China Woes Challenge Hong Kong’s Prospects: Aug. 22, 2025

The outlook for Hong Kong improved earlier this summer as negotiations with Beijing and Washington progressed, easing global trade uncertainty, but China’s worsening economic woes have softened that optimism. Hong Kong, a special administrative region (SAR), relies on China, as the nation is a significant buyer for its manufactured products; Beijing purchases more than half of its exports. Meanwhile, Hong Kong is experiencing decelerating export growth, weak domestic demand, a softening labor market and plunging business sentiment. These factors alongside the elevated US tariff rate on China increases the likelihood of the SAR underperforming in the coming quarters.

China’s Weakness Creates Challenges

China is a major export market for Hong Kong, which provides finished and intermediary products to the country, as well as industrial materials and natural resources. As such the success of the two entities is closely intertwined. Last week, China dished out the following combination of worse-than-expected data:

• Industrial output climbed only 5.7% year over year (y/y) in July, falling below the economist consensus estimate of 6% and June’s 6.8% gain.
• In the same month, retail sales grew only 3.7% y/y, missing the 4.6% consensus estimate and the 4.8% June increase.
• The unemployment rate climbed from 5% to 5.2%, worse than the 5.1% estimate.

A temporary funding shortage for a fiscal stimulus program that provides consumer subsidies and the country cracking down on price wars hurt results. From a longer-term view, Beijing is struggling with excess manufacturing capacity, a glut of residential properties and the US trade conflict. Those conditions are likely to hamper the country’s gross domestic product growth and weaken demand for Hong Kong’s products as a result.

HK Employers Trim Labor, Profit Margins Compress

The SAR’s private sector contracted in July for the sixth-consecutive month although the decline was shallower than June’s, according to S&P Global’s Purchasing Managers’ Index (PMI).

The weakness resulted from new orders from both domestic and foreign buyers remaining subdued. Decelerating revenues weighed on hiring, with overall payrolls slipping for the first time since April. Inflationary pressures remained strong, but weak transaction volumes led corporates to absorb heavier costs and accept lighter profit margins, rather than pass those greater charges onto consumers. Meanwhile, business sentiment is still pessimistic as firms are worried about demand and production prospects as well as the elevated tariff rate the US has maintained on China.

A separate report signals that Hong Kong’s level of joblessness continues to climb. The SAR’s unemployment rate was 3.2% in March. But in the subsequent two months, the indicator hit 3.5% and in June, it climbed to 3.7%. While the most recent data is still fairly low, the past three months depict a trend of weakening employment conditions and June’s print was the highest since November 2022.

Hong Kong Growth Slows

Hong Kong’s second-quarter GDP grew 0.4% quarter over quarter (q/q), meeting the economist consensus estimate but slowing from the 1.9% expansion during the first three months of the year. From an annualized perspective, the April-to-June timespan produced a 3.1% growth rate, driven by stronger exports and an uptick in foreign tourists that helped sustain domestic consumption.

June HK Exports Decline

With Beijing struggling to improve its anemic economy and the US establishing elevated tariffs, Hong Kong exports have decelerated. The SAR’s overall merchandise exports grew 11.9% month over month (m/m) in June, weaker than the 15.5% pace in May. Encouragingly, the exports to China and other Asian neighbors climbed, but not enough to maintain the May growth rate as trading with the US and Europe declined. Going forward, the challenge for the SAR will be to continue growing its shipments to China even as the world’s second-largest economy limps.

Consumer Spending Increases from Low Levels

Hong Kong experienced 14 consecutive months of declining retail sales. In May and June, that tend reversed with 2.4% and 0.7% y/y increases. Importantly, the modest advances were from dramatically low levels during the year-ago periods. The June number, furthermore, was supported by a 12% y/y June increase in mainland tourists rather than an uptick in domestic demand. Local consumers are unlikely to gain much momentum because the SAR’s labor market has been softening and the landscape faces the additional challenge of political leaders seeking to slice the budget deficit to 4.6% of GDP from 6.2%, thereby reducing fiscal support. But contained inflationary pressures does enable the SAR’s monetary authority to ease policy, offering stimulus via lighter financial conditions.