Hong Kong is facing economic challenges unseen in the territory for more than a decade. In May, financial secretary John Tsang announced a $2.2bn stimulus package, following a string of other stimulus measures over the past 18 months totalling about 5% of the region’s GDP.

Unemployment in Hong Kong now stands at 5.3%, the highest level in three years. The region’s investment authorities have much work to do alongside the government to ensure that reduced trade flows through Hong Kong do not result in any more job losses in the territory’s financial services and trade sectors.

Investment slowdown

According to greenfield investment tracker fDi Markets, foreign investment projects in Hong Kong in the first quarter of 2009 fell by 25% on the same period last year. But Simon Galpin, director-general of investment promotion at Invest Hong Kong, says the territory will always have certain advantages which set it apart from other economies in the region. “At a time of economic uncertainty, things like our regulatory framework and simple tax regime stand us in good stead,” he says. In tough times businesses become increasingly cautious, so having a contract enforceable by law with assured recourse through the courts becomes ever more important, he adds.

With the security that Hong Kong can offer international firms, it is no surprise that many companies see it as a place from which they can plan their expansion into mainland China and beyond. As an emerging service centre for China, business and professional services companies locating in the region are tapping into the existing business community, as are more than 3000 mainland Chinese companies using Hong Kong as a stepping stone to going global.

Despite Hong Kong’s geographical advantage, Mr Galpin admits to increasing competition from locations in mainland China. “Many mainland cities in China have made great strides in improving their business and regulatory environments even though they still have a long way to go to reach the level of Hong Kong,” he says.

Hong Kong also has a strong track record of reinventing itself. The island’s latest reincarnation involves developing relatively new sectors such as creative industries and renewable energy. However, it will face the same challenges faced by locations worldwide in developing industry clusters around such fledgling business sectors, not least a dearth of available skills. Mr Galpin says that the openness of Hong Kong’s economy attracts the brightest and the best from around the world as well as from mainland China, which makes it better placed than many regions in terms of its skills base.

Mainstay sectors

Hong Kong also has its pillar sectors of financial services and trading. Financial services will remain very important for Hong Kong despite the financial slowdown, says Mr Galpin. The sector is continuing to enjoy inward investment, particularly by banks from developing economies such as India and Taiwan, which are setting up in Hong Kong in order to expand elsewhere.

A large number of Western retailers also continue to locate sourcing and buying operations in the territory. These command and control centres for sourcing products from China, South America, India and South Africa locate in Hong Kong largely because of its pool of banks, competitive trade finance market and proximity to China’s manufacturing base.