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How Will Hong Kong and China Navigate Their Fiscal Challenges in 2025?

2024-12-17 06:49:01.196000

Hong Kong is grappling with a projected fiscal deficit of HK$100 billion (approximately US$12.8 billion) for the 2024-25 financial year, a significant increase from the earlier estimate of HK$48 billion. Finance chief Paul Chan Mo-po has attributed this sharp rise to a sluggish property market and diminished corporate performance, which have severely impacted government revenues [cc4193d0].

In a recent announcement, Chan emphasized the need for more prudent management of public finances amid structural adjustments in the economy. He noted that public consultation for the 2025-26 budget is currently underway, reflecting a proactive approach to engage citizens in fiscal planning [2847fdf2]. Chief Executive John Lee Ka-chiu has also highlighted the necessity of caution in tapping new income sources to minimize the impact on residents while addressing the deficit [313a3865].

The property sector's downturn has been particularly alarming, with land sales revenue reported at only HK$4.5 billion, representing just 13.6% of the budget estimate, and stamp duties at HK$24 billion, or 33.8% of the expected amount. This decline in revenue is compounded by a drop in property transactions, which fell to a seven-month low of 3,843 in September before rebounding to 5,857 in October [cc4193d0]. Furthermore, land premiums earned from April to October were only HK$3.7 billion, a mere 11.2% of the HK$33 billion target for the year [2847fdf2].

Adding to the fiscal challenges, Chan recently addressed concerns regarding a HK$20 billion (US$2.7 billion) infrastructure bond that was undersubscribed by retail investors, with only HK$17.85 billion subscribed by 128,000 investors. He noted that institutional demand was three to four times larger than supply, attributing the undersubscription to a more attractive IPO market. Chan projected a deficit exceeding HK$100 billion for the upcoming financial year and emphasized the need for fiscal consolidation [acd5a96f].

In a parallel development, Chinese leaders have agreed to raise the budget deficit to 4% of GDP for 2025, the highest on record. This new deficit plan amounts to about 1.3 trillion yuan (US$179.4 billion) and reflects a significant shift in fiscal policy following the December Politburo meeting and the Central Economic Work Conference (CEWC). The initial target for 2024 was set at 3% of GDP. This stronger fiscal impulse aims to counter expected U.S. tariffs under President-elect Donald Trump, as China's economy faces challenges from a property crisis, high local government debt, and weak consumer demand [cffb8eec].

Experts are now suggesting that the Hong Kong government may need to consider cutting expenses and potentially raising taxes to address the deficit. Gary Ng Cheuk-yan from Natixis has warned against the risks of relying too heavily on asset prices, while Lau Siu-kai emphasizes the importance of maintaining fiscal balance as mandated by the Basic Law [cc4193d0]. Lawmaker Wendy Hong Wen has proposed increasing tuition fees for non-local students and mobilizing retirees to join the workforce as potential measures to alleviate the financial strain [313a3865].

In addition to these domestic challenges, geopolitical tensions and U.S. tariffs are expected to pose further difficulties for both Hong Kong and China's economies in 2025. Former finance minister Henry Tang has called for a diversified economic strategy to mitigate these risks and ensure sustainable growth moving forward [cc4193d0]. Lee also highlighted the importance of Beijing's support and local initiatives to boost the economy, including the reintroduction of multiple-entry permits for Shenzhen residents and the upcoming Kai Tak Sports Park [313a3865].

As the Legislative Council prepares to discuss potential budgetary measures, the implications for public services and infrastructure investment will be closely monitored. Chan's budget presentation is scheduled for February 26, 2025, and the government's approach to managing this deficit will be crucial in shaping Hong Kong's economic landscape in the coming years [b4bef630].

Disclaimer: The story curated or synthesized by the AI agents may not always be accurate or complete. It is provided for informational purposes only and should not be relied upon as legal, financial, or professional advice. Please use your own discretion.