Following is a question by the Hon Paul Tse and a reply by the Acting Secretary for Financial Services and the Treasury, Mr Joseph Chan, in the Legislative Council today (July 16):

Question:

     It has been reported that 300 enterprises in Hong Kong have ceased operation over the first half of this year. Quite a number of enterprises are facing cash flow difficulties, and some are even having their loan called in by the bank (an operation commonly known as "call loan"). Many members of the business sector are worried that, once unable to reverse the fiscal deficit, the Government will raise taxes significantly. Some academics have projected that the Government may need to raise the salaries tax rate to 26.5 per cent before fiscal balance can hopefully be achieved. Against a backdrop of uncertain economic prospects, instability in work income, and substantial increase in living and tax expenses, the public's investment confidence and desire for consumption have been directly suppressed. In this connection, will the Government inform this Council:

(1) whether it has examined if there are signs that the Government's fiscal deficit has narrowed since the release of this year's Budget and if there is room to reduce bond issuance volumes in the future;

(2) in the light of the aforesaid worries of the business sector and members of the public about the economy and tax hikes, what policies or measures are put in place by the authorities to stabilise the confidence of various sectors; whether it can explicitly commit to not raising taxes; and

(3) as it has been reported that a certain major property developer and a number of small and medium-sized developers in Hong Kong are facing operational crises, with some even defaulting on debts and being on the verge of closure, and foreign media have even described a certain major developer as "too big to fail", so much so that in the event of a closure, it stands to pose a serious crisis to local banks, whether the Government has assessed the negative impact on the banking system, economic structure, unemployment rate, public confidence in investment, consumer sentiment and even government revenue in the event of successive closures of developers, and whether it has formulated counter-measures?

Reply:

President,

     Regarding the question raised by the Hon Paul Tse, I will first give a brief account of the latest developments of Hong Kong's overall economic situation and the Government's public finance strategies.

     The Hong Kong economy grew solidly. Real gross domestic product rose by 2.5 per cent in the full year of 2024 and the year-on-year increase in the first quarter of 2025 is 3.1 per cent, which is significantly higher than the 1.5 per cent average growth of G7 countries in the first quarter of 2025. As regards the stock market, the Hang Seng Index surged by a cumulative 20 per cent in the first half of the year. Our stock market trading as well as initial public offering was active. The average daily turnover for the first half of the year was around $240.2 billion, an increase of 118 per cent when compared with the same period last year. More than $107 billion was raised in the first half of the year, approximately 22 per cent more than the full-year total for last year and ranking first globally in the year-to-date. Nevertheless, certain sectors, such as traditional retail and catering, are still facing greater challenges due to changing consumption patterns of visitors and residents.

     On public finances, the 2025-26 Budget outlined a reinforced fiscal consolidation programme, focusing primarily on expenditure control, supplemented by revenue generation, to gradually restore balance to government accounts. According to the Medium Range Forecast (MRF), the Government's Operating Account will largely achieve balance in 2025-26 and return to a surplus starting from 2026-27. The Capital Account is estimated to record a deficit in the MRF period due to the accelerated development of the Northern Metropolis and other capital works projects relating to the economy and people's livelihood. Nevertheless, the level of deficit will decline year-on-year from 2026-27 onwards. After taking account of net proceeds from the issuance of bonds, the Consolidated Accounts will return to a surplus starting from 2028-29.

     As the question raised by Hon Paul Tse covers a wide range of issues, we have prepared a reply in consultation with the relevant bureaux and the Hong Kong Monetary Authority (HKMA) as follows:

(1) Fiscal deficit and size of bond issuance

     A consolidated deficit of $67 billion is expected for this financial year. Due to the fact that some major types of revenue including salaries and profits taxes are mostly received towards the end of a financial year, it is premature at this juncture to project our full-year financial results. Nevertherless, the increase in trading volume of the stock market in the first half of the year has led to an increase in stamp duty revenue, rendering support to our public finances. Regarding the size of bond issuance, we have planned to issue a total of about $150 billion to $195 billion worth of bonds per annum under the Government Sustainable Bond Programme and the Infrastructure Bond Programme in the next five years. The size of bond issuance for the current financial year is estimated to be $150 billion. We have no intention to change this target at the present stage.

(2) Economic and tax policy

     The Government has all along been adopting a multi-pronged approach to assist enterprises in meeting the challenges of economic restructuring, with a view to reinforcing their confidence in pursuing business development. As regards cash flow pressure, the Government helps small and medium enterprises (SMEs) obtain commercial loans by providing loan guarantees through the SME Financing Guarantee Scheme. Moreover, in the light of market and technological development trends, the Government supports enterprises (particularly SMEs) through Dedicated Fund on Branding, Upgrading and Domestic Sales (BUD Fund), including its E-commerce Easy, the Export Marketing and Trade and Industrial Organisation Support Fund, etc, in upgrading and transformation, as well as tapping into the Mainland and overseas markets.

     It must be emphasised that the Government did not raise taxes substantially in the past few years, and has no plan to raise taxes substantially at present. The reinforced fiscal consolidation programme outlined in this year's Budget also focuses primarily on expenditure control, to be supplemented by revenue generation. On identifying new revenue sources, our principles are to maintain the competitiveness of Hong Kong's simple and low tax regime by avoiding considerable increase in tax rates or introduction of new taxes, and to uphold the "user pays" and "affordable users pay" principles as far as practicable whilst increasing revenue. The simple and low tax policy that Hong Kong has all alone been pursuing is one of Hong Kong's core competitiveness. In the latest World Competitiveness Yearbook 2025 published by the International Institute for Management Development, Hong Kong's competitiveness ranks third globally, in which Hong Kong tops the ranking in "tax policy". Meanwhile, the Government continues to make strategic use of tax measures in different areas to promote the development of our industries and economic diversification, as well as to enhance Hong Kong's business environment and competitiveness. As announced in this year's Budget, we will provide half-rate tax concession for eligible commodity traders to drive the development of maritime services. It is also our plan to formulate proposals on the preferential tax regimes for funds, single family offices and carried interest this year to foster the development of the asset and wealth management industries.

(3) Property related loans' impact on banking system

     The HKMA has been closely monitoring the healthy development of Hong Kong's banking sector. The Total Capital Ratio of locally-incorporated banks and the average Liquidity Coverage Ratio of the major banks were 24.2 per cent and 182.5 per cent respectively as at end-March this year, well above international standards. Overall, the credit risk associated with local property development and investment loans is manageable. A significant portion of the Hong Kong banks' exposures relating to local property development and investment loans are to the large players with relatively good financial health. For exposures to small and medium-sized local property developers and investors, including some with weaker financials or higher gearing, banks have already taken credit risk mitigating measures early on, and most of these loans are secured. Besides, there is no concentration of risks at individual borrower level.

     The overall asset quality of the banking system is manageable and provisions remain sufficient. The provision coverage ratio (i.e. total of general and specific provisions as a percentage of non-performing loans) stand at around 60 per cent as at end-March this year. If taking into account and deducting the market value of collateral from the non-performing loans, the adjusted provision coverage ratio would be about 145 per cent. The HKMA will strive to maintain a sound banking system by continuing to keep a close watch on the global economic and trade conditions as well as the development of and risk changes in the real estate market, and maintaining close communication with the banking sector.

     Thank you, President.

Ends/Wednesday, July 16, 2025
Issued at HKT 13:22

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