The level of business optimism in Hong Kong has fallen over the past 12 months, from a balance of +64% in 2010 to +57% in 2011, according to the Grant Thornton International Business Report 2011 (IBR). The survey also indicates that business optimism in mainland China has suffered a dramatic fall to a balance of +42%, from +60% a year ago, representing the fourth largest negative swing in the survey.
Worries over Inflation
Despite the slow pace of economic recovery to date, many businesses worldwide offer a somewhat bullish outlook for 2011. Nevertheless, Hong Kong and mainland China were among the 9 out of 39 economies surveyed which expressed a drop in business optimism compared to last year.
“After a strong rebound in 2010, the Hong Kong economy is set to experience a moderation in growth rate,” says Daniel Lin, managing partner of Grant Thornton Jingdu Tianhua in Hong Kong. “The rebuilding cycle of developed market economies, such as Hong Kong, after the global financial crisis in 2008 has almost been completed. As the effects of stimulus measures wanes, economic growth is likely to slow.”
Lin explains that in November, inflation rose to 2.9%, reflecting increases in the cost of energy and food. Soaring production costs and recent tensions on the Korean peninsula and within the region have slightly dampened business confidence locally.
“The warning lights started to flash for the Chinese economy in 2010,” continues Lin. “An inflation rate of 5.1% was recorded in November, increasing the likelihood of further interest rate increases. Low costs, particularly in labour, have powered the Chinese economy over the past few years, so it is of little surprise that business confidence is being hit by these new challenges.”
Overheated Property Market
The IBR survey also reveals that Hong Kong businesses show highest expectation of increased revenue (+66%) in 2011, followed by selling prices (+47%) and employment (+44%). However, only +12% of Hong Kong businesses were on balance more positive than negative about investment in new building in the new year, a drop of -4% compared to last year.
“Despite government cooling measures, the property market in Hong Kong continues to be fuelled by hot money from mainland buyers and investors, in addition to low interest rates and tight supply. Businesses believe that there is a bubble forming in the local property market,” remarks Lin.
“Hong Kong businesses are therefore reluctant to invest heavily in property at present given the potential for prices to correct in the future. They would rather invest capital in other areas, such as plant and machinery and employment, in order to strive for higher profitability," continues Lin.
Despite faltering optimism, businesses in mainland China continue to take a long term view. A balance of +69% of mainland Chinese businesses expect to increase revenue in 2011, +61% expect to increase expenditure on research and development (R&D), +57% anticipate increased selling prices, +52% expect to increase employment and +47% expect to increase investment in plant and machinery.
“This indicates that Chinese businesses are confident that global demand for their goods and services will continue. Their decisions of investing in R&D as well as plant and machinery will enable China to keep breathing fire into the world economy over the next five years,” explains Lin.
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