(Bloomberg) -- For the first time since protests began in June 2019, Hong Kong has returned to a state resembling business as usual, with residents no longer facing transport shutdowns, quarantine, social distancing restrictions or a mask mandate.

Yet the legacy of the past few years means the city has a number of obstacles to overcome to return to its former condition. 

At stake is the future of the principle conduit for capital flowing in and out of China, as well as bragging rights as Asia’s primary international finance hub. 

Hong Kong faces a number of domestic pressures — from an exodus of residents to a shattered economy — as well as fallout from Beijing’s worsening ties with the US. While the city is celebrating the return of global events from sports tournaments to banking conferences, the government’s flexing of its national security law is creating an environment of uncertainty and caution.

“It’s not easy to maintain Hong Kong’s international financial center status,” said Billy Mak, an associate professor at Hong Kong Baptist University’s Department of Accountancy, Economics and Finance.

Since coming into power in July, Hong Kong leader John Lee has prioritized reopening the city, bringing in high-skilled workers and repairing the estimated $27 billion economic damage. The following list shows how Lee — who is sanctioned by the US — is facing up to the challenges:

Charting the Economic Rebound

The city entered 2023 trying to dig itself out of a deep economic hole: Gross domestic product contracted 3.5% last year, the third time since 2019, as exports slumped, retail sales struggled and Hong Kong’s housing market came under stress.

The end of Covid restrictions and China’s reopening are expected to spur local growth and spending, with economists recently raising their median forecast for GDP expansion in 2023 to 3.4% from an earlier estimate of 2.7%. Early signs of recovery include a 7% jump on-year in retail sales for January, higher than estimates.

Challenges remain, however, with economists saying consumption, property investment and external trade will continue to face pressure from rising interest rates. A massive fiscal deficit also presents concerns, as does an exodus of highly-skilled workers.

Stemming a Talent Exodus

Since 2020, tens of thousands of people have left. Among them are scores of bankers, lawyers and other professionals who’ve traditionally helped to make this a freewheeling, international entrepot. While that outflow is slowing, according to the latest data, the city’s population continues to shrink at a time when the birth rate is among the world’s lowest.

Lee has launched programs to attract global talent. That includes a two-year visa plan launched last October for high-income workers and top university graduates. So far the result seems mixed. Most of the roughly 10,000 applications for that program so far are from mainland China, according to local media.

It’s still not clear whether some of the top banking positions that shifted away from Hong Kong will return. Bloomberg previously reported that Bank of America Corp. and Citigroup Inc. relocated big dealmakers and senior equities staff to rival hub Singapore, which is also trying to entice more talent workers with its own visa program. 

“The major challenge right now for Hong Kong is to be seen as the first choice or the most attractive choice for international companies to grow regional headquarters,” said John Mullally, managing director for southern China and Hong Kong financial services at Robert Walters Plc.

The government has also focused on staging major conferences and events to showcase the city’s strengths and attractiveness as a hub to live and work.

Luring Back Global Events 

Next week alone sees the return of the Credit Suisse Asian Investment Conference, the HKMA-BIS Joint Conference of central bankers, a family office event titled called Wealth for Good in Hong Kong Summit, as well as international art fair Art Basel. 

The city is seeking to challenge Singapore, which snapped up some key events and exhibitions — including major wine and spirits fair Vinexpo — as Hong Kong lagged behind in its removal of Covid restrictions. Last year, Singapore hosted a late of slate of high-profile events including the Milken Institute Asia Summit, the Forbes Global CEO Conference and the Singapore Grand Prix.

Singapore is seeking to capitalize on its momentum with the launch of Art SG, Southeast Asia’s largest-ever art fair. That was the largest such launch in Asia Pacific since Art Basel held its inaugural Hong Kong show in 2013.

Hong Kong is also hoping events such as the Rugby Sevens sports tournament will bring in much-needed tourists after the city’s prolonged border closure. 

Boosting an Ailing Tourism Industry

The city’s tourism industry clearly needs a boost. The number of visitors arriving in Hong Kong in January was 93% less than pre-pandemic levels, mostly because mainland Chinese were still kept at bay by Covid restrictions. 

To that end the government has launched an ostentatious campaign entitled “Hello Hong Kong.” The centerpiece of the promotion is the giveaway of half a million air tickets this year, mostly by the city’s flagship carrier Cathay Pacific Airways Ltd.

The number of visitors jumped to about 1.5 million last month, according to the local tourism board. That’s triple January’s amount, but still the lowest for any month pre-pandemic since 2004.

Capacity constraints may also hold the city back. The Airport Authority says Hong Kong’s airport is operating with 32% fewer employees than before Covid, and a labor shortage has capped the ability of airlines to quickly resume all of the travel routes that were paused.

The pace of the industry’s recovery may show how badly damaged the city’s reputation has been from extreme Covid restrictions, the 2019 protests and the resulting national security drive.

Rebuilding its International Reputation

Not only did the pandemic curbs hurt the city’s ties to the broader global economy, so did political strains as Beijing imposed its sweeping security law on Hong Kong that was condemned by several Western governments. At the same time, strained ties between China and the West imperils Hong Kong’s position as a go-between.

“If the investment into China declines due to geopolitical tensions, then the investment will also decline,” said Samuel Tse, an economist at DBS Group Holdings Ltd. 

The United States sanctioned John Lee and other top officials over the national security law, and made it harder to export sensitive American technology to the city. Tension abounds in the corporate sector, too, with mainland Chinese firms holding regional headquarters in Hong Kong outnumbering American ones for the first time.

With little policy recourse to overcome worsening US-China relations, Tse said, Hong Kong will have to diversify their allies and investment partners. 

Lee appears to be trying to do so. He kicked off international travel with a high-profile visit to the Middle East last month, and sought to persuade oil giant Saudi Aramco to list in the financial hub despite competition from rivals such as New York and London. Southeast Asia is also being targeted, with Lee traveling last year to Thailand. 

Still, the government is also courting more traditional allies as it seeks to restore global ties. One of Hong Kong’s most senior finance officials is planning to visit the UK next month in the territory’s first ministerial-level trip to the country in three years, the Financial Times reported this week. 

The proposed trip by financial services secretary Christopher Hui is the first since the UK accused China of violating the Sino-British Joint Declaration, it said.

Reviving the City’s Financial Markets

Promoting Hong Kong as a financial center globally has become all the more pressing given the poor performance of its stock and property market.

The Hang Seng Index is down almost 30% since June 6, 2019, the last trading day before a mass demonstration kick-started the protest movement. While the China-dominated gauge rallied to a two-year high in early 2021, President Xi Jinping’s crackdown on everything from tech to property weighed on the city’s equities. A rally sparked by China’s U turn on Covid Zero has petered out amid concern over the nation’s economy.

Tighter rules on Chinese companies listing overseas on national security concerns have meant a sharp drop-off in Hong Kong share sales, with IPO proceeds last year slumping 69% to a decade-low. There were no debuts at all in February, the first time that’s happened for any month since 2012. 

The regulator has now published rules that tone down curbs on firms seeking to sell shares overseas, which may lead to a revival in Hong Kong. The city is also seeking to boost listings by non-Chinese companies.

But other areas are struggling — look at the property market, where poor sentiment was worsened by the exodus of residents and businesses, a contracting economy, as well as rising borrowing costs. 

Hong Kong will need to work hard to reverse the outflows of people, businesses and capital, especially against its rival Singapore.

--With assistance from Jill Disis and Shawna Kwan.

©2023 Bloomberg L.P.