The Eclipse of Hong Kong

The Eclipse of Hong Kong

photo by: Kalexander2010

Hong Kong’s growth has eclipsed, says Dan Steinbock. Without an aggressive growth strategy and China’s innovation, the city’s living standards will deflate.

“We are looking at a new normal, at the current level, at about 2-4 percent,” Financial Secretary John Tsang said recently. That may prove to be an understatement.

Before the global crisis, Hong Kong’s growth still exceeded 6 percent on the back of China’s double-digit growth. Between 2009 and 2013, its expansion was more than halved to 2.8 percent. Last year, its growth further decelerated to 2.5 percent.

Hong Kong’s old growth drivers have eclipsed.

Falling tourism, trade and property prices

Recently, Chief Secretary Carrie Lam Cheng Yuet-ngor lamented that tackling poverty as Hong Kong’s population is rapidly aging would be “an uphill battle.” With the plunge of growth in the post-crisis years, elderly poverty soared by a fifth to nearly 440,000 last year.

However, that’s only a prelude to the future because Hong Kong’s growth continues to rely on mainland tourism, low interest rates and trade which have eclipsed.

Four of every five visitors come from the mainland. In the first half of the year, the number of visitors increased only 2.8 percent over the period of 2014. Concurrently, Hong Kong fell behind South Korea, Taiwan and Japan among the Chinese tourists’ top-10 outbound destinations. Moreover, Chinese visitors’ long-haul travels to US, Russia, France and Italy surged amid the National Day Golden Week.

Accordingly, Hong Kong retail sales fell for the sixth straight month in August, slipping 5.4 percent from a year earlier and outlook remains subject to uncertainties.

What about trade? Until recently, Hong Kong benefited enormously from China’s growth, which was fueled by net exports and investment. But the mainland’s rebalancing means a massive shift toward innovation and consumption – away from net exports as the key source of growth.

In the first eight months of 2015 – amid stagnation in the US, Europe and Japan – Hong Kong’s exports value fell 1 percent on a year-to-year basis, with domestic exports falling 15 percent. As a result, export growth forecast for 2015 was revised from 3 percent to zero.

In the coming years, Beijing and Hong Kong economies may also take a hit from the Washington-led Trans-Pacific Partnership (TPP) deal, if it is ratified by the members.

Ever since the global crisis, Hong Kong has enjoyed ultralow interest rates. But that, too, is coming to an end. The net effect is bound to impact the inflated property market, which may face a 25-30 percent downward correction in the next two years.

Erosion in financial intermediation

Will global growth boost Hong Kong’s expansion? That’s unlikely. As clouds continue to hang over the global economy, the International Monetary Fund (IMF) recently cut its forecast for global growth this year to 3.1 percent.

What about Hong Kong’s financial strengths? For almost two decades, Hong Kong has served as China’s financial engine. To continue to do so, it would have to excel over Shanghai and remain the main offshore renminbi center. But neither is likely.

As Chinese financial reforms are accelerating and capital convertibility is a necessary step toward the RMB’s role as a major international reserve currency, the financial clout of Shanghai – and other major Chinese cities – is rising.

Until recently, Hong Kong has dominated the rapid expansion in RMB usage outside the mainland, as measured by RMB bilateral swap lines, deposits, RQFII quotas and appointed clearing banks. But its de facto monopoly is eroding.

In Asia, it is followed by Korea and Singapore, while Prime Minister Cameron hopes to make London a leading offshore RMB center. Reminiscent of the Shanghai-Hong Kong stock connect, the idea of a Shanghai-London connect could take off and is likely to be discussed during President Xi’s UK visit.

In the recent US-China Summit, the White House also began talks about RMB trading and clearing in the US.

The innovation illusion

According to the World Economic Forum, Hong Kong is 7th in global competitiveness. As measured by per capita income, the city ranks 10th worldwide, even before the US. Over time, such living standards can only be sustained by world-class productivity and innovation.

But here’s the catch: Innovation can be measured by the share of R&D per GDP. In the most competitive countries, it is 2.4-4.4 percent (Germany and South Korea, respectively); 2.2 percent in Singapore and close to it in China. But in Hong Kong it is barely 0.7%. That’s less than in Ukraine and Tunisia (79th and 92nd in the WEF list) – though more than in Pakistan and Morocco.

Despite all the rhetoric about its innovation, Hong Kong’s record is based largely on a piggyback ride on the mainland’s R&D, while its traditional assets – free trade, investment and finance – are spreading in China through free trade zones. Without China, Hong Kong would be left with only half of its trade, and a fourth of its foreign investment and visitors.

Only further economic integration with Guangdong can alleviate the erosion of Hong Kong’s maturing economy and aging population, while boosting entrepreneurship, venture capital and innovation across the region.

Neither complacency nor old policies are an option anymore. Hong Kong needs a radical new vision, accompanied by decisive political leadership, intensified regional economic integration and an aggressive pro-growth strategy.

Time ran out half a decade ago.


Dan Steinbock is research director of international business at the India China and America Institute (US) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Centre (Singapore). See  


A slightly shorter version of this commentary was released by South China Morning Post on October 18, 2015.