Why Hong Kong is Losing Global Relevance

Jun 6, 2025 - 09:58 Updated: Jun 5, 2025 - 19:19

Why Hong Kong is Losing Global Relevance

News Analysis

In a move that has rattled investor confidence, New World Development Co. (HKEX: 0017)—one of Hong Kong’s most prominent property developers—has deferred coupon payments on its perpetual bonds, citing liquidity concerns amid ongoing market volatility. The decision has raised concerns among analysts about broader structural vulnerabilities within the city’s real estate and financial sectors, recalling the bond defaults that shook mainland China’s property market in recent years.

Against this backdrop, economists are issuing renewed warnings about Hong Kong’s long-term economic trajectory. Professor Yip Sau Leung of Nanyang Technological University cautions that the city may be entering a decade-long downturn, fueled by over-leveraged real estate markets, eroding international neutrality, and declining competitiveness.

Yip’s analysis carries particular weight given his unique perspective on both Hong Kong and Singapore—two highly comparable Asian financial centres. As senior research adviser at the Asia Competitiveness Institute of the Lee Kuan Yew School of Public Policy at the National University of Singapore, as well as part-time lecturer at the Chinese University of Hong Kong, Yip brings deep insights from both cities’ economic trajectories and competitive positioning.

The economist specifically warns that when residential property prices fall by 60–75 percent, Hong Kong’s 21.1 percent bank capital adequacy ratio will prove insufficient to handle bad debt provisions, potentially triggering a “comprehensive financial crisis.”

Hong Kong’s declining status as an international financial center manifests clearly in changing international rankings and credit assessments. International credit agencies have expressed deeper concerns about Hong Kong’s neutrality. Moody’s downgraded Hong Kong’s outlook from “stable” to “negative” in September 2019 amid ongoing protests, explicitly citing concerns about “the narrowing of Hong Kong’s legal and regulatory distance from China.” In December 2023, Moody’s maintained its negative outlook due to Hong Kong’s increasingly close ties with the mainland, demonstrating sustained international skepticism about the city’s ability to maintain an independent financial status.

While Hong Kong still aspires to be a super-connector bridging China and the global economy, the international community increasingly views it as part of China rather than an independent financial hub.

The U.S. State Department’s 2024 Investment Climate Statement notes that since December 2020, Hong Kong’s SFC has required licensed firms to seek approval before using external data storage providers—such as Google (GOOGL) Cloud, Microsoft (MSFT) Azure, or Amazon (AMZN) AWS—for regulatory records, even if hosted locally.

U.S. policy measures have increasingly aligned Hong Kong with mainland China in areas of export control and trade enforcement. The U.S. Commerce Department’s Bureau of Industry and Security implemented export controls on advanced computing semiconductors to China, including Hong Kong, effective Oct. 7, 2022, which banned the export of Nvidia’s (NVDA) A100 and H100 chips to mainland China and Hong Kong in September 2022, followed by restrictions on the A800 and H800 chips in October 2023. These include Nvidia’s most advanced AI chips: A100, H100, A800, H800, L40, L40S, and RTX 4090 chips.

In 2025, the United States ramped up trade and tech restrictions, further erasing the distinction between Hong Kong and mainland China. In April, the Commerce Department expanded export controls to cover AI model weights and high-bandwidth memory chips, applying the rules to both China and Hong Kong.

A month earlier, several Hong Kong entities were added to the U.S. Entity List for national security concerns tied to AI development. In May, the Trump administration issued an executive order extending tariffs to Hong Kong and Macau alongside China. The measures marked a further shift toward treating Hong Kong as part of China’s economic and strategic sphere.

This policy logic already appears in trade data. Law Ka-chung, former chief economist at Bank of Communications Co. Ltd. (HKEX: 3328), noted in an interview with The Epoch Times that Hong Kong’s trade dependence on the United States persists, with goods “exported to the [United States] via Vietnam, South Korea, and Malaysia ultimately returning as U.S. dollars.”

However, he said, when the U.S. government views Hong Kong as a Chinese extension rather than an independent trading partner, this re-export model faces stricter scrutiny and restrictions.

Meanwhile, the linked exchange rate system is facing new tests, according to Ka-chung.

While he emphasizes that “the currency peg remains important for Hong Kong trade because Hong Kong exports still depend on the U.S. market,” he said the widening Hong Kong–U.S. interest rate differential is pressuring the peg.

Hong Kong Association of Banks data show that the one-month Hong Kong interbank offered rate (HIBOR) fell to 0.58 percent on May 30, a three-year low, further widening its gap with U.S. federal funds rates.

The property market, Hong Kong’s most important collateral base, continues to decline, triggering chain reactions.

The Centa-City Leading Index stands at 135.16 points, down 27.26 percent from its August 2021 historical peak of 191.34 points, returning to 2016 levels. The Centa-City Leading Index is widely regarded as the most authoritative gauge of Hong Kong’s residential property market, compiled weekly by Centaline Property Agency.

The banking sector bears the brunt.

Hang Seng Bank Ltd.’s (HKEX: 0011) 2024 interim results show nonperforming loan ratios surging to 6.12 percent, dramatically worse than 0.6 percent during the pandemic in 2020. As Hong Kong’s fourth-largest bank with a 7 percent market share of deposits and a Hong Kong-focused strategy, Hang Seng Bank serves as a key indicator of the city’s banking health.

Hong Kong Monetary Authority data show classified loan ratios rising from 0.9 percent in 2020 to 1.96 percent in the fourth quarter of 2024, the highest in 20 years.

On domestic consumption, Hong Kong’s tourism sector—once a pillar of retail growth—is undergoing a fundamental shift.

While mainland Chinese visitor numbers have rebounded post-pandemic, the nature of this tourism has changed. Many arrivals now fall into the category of cost-conscious “special forces” tourists—a term coined by young mainland Chinese travelers on social media platform Xiaohongshu (Little Red Book) to describe themselves as ultra-efficient, budget-conscious tourists.

Luxury retail, once driven by high-spending tourists, has yet to recover. According to the Hong Kong Tourism Board and Census and Statistics Department data, overnight and same-day visitor shopping spending was at 55 percent and 18 percent of 2018 levels, respectively, in the first half of the year. Hard-luxury sales slipped 15 percent, to HK$30.25 billion (US$3.88 billion), in the first six months of the year. Sales in all retail categories fell 7 percent to HK$220.59 billion (US$28.29 billion), according to retail sales statistics from the Census and Statistics Department.

Ka-chung takes a relatively optimistic view, believing property price declines “historically range from one-third to two-thirds, they won’t disappear entirely.” He cited historical data showing three major property crashes with declines of approximately 40–50 percent, one-third, and two-thirds, respectively, arguing “declines have limits, they won’t continue for 10 or 20 years.”

Facing Hong Kong’s economic uncertainty, Ka-chung provides an important historical perspective. He emphasizes that economic declines “have endpoints, entering stable periods,” citing Japanese and Nordic experiences showing “declines flatten out, they don’t continue indefinitely.” This view aligns with post-Asian financial crisis recovery experiences.

Japan’s experience offers a potentially relevant reference point for Hong Kong’s current situation. According to World Bank data, Japan’s economy averaged low growth during its “Lost Decade” (1991-2003), following an asset price bubble collapse that left banks with significant bad debt.

Like Hong Kong today, Japan faced challenges with over-leveraged real estate markets and banking sector stress. However, as noted in the IMF’s 2025 Japan Article IV Mission, “Japan’s total factor productivity growth has been slowing for a decade and has fallen further behind the United States,” with productivity stagnation being a key factor in Japan’s prolonged economic challenges.

Bank of Japan data shows total factor productivity growth averaging significantly lower levels during periods of economic stagnation. Crucially, however, World Bank data indicate Japan’s economy showed periods of recovery, demonstrating that economic downturns can eventually stabilize and recover, aligning with long-term economic fundamentals.

Ka-chung’s analysis of Hong Kong’s currency peg provides important insights. While he said that “one U.S. country’s consumption power equals 157 countries combined,” according to U.S. Bureau of Labor Statistics data, American consumers spent $77,280 per household on average in 2023, with total U.S. consumer spending representing the world’s largest consumer market. This suggests that even under new geopolitical arrangements, Hong Kong’s economic ties with the United States retain objective foundations.

The International Monetary Fund’s 2023 assessment notes that in the medium term, against a backdrop of an aging population, elevated private debt, and mainland China’s secular growth slowdown, GDP growth is forecast to slow below 3 percent.

Given Hong Kong’s deep economic and financial integration with the mainland, slower growth in China poses a direct risk to the city’s outlook.

Mainland Chinese companies accounted for 79.8 percent of HKEX’s total market cap by the end of 2024, up from 76 percent in 2023, and rose further to 81.1 percent by April 2025, according to HKEX data. Their dominance in trading was even greater, accounting for 90.9 percent of equity turnover.

Many of these so-called “foreign companies“ are in fact Chinese enterprises registered overseas—some even retain “China” in their names—further underscoring the concentration risk in both geographic and substantive terms.

Whether Hong Kong can transition from a broad-based international financial hub to a specialized conduit for Chinese capital will determine its long-term viability. The city’s ability to craft a sustainable growth model within the constraints of political integration and external decoupling will shape not only its economic outlook but also its strategic relevance in the post-globalization order.