LDN - Business

Hong Kong under pressure to ease property curbs, plug deficit in budget

[February 27, 2024] By James Pomfret and Clare Jim

HONG KONG (Reuters) - Hong Kong unveils its annual budget on Wednesday at a time when it faces mounting fiscal deficits and economic headwinds including a struggling Chinese economy, with markets expecting authorities to ease property curbs to boost the ailing sector.

Economic growth in the global financial hub has also been hampered by geopolitical tensions between China and the United States, while capital flight turned the Hong Kong stock market into the worst performing major index last year.

Accounting firms PwC and KPMG expect a budget deficit more than double what the government had initially forecast for the fiscal year ending March 31, 2024.

PwC is projecting a fiscal 2023/24 consolidated budget deficit of HK$110 billion ($14.06 billion), while KPMG expects an even bigger HK$130 billion deficit, which would mark the second sizeable yearly deficit in a row.

In fiscal 2022/23 Hong Kong posted a budget deficit of HK$122.3 billion after taking into account the proceeds of HK$66 billion received from issuance of green bonds.

The government is expected to further relax property stamp duties as housing prices have plunged 20% since the 2021 peak, dragged down by fragile market sentiment and high interest rates. Some analysts expect a further 10% drop this year.

In recent months, some observers have warned of entrenched structural problems hampering Hong Kong's future prospects.

Stephen Roach, a faculty member at Yale University and a former chair of Morgan Stanley Asia, wrote in an editorial titled "Hong Kong is Over" that various factors including worsening geopolitics and a China-imposed national security clampdown since 2020 had sapped Hong Kong's dynamism and "shredded any remaining semblance of local political autonomy."

Hong Kong's "free market has been shackled by the deadweight of autocracy" he added. Few observers expect Beijing to loosen its grip with a fresh round of national security legislation known as "Article 23" to be enacted within months.

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A man looks at the construction site of residential units, in Hong Kong, China February 27, 2024. REUTERS/Tyrone Siu

PROPERTY STIMULUS?

Many realtors, business and political groups are calling for a full elimination of additional stamp duties including for second home buyers and non-citizens after the government's partial easing in October largely failed to boost sentiment. They say these tightening measures, some introduced over a decade ago, are no longer appropriate.

The Hong Kong government in October halved the additional stamp duty for second home buyers and non-citizens to 7.5% and a total of 15%, respectively, and allowed some home owners to sell properties after two years, decreased from three years, without incurring hefty duties. It also waive the additional taxes for foreign buyers unless they fail to gain citizenship after seven years in a bid to attract talent.

JPMorgan said the majority of the investors surveyed by the investment bank expected a lowering of rates in the additional stamp duty rather than a full elimination.

Even with a full removal, the bank said it might only stimulate volume in the short term, and would unlikely reverse the downtrend in home prices, as the property market is driven more by interest rates and investor confidence.

Hong Kong home prices, which remain among the world's most expensive, dropped 1.6% last month from the previous month, the ninth monthly fall in a row.

($1 = 7.8233 Hong Kong dollars)

(Additional reporing by Donny Kwok; Editing by Shri Navaratnam)

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