Hong Kong announced an unexpected loosening of coronavirus social distancing restrictions on Tuesday as the Asian financial centre published data showing its first economic contraction since the start of the pandemic.

The softening of Hong Kong’s Covid-19 measures contrasted sharply with continuing strict measures in mainland China, where residents in parts of Shanghai remain restricted to their homes and Beijing teeters on the brink of lockdown.

Official data showed Hong Kong’s gross domestic product contracting 4 per cent in the first quarter of the year compared with the same period of 2021, a much worse performance than the 1.3 per cent reduction estimated by economists polled by Bloomberg.

Economists said the contraction showed the heavy burden that the Chinese government’s tough “zero Covid” policy has had on Hong Kong.

Carrie Lam, the city’s leader, said a drop in Covid cases since its worst outbreak earlier this year had made it possible to reopen beaches and pools from this Friday and to allow up to eight people to dine together.

“We were worried that . . . there might be an increase of confirmed cases, luckily this did not happen and we see the epidemic is stabilising,” Lam said on Tuesday.

But economists said the latest data were a warning signal about the attractiveness of the financial hub, which remains tied to China’s overall Covid policy and retains strict controls on international travel.

“[The GDP figures are] way, way below market expectations,” said Kevin Lai, chief economist for Asia excluding Japan at Daiwa Capital Markets.

“Hong Kong was hit by the Omicron outbreak, but then the other surprise was that although we saw a decline in service exports and private consumption . . . there was also a sizeable decline in goods exports,” Lai said.

Lai added that exports slowed owing to a drop in demand and border closures between Hong Kong and the mainland, as well as lockdowns in Chinese cities.

Singapore, South Korea and Taiwan had GDP growth of more than 3 per cent in the first quarter, he added. “So with zero-Covid . . . Hong Kong was hit particularly hard.”

From May 19, a host of other venues from bars to mah-jong parlours will reopen and cruises will also be allowed to restart. Restaurants can open until midnight, from 10pm previously. Bars can open until 2am, but just four people will be allowed per table.

Hong Kong will retain its strict quarantines on arriving travellers and continue to ban airline routes if a certain number of Covid-positive passengers are discovered on a flight.

The tough restrictions have helped trigger an outflow of residents and expats and have caused some global companies to rethink the size of their presence in the city.

Hong Kong recorded an 8.3 per cent drop in gross domestic fixed capital formation — a measure of investment confidence — in the first quarter.

“Companies in Hong Kong are screaming, especially foreign companies, and that sharp decline in investment standing is very telling,” Lai said.

The city’s reputation has also suffered from a crackdown on freedom of expression that followed 2019 anti-government protests.

Hong Kong dropped 68 spots to 148 among 180 countries in the 2022 Press Freedom Index published on Tuesday, now holding a position similar to Sri Lanka, Philippines and Turkey. It was the fourth-largest year-on-year drop in rankings since the index was first compiled in 2002, according to a Financial Times analysis.

Lam insisted Hong Kong’s press and media were “as vibrant as ever”, but journalists and media organisations were “not above the law”.

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