端炎熱的天氣日益嚴重，乾旱、山火等自然災害發生頻率愈來愈高。同時，溫度上升加劇水的蒸發，導致極端降雨以及颱風更加常見，氣候變化所導致的自然災害不斷增多。

根據中國國家應急管理部資料，2023年全年中國大約有9500萬人受到不同程度的自然災害影響，直接經濟損失超過3000億元人民幣。與過去5年的均值相比，房屋倒塌數量上升將近一倍，直接經濟損失上升13%。今年上半年，中國的洪澇災害和山泥傾瀉事故頻發，超過300人因災死亡或失蹤，緊急轉移安置達85.6萬人次。

極端天氣事件日益頻繁，不僅為人民生活帶來深重苦難和嚴重影響，亦為各行各業帶來了前所未有的挑戰。最近，筆者的研究團隊對中國所有上市公司以及其所有子公司的氣候災害風險進行評估，並研究了各種極端天氣（包括極端高溫、極端低溫、颱風、洪水、乾旱）如何影響這些企業的績效。

資產回報率下降

通過分析約4000家非金融上市公司和這些公司擁有的超過14萬家子公司近20年的資料，我們發現氣候災害對中國上市公司的負面影響很大。根據我們估算，中國每年因各種氣候災害導致企業平均資產回報率（ROA）降低了大約0.62個百分點，而中國企業的ROA在過去20年的均值大約是4.7%。

僅極端高溫每年就會令中國上市企業的ROA降低大約0.37個百分點。我們的研究估計，如果全國各地極端高溫天氣（日平均氣溫超過攝氏32度）增加10天，上市企業的ROA便會降低1.38個百分點。在此研究基礎上，我們還構建了「中國上市公司氣候相關風險指數」來衡量企業受到氣候災害的影響。

須預防供應斷鏈

這些極端氣候災害具體是怎樣影響企業的績效？眾所皆知的是，某些極端災害，例如洪水和颱風等，能夠直接導致生產中斷和設備損壞，從而影響企業的生產能力。在這些災害特別嚴重時，甚至可能導致供應鏈中斷，影響企業的生產計劃。我們的研究進一步發現，即使是那些不具有毀壞基礎設施能力的極端氣候風險，例如極端高溫和低溫，也會顯著影響企業的生產率。這主要是因為在極端溫度下，設備維修成本和應急措施成本都會提高；與此同時，員工的工作效率也會因為工作環境的不適而顯著降低。

此外，很多行業的收入是非常依賴於適合的自然條件。例如，在氣候惡劣時，人們外出需求減少，零售業和服務業的業績都會降低。最後，資本市場也更關注極端氣候災害對企業的影響。在那些自然災害頻發的地區，投資者因擔憂企業前景，從而影響企業在資本市場的表現，並導致其股價波動及融資成本上升等問題。

面對如此巨大的氣候災害成本，企業如何應對？企業如何能綜合提高其應對極端氣候災害的能力，以及降低各種氣候風險的影響？筆者認為，企業應該從氣候風險評估和管理、基礎設施建設、極端天氣監測預警、氣候保險和綠色生產等多方面着手。

首先，企業應該充分評估氣候變化和極端天氣對其生產和業務帶來的影響，以便制定應對預案。具體來說，企業需要綜合分析極端天氣可能對生產、供應鏈、員工生產率、設備營運效率、營收等方面帶來的負面影響，並制定相應對策。例如，採用多元化的供應商體系可以降低供應鏈中斷的風險，確保在面臨極端天氣時能夠及時調整生產計劃，減少損失。

其次，企業應該加強其基礎設施韌性，提高抗風險能力。例如，企業可對建築物、排水設施、應急供電等設施進行加固和升級，確保在極端天氣事件發生時能夠迅速恢復生產。此外，企業在新建工廠或分支機構時，其所在地理位置的氣候相關風險，也應該成為選址時的重要考量。

第三，企業的風險管理部門應該把極端天氣監測和預警納入工作範疇。企業的風險管理部門應該關注氣候變化和極端天氣的動態資訊，加強氣象預警服務，及時採取應對措施，以降低災害對企業的影響。與此同時，企業還需建立應急回應機制，加強與政府、行業協會，以及研究機構的合作，不斷總結應對氣候變化和極端天氣的經驗，調整和完善應對策略，確保企業在未來遇到氣候災害時能夠有效降低損失。

氣候保險減損失

第四，氣候保險也是企業應對氣候變化和極端天氣的重要手段。購買氣候保險可以為企業提供經濟保障，減輕相關損失。例如，市場已有多種保險產品覆蓋極端氣候災害對農業企業的影響。對工業企業而言，產業中斷保險、物業保險等都是其抵禦氣候風險災害的重要保險產品。

最後，除了努力適應氣候變化外，企業也應該以積極行動減緩氣候變化。例如，若有更多企業能在生產過程中推廣環保技術和採用能源效益較高的生產方式，以降低溫室氣體排放，我們將來面對的氣候風險災害將會顯著減少。同時，企業可加強內部培訓，提高管理層和員工對氣候變化和極端天氣的認識，培養綠色生產的意識。

企業也應該積極參與應對氣候變化的行動，與政府、社區、研究機構共同努力，推動減緩氣候變化的工作。這些行動，不僅有助於提高企業自身應對氣候風險時的能力，也會顯著提升其ESG表現，從而更受資本市場的青睞。

何國俊教授
港大經管學院經濟學教授、香港大學賽馬會環球企業可持續發展研究所所長

（本文同時於二零二四年八月七日載於《信報》「龍虎山下」專欄）

國際可持續公共採購的實踐與展望

在2002年8月的可持續發展世界首腦會議上，可持續公共採購（Sustainable Public Procurement）概念首度被提出。此後，這一概念逐漸成為可持續生產和消費領域的關注焦點，並被納入公共採購制度的嶄新政策方向和推動全球可持續發展的重要實踐範疇。聯合國環境規劃署和聯合國經濟與社會事務部更將之視為馬拉喀什全球氣候行動夥伴關係（Marrakech Partnership for Global Climate Action）的關鍵一環。

何謂可持續公共採購？這是一種將環境、社會和經濟效益互相結合的採購策略，旨在通過政府採購活動促進可持續發展。傳統的公共採購主要集中在成本、品質和滿足需求，而可持續公共採購在此基礎之上，更強調環境、社會和經濟效益的平衡，使公營部門可以有效支援可持續發展目標，推動環境保護、社會福利和經濟增長。

在亞洲，日本於1992年率先推出《環保採購法例》，規定所有政府部門必須每年提交相關基本方針、預算和事項。每個採購決策都應建立在明確的數據標準上，以便提供客觀指標，可見日本對可持續採購非常嚴謹和重視。

市民的認同和支持，足令推行環保政策事半功倍。日本政府每年進行公眾諮詢，以便適當調整採購項目。例如當局曾經採購超過4萬個滅火筒，其中99.1%符合官方標準：滅火筒的液體至少40%符合再造物料成份的標準，經過完善的收集和處理流程，同時使用再造塑膠。採購完成後，政府會持續監管，透過追蹤每年符合標準的滅火筒數量，以檢討成效。通過這場大規模的環保公共採購，符合當局要求的滅火筒在本國市場佔比從2006年的46%上升至2013年的67.3%。

歐盟同樣是較早期就施行可持續公共採購，在2001至2010年期間，先後頒布了各項法例來完善制度，並給予成員國足夠靈活性，以致大部分成員國在2012年已經制定了相關條例和國家計劃。過半數成員國已落實可持續採購，當中德國、荷蘭和芬蘭表現最為積極。歐盟亦會以相關條例規範成員國實踐可持續採購。

在採購過程中，歐盟十分重視產品生命周期理念和分析方式，鼓勵廠家公開有關資訊。計算產品生命周期成本，有助於政府在兼顧環境和經濟效益的同時，避免只着眼於價格，而忽視生態效益顯著但初始成本較高的綠色產品或服務。

許多歐盟成員國政府部門都能成功運用產品或服務生命周期成本的概念。以德國漢堡為例，該市的環境部門決定以一個節能燈泡取代兩個普通燈泡的比例，替換所有燈泡。這一措施每年可減少45吉瓦時電力消耗，相當於減少2700噸二氧化碳排放。若每千瓦時電費節省5歐分，這個替換方案就可為漢堡節省22.5萬歐羅的電費開支。

可持續公共採購不僅帶來可量化的實際改變，也能對各個產業鏈產生潛移默化的影響。例如，希臘政府與7個地方政府聯合採購再生紙，再生紙的採購成本因而下降：每包500張紙的售價由2.9歐羅下降至2.34歐羅，減幅約為20%，進而帶動綠色市場的發展。因此，供應商不僅減少了有關開支，同時也提升了產品品質。從源頭推廣綠色產品，足以改變消費趨勢。減少廢物排放，自然也有利於社會環境和生態保護。

內地與香港的實踐經驗

中國政府近年致力於加大綠色低碳產品採購力度，並從建築業着手，提升全民的環保意識。鑑於目前全國建築全過程碳排放超過50億噸，佔碳排放總量一半，而材料的碳排放量尤甚。有見於此，財政部、住房和城鄉建設部、工業和信息化部於2022推出《關於擴大政府採購支持綠色建材促進建築品質提升政策實施範圍的通知》，在包括北京等48個市轄區實施政府採購政策，支持使用綠色建材，以促進建築品質。綠色建材具有節能、減排、安全、便利和可循環再用的優點，足以大幅減低建築時的自然能源消耗及其對生態環境的影響。各城市可先由部分項目開始施行，累計一定經驗後逐步擴大範圍，目標於2025年落實全國政府採購工程項目政策。

香港亦以促進環境保護和可持續發展為目標，積極推廣綠色採購，鼓勵在工務工程項目上使用可循環再造及環保材料。基於綠色材料成本可能高於傳統材料，政府要求各部門評估，並且替企業承擔因使用綠色材料而導致的額外成本，通過經濟誘因鼓勵企業予以採用。

在監管方面，特區政府訂定在工務工程項目中使用綠色材料的政策和指導原則，為採購流程提供了清晰的框架，並設跨部門工作小組，負責監督綠色規格的採用、審查常用產品和服務的採購，以及推廣綠色材料在工務工程項目中的使用。除此之外，當局採用了試用、早期實施階段和全面實施優先使用的3階段流程，確保新回收和其他綠色材料在技術上和在市場上的可行度。這一系列舉措不僅有利於減少廢物產生，還能推動企業採取更環保的生產和營運方式，從而提升其環境、社會及管治的表現。

企業作為政府可持續採購的供應商和合作夥伴，扮演着至關重要的角色。放眼未來，可持續公共採購可以使企業不斷推動綠色產品和服務的創新，以滿足政府部門在採購過程中對環保、節能、社會責任等方面的要求。這將惠及企業的競爭力，並為實現可持續發展目標作出貢獻。

為了滿足可持續採購的要求，企業將更加關注綠色供應鏈管理，確保其產品和服務在整個生命周期中盡量減少對環境和社會的影響。這包括對原材料、生產過程、運輸、銷售和回收等環節的全面考慮，以降低資源消耗和污染排放。隨着可持續公共採購理念的普及和政策推廣，企業將有機會拓展新的市場領域，包括綠色建築、節能交通和可再生能源等，既為企業帶來蓬勃商機，亦促進社會可持續發展，締造雙贏局面。

章逸飛博士
港大經管學院經濟學高級講師

江梓茵女士
港大經管學院本科生

葉梓淇女士
港大經管學院本科生

（本文同時於二零二四年八月一日載於《信報》「龍虎山下」專欄）

Perhaps unbeknownst to the locals, Hong Kong is already entering the Web 3.0 era. Not only has the SAR Government been actively promoting its development in recent years, but in May 2024, Cyberport also announced the establishment of the “Web 3.0 Investors Circle” under Cyberport Investors Network to facilitate related investment. These progressive initiatives hinge on web security and protection for online consumers and investors.

How will the advent of Web 3.0 impact the ways people live and invest? The virtual-asset market is the holy grail for financial cities around the globe. With its status as an international financial centre, Hong Kong is set to secure its place in the market. In addition to supporting the sector’s development, the SAR Government, for its part, should formulate a custom-made regulatory framework.

Beware of virtual-investment traps

Virtual assets are part and parcel of the Web 3.0 ecosystem. Recent years have seen an upward trend of virtual-asset scams. Data for December 2023 of the Anti-Deception Coordination Centre of the Hong Kong Police Force illustrates that the top three most common investment frauds are investment fraud, employment fraud, and telephone fraud, with investment fraud showing a soaring rate of increase (see Figure).

The recent occurrence of a series of serious fraud cases in the virtual-asset market has been cause for alarm for some investors. The massive financial fraud case involving JPEX in 2023 turned out to be a crash course in virtual-asset investment for Hongkongers. The Securities and Futures Commission thus regularly publishes a list of suspicious virtual-asset trading platforms and a list of service providers applying for a licence to operate a virtual-asset trading platform.

Advantages of new financial products

On a traditional financial market, investment activities rely on interpersonal interaction. In order to avoid imitation by competitors, companies have the right to refuse disclosing details of their business models, leading to asymmetric information. Owing to high-efficiency operations and complexity of the modern-day financial market, it is necessary to integrate contractual trust into investment relations, which is the trust in the other party to fulfil their contractual obligations. A contract enables investors to accurately evaluate risks and returns, assisting all parties in assessing risks, including potential profits and losses of trustees.

The rapid advancement of technology has also brought about earth-shattering changes to the financial sector. As an emerging financial technology, decentralized finance (DeFi) can provide financial services without relying on traditional financial intermediaries, offering more cost-effective and safer alternative solutions to the conventional financial system. DeFi retains various traditional financial services, including exchange, lending, insurance, and asset management, yet it is unbeholden to any central authority. In addition, the trust mechanism of DeFi is based on smart contracts, which are program codes used to formulate contracts. By minimizing costs and potential human errors, it helps to address inadequacies of the conventional financial system.

Overnight change from summer to winter

Thanks to high expected returns and flexible investment options, DeFi became the fastest growing sector of crypto assets from 2020 to 2021, referred to as the “DeFi Summer”. The market capitalization of DeFi products and services skyrocketed from US$4.5 billion in June 2020 to US$166.5 billion in November 2021, marking a historical high. Meanwhile, the total number of crypto-asset wallets leaped from about 200,000 to around 5 million (see 【Note 1】).

However, the bankruptcy of major crypto-asset service providers one after another revealed how easily retail investors could be lured by the promise of unrealistically substantial returns. The complete anonymity of cryptocurrencies makes them exploitable by criminals, progressively exposing the underbelly of the market. As a consequence, the negative shift in investor sentiment ushered in the “Crypto Winter”.

The price of crypto assets plummeted by 75% from the peak in late 2021 while Defi’s market capitalization fell to US$32 billion by the end of 2022 (see Figure). Nevertheless, DeFi so far represents but a relatively small portion within the crypto-asset ecosystem. With its market value standing at US$113.7 billion as of March 2024, DeFi merely accounted for 4.1% (US$2.73 trillion) of the total market capitalization of crypto assets.

Figure Market capitalization of crypto assets and DeFi

Source: Statista and Trading View; authors’ calculations

Inherent flaws and potential risks of DeFi

There is evidently a lack of comprehensive investor-protection measures for the DeFi market. While DeFi and the crypto-asset market have been undergoing rapid growth, regulatory measures have yet to be standardized across countries because of their cross-border nature. Characterized by its access to high leverage from lending and trading platforms (see 【Note 2】), DeFi enables investors to purchase more assets after making an initial investment. However, when it becomes necessary to decrease the debt, due to investment loss or collateral depreciation, investors would be forced to sell their assets, exerting further downward pressure on prices. That explains why investors suffered huge losses when the DeFi market crashed in 2022.

At the same time, the cross-border nature of blockchain has also given rise to compliance and legitimacy issues while there is a lack of cohesion in legislation and law enforcement in different jurisdictions. The worldwide nature of DeFi and the crypto-asset market means that DeFi entities, participants, and related activities often straddle national borders, with varying rigidity of regulatory standards among them. Operators and service providers failing to comply can thus seek to take advantage of loopholes and relocate to countries with minimal or zero regulation. This also makes it difficult for financial institutions to gather relevant information, posing a big hurdle to investor protection.

The absence of standardized definitions and classifications of crypto assets has created enormous challenges for the world’s financial regulators in analysing and verifying the authenticity of different crypto-assets products. Given the immutability of smart contracts, any errors or loopholes in the contract’s programming code could have dire consequences. Besides, legal recourse is elusive in the event of disputes derived from financial smart contracts.

Regulatory approaches and investor protection

With regard to DeFi and the entire virtual-asset market, financial authorities around the world are upholding the principle of “same activity, same risk, same regulation”. By affording the same treatment to business activities of the same nature and with the same risk, this practice ensures fair competition for all companies. Governance issues often arise with DeFi agreements which claim to be decentralized but are in fact centralized, resulting in false claims and moral hazards. All DeFi platforms have a central management framework which outlines how to formulate strategies and operational priorities. The centralized element, based on governance token holders (usually platform developers), can serve as the basis for recognizing DeFi platforms as legal entities similar to companies.

In addition, international organizations have made specific recommendations regarding the unique nature of the DeFi market to minimize financial stability risks. The Financial Stability Board and the Organization for Economic Cooperation and Development stress the importance of constant monitoring of Defi’s development and stringent prevention of its spillover risks. The International Organization of Securities Commissions requires key participants with significant control of or impact on DeFi arrangements to resolve conflict of interests, major risks, and disclosure-related problems. Since DeFi is still in its infancy, there have been few regulations targeting DeFi activities. A relevant example is the “DLT Foundations Regulations 2023” introduced by the Financial Services Registration Authority of the Abu Dhabi Global Market in 2023, consisting of provisions related to DeFi.

The Hong Kong SAR Government embraces the legitimacy of virtual assets and their role in the financial sector. Service providers are welcome to establish operations here, ensuring they have timely and necessary preventive measures in place. According to Mr Enoch Fung, CEO of the Hong Kong Academy of Finance, emerging technologies related to DeFi and the metaverse, which are inextricably linked to the growth of virtual assets and Web 3.0, are likely to bring opportunities to the financial services industry. To market participants, a clear regulatory framework, powerful financial infrastructure and networks, and people with blockchain-related skills are crucial to the future prospects of DeFi and the virtual-asset market in Hong Kong.

【Note 1】 Hong Kong Institute for Monetary and Financial Research. “Decentralised Finance: Current Landscape and Regulatory Developments”. HKIMR Applied Research Report No.1/2024.

【Note 2】 Aramonte, S., Huang, W., & Schrimpf, A. （2021）. “DeFi risks and the decentralisation illusion”. BIS Quarterly Review.

Dr. Maurice K.S. Tse
Principal Lecturer in Finance

Ms. Vivian Cheung
HKU SPACE College Senior Lecturer

Mr. Clive Ho
HKU SPACE College Lecturer

(This article was also published on July 24, 2024 in the “Lung Fu Shan” column of the Hong Kong Economic Journal)

Over the past few decades, thanks to its prime geographical location, open access to international trade and investment, robust banking sector, sound regulatory framework, and vibrant stock market, Hong Kong has facilitated the demand for local financial services from investors and foreign companies. The city has thus successfully evolved into an international financial centre.

Pressing need for financial adjustments amid geopolitical challenges

Under the influence of the Linked Exchange Rate System, Hong Kong’s money supply and interest rate movements mostly mirror the US Federal Reserve’s monetary policy decisions (see Figure 1).

Figure 1 Hong Kong monetary base and money supplies M1, M2, M3 (HK$ in trillions)

In other words, to maintain the stability of Hong Kong’s exchange rates, the SAR Government has relinquished its monetary policy autonomy. This in turn compromises its ability to address economic fluctuations and the potential risk of asset price inflation. In addition, the exchange rate of the Hong Kong dollar to other currencies will also fluctuate with the US dollar (see Figure 2), thus influencing the SAR’s import and export performance.

Figure 2 Trade-weighted exchange rate and HK-RMB exchange rate

At the turn of the 21st century, against the backdrop of globalization and its integration with the Mainland stock markets, Hong Kong continued to lure investors with the help of its status as the main gateway to China for foreign investments. This is evidenced by the rising trends of the SAR’s Hang Seng Index, stock trading volume, and market capitalization (see Figure 3).

Figure 3 Hang Seng Index

Furthermore, Hong Kong’s role as China’s window for international liquidity has also contributed to the growth in loans and advances. Hong Kong is well-equipped to provide intermediary services for Mainland enterprises seeking international financing as well as for foreign companies looking to invest in the Mainland. This has been conducive to the establishment of local lending platforms and expansion of cross-border financing activities. The sophisticated legal system and ideal regulatory environment have boosted the confidence of lenders, thus fostering an increase in loans and advances. These financial services have in turn supported the development of Hong Kong’s trade, real estate, and manufacturing industries.

Hong Kong boasts the status as an international financial centre, a strategic location as the bridge to Mainland China, and the constructive role of the Hong Kong Monetary Authority and the HKEX as a twin engine of the debt securities market. Hence, securities issuers and investors including multinational corporations and financial institutions have been flocking to the city in search of funding for business expansion, acquisitions, refinancing, etc. This has enabled Hong Kong to become a major debt issuance centre for the Southeast Asia region (see Figure 4).

Figure 4 New issuances of HKD debt securities (HK$ in billions)

It is noteworthy that recent years have seen China-US geopolitics pose a potential impact on Hong Kong’s standing as an international financial centre. The local financial market has undergone consolidation in recent years, as evidenced by the relatively steep fall of the total market value and total funds raised in the stock market. The extent of adjustment by the financial sector and the future development of Fintech and asset management will determine whether Hong Kong can reinforce and maintain its status as a leading international financial centre in Asia.

Social media-induced change in tourist spending patterns

With its historical development as a city where East meets West, its accessible transport infrastructure, and its reputation as a shopping paradise and international convention and exhibition centre, Hong Kong has been a preferred destination for leisure and business travellers from all over the world for decades, fuelling the growth of the local tourism industry. These factors are reflected in the long-term upward trend in inbound visitors, who are primarily from the Mainland (see Figures 5–6).

Figure 5 Monthly overnight visitor arrivals (in thousands)

Figure 6 Monthly same-day visitor arrivals (in thousands)

Since the 2010s, however, the emergence of social media has made it more convenient for visitors to obtain travel information about Hong Kong and to share their experiences. Fierce competition from neighbouring regions has also effected a gradual change to the travel and consumption patterns of inbound visitors.

From the mid-2010s onwards, per-capita spending of visitors to Hong Kong began to show an adverse trend mainly due to a continued decline in per-capita shopping expenditure (see Figures 7–8).

Figure 7 Per-capita overnight visitor spending (HK$)

Figure 8 Per-capita same-day visitor spending (HK$)

In the aftermath of the social incident in 2019 and the COVID-19 pandemic in 2020, which dealt a serious blow to the local tourism industry, Hong Kong has yet to see a return to the peak levels of visitor arrivals and per-capita spending recorded during the 2010s.

It is foreseeable that Hong Kong’s tourism industry is bound to face challenges, ranging from its image and positioning, the attractiveness of tourist facilities and services to global travellers, to industry policy and management structure, and the international political environment. For the industry to get back on track, a concerted effort between the government and the general public is indispensable.

Dr. Chi Pui Ho
Lecturer in Economics

(This article was also published on July 18, 2024 in the “Lung Fu Shan” column of the Hong Kong Economic Journal)

In face of a mountain of data, how best to dissect the macroeconomic situation of Hong Kong? With the prevalence of data science today, different data and methods are adopted by individual researchers, together with different reference points for comparison, ultimately leading to a range of divergent conclusions. In order to get a full picture of economic development, it is essential to begin with economic time series, augmented with clear diagrams and tables. By applying relevant theories, we can chart the growth trends and forecast future prospects in various economic sectors. Due to the limited space of this column, I will concentrate on analyzing the historical performance and future challenges of the property market, utilizing graphs based on market data. In the next article, I will delve into the financial sector and tourism industry.

Long-term upward trend of housing prices

It is widely acknowledged that the local residential property market has undergone rapid growth in the past few decades. Despite periods of fluctuation, both housing demand and property prices have kept increasing in the long term. Figure 1 shows that from its low point in 2004 to its peak in 2021, the overall housing price level surged by six times. One of the driving forces behind the property price hike was economic growth. As an international financial centre and business hub, Hong Kong has attracted a large inflow of foreign enterprises and talent, creating a strong housing demand that has kept pushing property prices up.

Figure 1 Residential property price index

Another rationale behind the price rise is limited land supply. With a population exceeding 7.5 million and still on the increase, Hong Kong is plagued by not only space shortage for new housing developments but also a decline in the number of housing units completed (see Figure 2). Local housing prices have been soaring due to undersupply of housing units and intense competition among buyers. For decades, the homeownership rate has remained at around 50% (see Figure 3).

Figure 2 Total completions of residential flats

Figure 3 Share of domestic households by housing type (%)

During the 2010s, to stem the housing price hike driven by a red-hot market, the SAR Government introduced several rounds of so-called “spicy measures” and regulatory responses aimed at curbing housing demand. Subsequently, residential transactions shrank significantly (see Figure 4). However, all these “harsh measures” were scrapped in 2024.

Figure 4 Number of sale and purchase agreements of flats

Market fluctuations could result from such factors as interest rate movements, market sentiment, government policy, etc. In the long run, economic growth and land undersupply are bound to drive up housing prices in Hong Kong. Given that housing market development is still a major economic growth engine, the SAR Government must ensure that steep property prices do not put homeownership beyond the reach of the general public while also minimizing the risk of a long-term economic recession similar to the one triggered by the housing market crash in 1997.

Non-residential market under near-term pressure

As for the non-residential property market, Hong Kong being an international financial centre offers a string of advantages, ranging from a low tax-rate regime, a sound legal system, to a transparent regulatory framework. These have been a magnet for attracting Mainland corporations, multinational companies, and financial institutions to expand their businesses in the SAR, thus lifting the demand for office space.

In terms of retail premises, retailers from around the world are drawn to set up shop in Hong Kong by its strategic location as a gateway to the Mainland and Southeast Asian markets. Inbound visitors (especially those from the Mainland) are instrumental in stimulating demand for retail outlets, particularly in shopping hot spots such as Causeway Bay and Tsim Sha Tsui. In addition, the high income of Hongkongers is also conducive to the development of retail premises for high-end and luxury brands.

Owing to limited land supply and high property costs, private flatted factories that accommodate light industrial activities, including manufacturing and warehousing, provide affordable and convenient premises for small and medium enterprises (SMEs), creative and cultural industries, innovation and science enterprises, etc. All these factors contribute to the demand and long-term price rise in the non-residential market (see Figures 5–7).

Figure 5 Private offices price and rental indexes

Figure 6 Private retail price and rental indexes

Figure 7 Private flatted factories price and rental indexes

With the continued surge in non-residential property prices, companies (particularly SMEs) will find the property rent more unaffordable than ever. Moreover, deteriorating business environment due to geopolitics, changing consumption pattern among Mainland visitors, and intense competition from the Guangdong-Hong Kong-Macao Greater Bay Area have put pressure on non-residential property prices in recent years. Amid this backdrop, Hong Kong has experienced increased vacancy rates in both offices and retail outlets (see Figure 8).

Figure 8 Total vacancy rate of non-residential properties (%)

Dr. Chi Pui Ho
Lecturer in Economics

(This article was also published on July 17, 2024 in the “Lung Fu Shan” column of the Hong Kong Economic Journal)

Ever mindful of the impression the Pearl of the Orient gives to the outside world, Hong Kong people naturally pay close attention to all sorts of international league tables. What’s most encouraging is that, in a tiny place like Hong Kong, local higher-education institutions fare impressively in various global university rankings, rivalling top universities in Europe and the US in academic performance. While Hongkongers are relishing these achievements, an education league table focusing on English language skills is hardly in the public eye.

According to the EF English Proficiency Index published in late 2023, among the surveyed 113 countries and regions (excluding the UK, the US, Canada, and Australia), Hong Kong ranks 29th and is in 4th place among 23 Asian countries and regions, lagging far behind Singapore, which ranks 2nd on the global list and top in Asia. In the Index, the SAR also trails behind the Philippines, which ranks 20th worldwide and 2nd in Asia, as well as Malaysia, which ranks 25th worldwide and 3rd in Asia (see 【Note 1】).

To Hong Kong, once the crown jewel of the Commonwealth and now striving to be a leading international metropolis, the above results are of course less than ideal. What is most worrying is that English proficiency among the 18–20 age group has been sliding and that is also my impression as a teacher at The University of Hong Kong. Among undergraduates studying economics, business administration, and finance, many local students keep quiet in class and even struggle to convey their meaning in assignments due to low English proficiency. As it appears, they fall behind international students and some counterparts from the Mainland.

Whether an individual can be regarded as talented or a city as a mecca of some sort cannot be determined by English proficiency alone. Among developed economies other than Hong Kong, Singapore and Japan stand out as two distinctly different examples in Asia.

“Singlish”: one of a kind

I am not the first to say tongue in cheek that Singaporeans have their localized way of speaking English. Nor is such a comment meant to be derogatory at all. In an episode of “The Story of English”, a popular Emmy-winning TV series launched by the BBC in 1986, the future of the English language in Asia was explored and Singaporean English was referred to as “Singlish”. Finding this a disgrace, many Singaporeans were much offended. In a public speech in 1999, Lee Kuan Yew, the founding prime minister of Singapore, stressed the importance of speaking and writing standard English so that “we can understand the world and the world can understand us” (see 【Note 2】).

The English attempt to take the mickey out of the use of Singlish galvanized Singaporeans into action to improve their English standards. So government officials were required to attend training courses to brush up on standard English. The Straits Times started hiring English experts as columnists to promote the learning of standard English. The engineered effort resulted in a nationwide English-learning trend. Meanwhile, as the English language continued to localize, Singaporeans gradually got used to using Singlish as a colloquial style of English. Even such vibrant Singlish phrases as “car here, car there” have found their way into the poems written by local cultural figures.

Amid a multitude of dialects in use and without a dominant national tongue, the Singaporean government has established a language framework where Putonghua is primarily used for domestic communication while English is used for international communication. This bilingual approach has been instrumental in the country’s economic rise. In the wake of the COVID-19 pandemic, both Singapore and Hong Kong have become global knowledge exchange hubs. As I have been told by various famous scholars, they feel more at home in the linguistic environment of Singapore.

Japanese English: silence is golden

Unlike the Singaporeans, who have the drive to speak English, most Japanese people do not speak the language. The Japanese are well known for their civility and meticulousness. More often than not, travellers are impressed by the hospitality and attentiveness of the local people. Foreigners, however, may find it an uphill battle to overcome the language barrier. At drugstores located in big cities, where many Chinese students work as part-timers, communication is not a problem. Otherwise, be it at hotels or restaurants, it is not easy to find someone who can speak decent English. On a business trip to Osaka in the depth of winter one year, I asked for directions at a train station. Five or six staff members there came out one after another. After taking a look at the address in my hand, they all smiled and spoke the same phrases in Japanese, leaving me completely clueless all along. Finally, a helpful gent at the station braced the heavy snow and insisted on walking with me all the way to my destination for the next 10 minutes or so before heading back by himself.

In fact, industrial cities like Osaka aside, even in Kyoto, an ancient capital and world-renowned tourist city, only a few Japanese people can communicate in English. As a customer enters a quaint old shop in enthusiastic anticipation, a female shop assistant will diligently introduce the products in Japanese. Even though seeing the customer does not understand at all, she will nonetheless go on explaining with patience, perhaps hoping that “sincerity can move even metal and stone” — that after listening to Japanese some more, coupled with the help of non-verbal communication, the customer will eventually understand what she means. Having said that, I do not find it worthwhile to apply such a craftsman-like spirit to luring a potential customer.

Why are there so few English speakers among the Japanese? I have posed this question to my Japanese friends. The most common explanation is that the Japanese and English languages are like chalk and cheese in their differences. That is why they find it so hard to learn English.

This reminds me of a story in the biography of mathematician Kunihiko Kodaira, the first Japanese recipient of the Fields Medal. After the Second World War, to resolve some mathematical problems, he accepted the invitation to be a visiting scholar at the Institute for Advanced Study in Princeton, US. No matter how hard he tried, he simply could not express himself well in English. During class, he only wrote equations and proofs on the blackboard, without giving students any oral explanation. To everyone’s surprise, the non-verbal teaching approach was a great hit among students because they often found it hard to follow the American and English professors who spoke too fast. In his biography, Kodaira mentioned an amusing anecdote about Shinichiro Tomonaga (1965 Nobel prize in physics laureate), a visiting Japanese scientist to the US at the time. In a desperate bid to improve his English, Tomonaga was said to replace his teeth with a full set of American-made dentures.

Even geniuses like Kodaira and Tomonaga could not speak English, let alone mere mortals among the Japanese! Apparently, the two languages are really a world apart from each other. However, I find this explanation hard to accept because many of my Japanese friends speak fluent English. At the end of the day, the main reason is that the economic return on mastering English is low in Japan. Given the much greater importance of exports to the Japanese economy compared to imports, coupled with the high quality of domestic products, the Japanese have little interest in foreign products. Nor are Japanese parents keen on sending their children to study overseas. Hence they never get to develop an affinity with English. Furthermore, since the Meiji Restoration, Japanese elites have been hard at work translating Western scientific knowledge as well as the latest trends in arts and culture into Japanese, expediting the pace of localization on these fronts. As a result, despite the inability among the general public to speak fluent English, Japan is one of the countries worldwide most steeped in Western culture. Not only has it been a cradle of talent in science and technology, but it has also nurtured numerous maestros in music, architecture, and arts who have taken the West by storm.

Chinglish: a mix of Chinese, English, and local flavours

Singaporeans bear resemblance to the Japanese in having an extreme attitude towards English. The former takes the language on board completely, popularizing its daily use to the extent of creating a hybrid known as Singlish. In contrast, the latter gives English a wide berth, relying on Japanese elites to localize the world’s advanced science and arts. In comparison, spoken English in Hong Kong is much more of a mixed bag, with all sorts of regional accents. Be it standard English with a London Oxbridge accent or New York-Boston accent, English with a South Asian or Southeast Asian accent, or that with a Jiangsu, Zhejiang, or Shanghai accent, or even a local Cantonese accent, you name it, we’ve got it!

While a diverse language environment is a good thing, without a linguistic mainstay and combined with the dilution effect of daily life, a jumble of styles can be confusing. In the last century, as an important pathway to upward mobility, English learning was popular among Hong Kong people. Thanks to tireless encouragement from bilingually proficient cultural figures from the older generation, more and more locals have taken to English learning. The environment for learning English today is markedly better than before. Regrettably, without motivation or role models, young people who are unwilling to work hard to brush up their language skills will only find it hard to master English.

Nowadays, while Westerners find Hong Kong too Westernized and Mainland Chinese find Hong Kong too Chinese, Hongkongers find our city not localized enough. To truly embrace the unique characteristics of East meets West, language learning is the place to start. It behooves various sectors of the community to support young people to become bilingual in Chinese and English.
Language learning is not a zero-sum game. Only with the right blend of bilingualism, coupled with a solid foundation in Cantonese, will Hongkongers be able to enjoy an all-embracing advantage all of their own.

【Note 1】: https://www.ef.com/assetscdn/WIBIwq6RdJvcD9bc8RMd/cefcom-epi-site/reports/2023/ef-epi-2023-english.pdf
【Note 2】: https://www.nas.gov.sg/archivesonline/data/pdfdoc/1999081404.htm

Professor Yanhui Wu
Associate Professor in Economics, Management and Strategy

Further to our discussion in this column last week regarding cash dividend distribution among A-Share listed companies and the growing trend in recent years, below is a review of the background factors and related taxation issues.

Legislating to keep up with the times

In view of the general apathy among A-share companies towards distributing cash dividends in general, the China Securities Regulatory Commission (CSRC) has, over the years, introduced various regulations to guide, encourage, and require listed companies to pay dividends. The “Measures for the Administration of the Listed Company Issuing New Shares” were promulgated in 2001 to mandate companies issuing new shares to provide an explanation if they have not declared dividends within the past three years. Released in 2004, the “Provisions on Strengthening the Protection of the Rights and Interests of the General Public Shareholders” specifically prohibit listed companies that failed to distribute profits in cash in the last three years from issuing additional shares and convertible bonds and from allotting shares to the company’s existing shareholders. Aimed at suitably protecting the interests of small and medium investors, this marks the CSRC’s first mandatory requirement for listed companies to pay dividends.

Announced in 2006, the “Administrative Measures for the Issuance of Securities by Listed Companies” stipulate for the first time that the profits accumulatively distributed in cash or stocks should not be less than 20% of the average annual distributable profits realized within the last three years. The “Decision on the Revision of Several Regulations Regarding Cash Dividends” promulgated in 2008 makes cash dividend distribution mandatory and raises the percentage to 30%.

Measures for cash dividends released by the CSRC in 2012, 2013, 2015, and 2022 underline the prescriptive nature of dividend distribution and are thus conducive to promoting this practice. Promulgated in 2013, the “Guideline No. 3 on the Supervision and Administration of Listed Companies ― Cash Dividend Distribution of Listed Companies” (hereinafter “Cash-Dividend Distribution Guideline”) makes it mandatory, for the first time, for independent board members to put forward their independent views on cash dividends. Besides, securities regulators are required to pay special attention to any irregularities about a company’s cash dividend distribution, e.g. withholding such distribution in spite of readily available funds or substantial dividends, or cash dividend payouts excluded in the company’s Articles of Association. The Guideline enables the board of a listed company to implement a differentiated cash-dividend-distribution policy based on comprehensive considerations of such factors as the company’s industry characteristics, development stage, its business model, profitability, and any arrangements for major capital expenditure.

．If the company is at a mature stage of development and has no arrangements for major capital expenditure – the proportion of cash dividends (i.e. cash dividends divided by the sum of cash dividends and stock dividends) should account for at least 80% of the profits distributed in the corresponding period;

．If the company is at a mature stage of development but has arrangements for major capital expenditure – the proportion of cash dividends should account for at least 40% of the profits distributed in the corresponding period;

．If the company is at a growing stage of development and has arrangements for major capital expenditure, the proportion of cash dividends should account for at least 20% of the profits distributed in the corresponding period;

．If it is difficult to identify the company’s development stage and the company has arrangements for major capital expenditure, then the provisions in the foregoing paragraph shall apply.

The “Notice on Encouraging Mergers, Acquisitions, and Restructuring, Cash Dividends, and Share Repurchase of Listed Companies” rolled out in 2015 encourages, for the first time, listed companies to distribute interim dividends. The 2002 Cash Dividend Distribution Guideline requires the issuer and sponsoring organization to give a reasonable explanation if the cash dividends paid by their listed company are low.

The latest Cash-Dividend Distribution Guideline revised in 2023 mandates that companies prioritize cash payouts as a form of profit distribution and incorporate a cash-dividend distribution policy into their Articles of Association. The proportion of cash dividends in the distributed profits for the corresponding period, as specified in the 2013 Cash-Dividend Distribution Guideline, still applies. In accordance with the Guideline, listed companies are required to disclose the reasons behind their failure to pay dividends. Apart from providing specific reasons for low cash dividends, companies must also disclose their improvement measures to be taken to boost investor returns. This approach aims to urge companies with high capital investment but low dividend payouts to lift their cash dividends. The Guideline also stipulates that, when reviewing the annual profit distribution plan at their annual shareholders’ meetings, listed companies can deliberate and approve the conditions, maximum ratios, maximum amounts, etc. for cash dividends in the following interim period. This facilitates the establishment of the practice of distributing interim dividends and increases the frequency of cash payouts. In addition, the Guideline no longer requires independent board members to provide their individual views, thereby streamlining the company’s internal process of cash-dividend distribution.

Issued in April 2024, the “Guideline in Promoting the High-quality Development of the Capital Markets, Strengthening Regulation, and Forestalling Risks” demands tightening the regulation of cash dividends on the part of listed companies. It requires limiting major shareholders’ reduction of share capital and issuing special-treatment risk alerts for companies that have not distributed dividends or have maintained low dividend ratios for an extended period. The regulation of cash dividend distribution is thus escalated once again.

All in all, the CSRC has been paying increasing attention to and strengthening the regulation of cash dividend distribution of A-Share companies. Such a degree of attention and requirement is rare among regulators worldwide, testifying to the regulator’s effort and determination to protect the interests of public shareholders. As of May 2024, the number of retail investors in the A-Share market stood at 220 million (see 【Note】). It helps to prevent listed companies from using listing as a means of profiteering. Cash-dividend policy has become a matter calling for serious attention for most listed companies.

Different dividend tax rates for different markets

It is noteworthy that different rates of profit tax apply to different investors in the A-Share market and the Hong Kong stock market and to dividends derived from different investment methods. For retail investors holding accounts at the Shanghai and Shenzhen stock exchanges, the tax rate on cash dividends is determined by the length of shareholding, e.g. at a rate of 20% for shareholdings less than one month long and at a rate of 10% for shareholdings between one month and less than a year. Those with shareholdings exceeding one year are exempted from tax on the dividends received.

Investors who invest in stocks (H shares and non-H shares) listed in Hong Kong via the Southbound Stock Connect are subject to a 20% income tax on cash dividends received. Investors with a Hong Kong Stock Exchange account are subject to a 10% income tax for dividends earned from A-Share stocks via the Shanghai-Hong Kong Stock Connect or the Shenzhen-Hong Kong Stock Connect. Currently, the treatment of dividend income varies among A-Share and Hong Kong market investors. Mainland investors face a higher dividend income tax when investing in H shares via the Southbound Stock Connect. The advantage of a higher pre-tax dividend yield due to the lower valuation of H shares issued by Mainland companies in the Hong Kong stock market is thus substantially offset. This scenario is not conducive to northbound inflows of funds to the Hong Kong stock market.

Different investors and the same investor using various methods to invest in a company’s stock are subject to different dividend tax rates. This not only influences the investors’ evaluation of dividend yields but may also affect the cash-dividend distribution policies of companies that are simultaneously listed on the A-Share market and the Hong Kong stock market.

Proposed improvements to taxation policy

Based on the above taxation analysis, we believe that it behoves regulators to adjust related tax policies in order to minimize or eliminate tax inequality, i.e. different tax rates levied on local and cross-border investors due to different investment account locations and different investment methods.

As it stands, protecting investors’ interests by guiding listed companies to distribute cash dividends through the CSRC’s regulatory requirements is doing more good than harm. In the long run, the decision to whether or not distribute cash dividends and to determine dividend payout ratios should be left in the hands of the listed companies, subject to approval by shareholders’ meetings. When the opportunity is ripe, regulators could consider relaxing or scrapping the dividend-distribution requirement for young innovation and technology companies that have research and development (R&D) expenditure reaching a certain proportion and have less cash holdings. This will serve to facilitate effort by promising companies to build up sufficient funds so that their market competitiveness can be maintained through R&D input and capital investment.

Note: https://www.news.cn/mrdx/2024-01/25/c_1310761978.htm

Professor Hong Zou
Professor of Economics

Mr Zike Shen
Masters Students at HKUBS

(This article was also published on July 3, 2024 in the “Lung Fu Shan” column of the Hong Kong Economic Journal)

A-Share listed companies in the Mainland have recently announced the annual results and profit distribution schedules of the previous year. According to statistics of the China Association of Public Companies, as of 2 May 2024, there were 3,859 listed companies planning to distribute cash dividends amounting to RMB2.24 trillion in 2023, representing a 5.16% growth over 2022. This can be largely attributed to the policy guidance provided by the China Securities Regulatory Commission (CSRC). The analysis below gives a clear overview of cash-dividend distribution by A-Share listed companies.

Incentives for distributing dividends

As a profit-making tool, stocks create benefits for investors when a company’s stock price goes up or when a company pays dividends. In a mature stock market, many listed companies distribute cash dividends on an interim or even quarterly basis, providing investors with regular income and boosting their confidence. On the other hand, through the distribution of dividends, companies return cash beyond their investment needs to shareholders, thus avoiding the waste of free cash flow due to inefficient empire building. As a result, the problem of management agency can be mitigated (see Note 1).

Investors usually expect the company they invest in to gradually increase its cash payouts. That is why a cash-dividend distribution policy, once implemented, is regarded as a long-term commitment. Any arbitrary reduction or suspension of cash dividends could trigger investors’ massive sell-off of the company’s stock because of concerns about its future, causing the stock price to plummet.

Given investors’ uncompromising expectation of cash dividends, company management tend to adopt a more conservative cash-dividend strategy. This also explains why corporate payout ratio and dividend per share have remained consistent with minimal change within a short period, e.g. two consecutive years. Stability of this nature is known as “dividend stickiness”. On the contrary, should company management significantly raise or lower dividends all of a sudden, it would inevitably signify to the market that they either have great confidence in or are deeply worried about the company’s future development.

Our research study illustrates that long-term dividend-paying companies in the A-Share market have also registered remarkable stock price performance. Over the period from 2008 to 2023, there were 17 listed companies in the market offering cash dividends on a regular basis. The buy-and-hold return excluding cash dividends between 2009 and 2023 was found to have outperformed that of the Shanghai Stock Exchange Composite Index while the excess stock return calculated by the geometric mean was at 6.1% per annum. This goes to show that listed companies able to sustain stable cash-dividend distributions can offer investors handsome capital appreciation even in the secondary market.

For this reason, dividend-to-profit ratio, dividend yield per share (calculated as cash dividend per share divided by share price), and the stability of these indicators are crucial factors for investors when selecting stocks to invest in.

Dividend distribution trend yet to be set

Despite the importance of cash payouts to investors and investor-centred listed companies, regular distribution of dividends is not traditionally common among A-Share listed companies. This phenomenon can mainly be put down to the difficulty of initial public offering (IPO) and seasoned equity offering (SEO), both being subject to approval by the CSRC in a relatively complex process. According to data of East Money, the refinancing scale of A Shares in 2023 shrank by 25% year on year while directed share issues in 2023 hit a new decade low.

Furthermore, widely-held listed companies in the US markets are generally disinclined to issue new shares to avoid diluting the voting rights of major shareholders. The concentrated shareholding structure among listed A-Share companies, however, is characterized by a higher percentage of ownership in the hands of major shareholders. Hence the dilution of voting rights by new shares is less of a concern. Broadly speaking, listed companies tend not to distribute their hard-earned cash as dividends and would prioritize allocating the cash for business operations and investment purposes. As mentioned above, based on the statistics of our study, there are currently only 17 A-Share listed companies that have offered regular cash dividends in the past 16 years.

Apart from distributing cash dividends, listed companies can opt to pay cash to participating investors by repurchasing their stock shares in the market (see Note 2). A buyback of shares is usually conducted when a company’s stock price is low so as to signify to the market that its value is underestimated and to boost the company’s stock price. Since investors do not expect listed companies to carry out buybacks on a regular basis, the companies have great flexibility to choose if and when to buy back shares. Besides, a buyback of shares is conducive to reducing issued share capital and to increasing profit per share and the potential share valuation.

Under the existing taxation arrangements, investors who make a profit in the A-Share market are exempted from capital gains tax. In terms of taxation, a buyback of shares is thus theoretically preferable to cash dividends. That said, buybacks in the A-Share market have only debuted in recent years and the overall scale of transactions in the Mainland market is not large. On the other hand, given the benefits of buybacks, a growing number of listed companies in the US prefer it to cash dividends. Based on our research, America’s buyback magnitude surpassed cash-dividend magnitude for the first time in 1998 and has consistently exceeded it since 2010.

Recent trend of cash payouts

Our study also reveals that, during the past three years, more and more A-Share listed companies have been distributing dividends, totalling 3,294, 3,446, and 3,859 respectively, representing respectively 70.4%, 67.8%, and 72.4% of listed companies in the same period. The dividend magnitude of A-Share companies that simultaneously issue H shares listed on the Hong Kong Stock Exchange (SEHK) was 83.2% and 81.2% in 2021 and 2022 respectively.

In terms of dividend per share and dividend yield, the average pre-tax dividend per share among A-Share listed companies over the past three years was RMB0.31, RMB0.32, and RMB0.3 respectively. Meanwhile, the average dividend yield among these listed companies was 2.2%, 2.03%, and 1.82% respectively. Since new initiators tend to adopt a more conservative dividend policy, the average dividend distribution level in the market would normally experience a slight dip as more companies start making cash payouts. As for A-Share companies that also issue H Shares listed on the SEHK, the average pre-tax dividend per share for 2021 and 2022 was RMB0.438 and RMB0.516 respectively. Meanwhile, the average dividend yield among these listed companies for the same two years was 3.02% and 2.96% respectively.

All in all, both the number and proportion of A-Share listed companies that distribute cash dividends are showing a rising trend, gradually cultivating an atmosphere conducive to cash payouts. Compared with A-Share companies, H-Share companies provide investors with higher pre-tax dividend yields.

Note 1: Jensen, Michael C. “Agency costs of free cash flow, corporate finance, and takeovers.” The American Economic Review 76, no. 2 (1986): 323-329.

Note 2: Listed companies may also distribute one-off cash dividends or stock dividends (bonus shares). Since bonus shares do not involve cash payouts, they serve the same purpose as share splits. In addition, companies may sometimes issue alternative dividends in lieu of cash payouts. For example, at the end of 2021, a listed company in Hong Kong issued dividends through shares it held in another company.

By Professor Hong Zou and Mr Zike Shen
26 June 2024