As the Covid-19 pandemic spreads – and in many places deepens – across the world, economic lockdowns remain firmly in place. Here in Hong Kong, we can only helplessly watch as the world economy slips into what may be the worst recession in a century.
The interconnected nature of our global economy, in particular for “superhubs” like Hong Kong and Singapore, means that even with swift and effective local management of the virus, prospects are dire, especially for SMEs.
Sobering questions arise of concern to all Chamber members: how deep is the recession going to be? How many companies will go bankrupt before we see light at the end of the tunnel? And just how many people will lose their jobs, or see their incomes sharply cut for the foreseeable future?
Almost certainly, things are going to be worse than any forecasts you have yet read.
The International Monetary Fund says the world economy is likely to contract by around 4.4%, with even worse projections of 6.9% for Asia. The World Trade Organization says global trade shrivelled by 14.3% in the second quarter of this year, and forecasts a 9.2% contraction for 2020 as a whole. This is a bleak sweetener, after earlier forecasts that the contraction might be as high as 32%.
Our own Government says the Hong Kong economy contracted by 3.4% in the third quarter. This marked the fifth consecutive quarter of recession, but was an improvement from declines amounting to around 9% in the first two quarters of the year. With tourism having evaporated, decimating the hotel, retail and restaurant sectors, unemployment has leapt to around 6.4%. That amounts to around 259,800 unemployed – the highest level in Hong Kong for 15 years, even with the Employment Support Scheme still in place.
In short, we are only at the earliest stages of discovering how massive the bankruptcy tsunami surging towards us might be, and how many thousands of our SMEs may perish through no fault of their own.
Hong Kong bankruptcies have already soared to levels not seen since the SARS crisis in 2003, although there are not yet any really big names among the casualties. Filings at the Official Receiver’s Office up to September took the year’s total so far of bankruptcy petitions to 5,124.
The highest monthly number of bankruptcy filings during the 2008/9 global financial crash (in April 2009) was 1,759. In January 2003, at the very worst point of the SARS-related recession, filings peaked at 3,193. Total bankruptcies in 2002 and 2003 were around 25,000 in each year. There are fears that bankruptcies will mount significantly higher as the Covid-19 pandemic asphyxiates the global economy.
The only comfort is that most other economies are staring at even grimmer numbers – both for bankruptcies and unemployment. In the United States we have seen household names including JC Penney, Neiman Marcus, J Crew, Chuck E Cheese and Hertz file for Chapter 11 protection. Hertz, which employed 10,000 people across the U.S., is likely to be one for the record books, with liabilities of US$24 billion. BankruptcyData, an insolvency tracker in the U.S., reports thousands of companies filing for Chapter 11 protection – with restaurants (513 filings), the construction sector (470) and real estate (466) reporting the most casualties.
Which reminds me that Hong Kong still lacks any corporate rescue framework equivalent to Chapter 11. James Lau, the recently retired Secretary for Financial Services, announced in March that the Government was planning to introduce such a law – but not until 2021. This strikes me as untimely, since it is at a time like now that Chapter 11-type arrangements are critically needed.
Most of the Hong Kong companies that will be filing for bankruptcy in the coming months will be undeserving victims of the pandemic lockdown. Drab queues of expensive and protracted litigated settlements seem wholly inappropriate when no one party is any more guilty than another, as the pandemic has frozen in place businesses and business partners alike.
Anticipating this dreadful bankruptcy trap, Hong Kong business leaders have in the APEC Business Advisory Council (ABAC) been pressing for economies across the region to move towards fast and cheap mediated settlements for companies – in particular SMEs – that find themselves innocent victims of pandemic entrapment.
Given that cross-border business disputes take an average 15 months to resolve, and legal fees average more than US$1,000 an hour, a cheaper and speedier settlement process has been a high priority, especially for SMEs. The aim has been settlement within a couple of months, and total legal costs of no more than US$1,000.
We have in particular been exploring how the Online Dispute Resolution platforms in the process of being established across the region might be used to minimise the inappropriate pain and punishment so often arising from bankruptcy proceedings.
Which makes the launch in July in Hong Kong of a Covid-19 Online Dispute Resolution process both timely and a welcome piece of good news. The Hong Kong ODR platform, operated by the eBRAM International Online Dispute Resolution Centre, will offer online mediation of Covid-19-related disputes involving any claim up to HK$500,000, with a registration fee capped at HK$200 for each party involved. The aim is for settlement within 30 days.
From its hub in the Justice Department in the newly opened West Wing Government offices in Central, eBRAM’s aim is “to provide speedy and cost-effective means to resolve disputes arising from or in connection with the Covid-19 pandemic globally and locally, especially those involving micro-, small- and medium-sized enterprises that may be adversely affected or hard hit by the pandemic.”
So while the prospects facing our small companies and their employees remain grim, eBRAM’s Government-supported efforts to minimise pain or blame – and thereby reducing the number of businesses that crash and burn – may for many Hong Kong companies be a godsend, and easing the road back to recovery.
If technological innovation linked with online dispute resolution can reduce that pain, then it will be an important force for good. The eBRAM initiative, and Hong Kong’s regional leadership of efforts to build Online Dispute Resolution platforms, should be applauded. We need similar platforms to be launched across the region in coming months. The livelihoods of thousands of companies in Hong Kong, and the jobs of perhaps millions, will depend on it.
David Dodwell, Executive Director, Hong Kong-APEC Trade Policy Group