Hong Kong must deepen integration with mainland China to survive the erosion of its maturing economy
Dan Steinbock says with its growth drivers in eclipse, Hong Kong must intensify integration with Guangdong
Financial Secretary John Tsang Chun-wah said recently that Hong Kong is "looking at a new normal, at the current level, at about 2-4 per cent [growth]". That may prove to be an understatement.
Before the global financial crisis, Hong Kong's growth still exceeded 6 per cent on the back of mainland China's double-digit growth. Between 2009 and 2013, the expansion was more than halved, to 2.8 per cent. Last year, growth slowed further, to 2.5 per cent. Hong Kong's old growth drivers are in eclipse.
Recently, Chief Secretary Carrie Lam Cheng Yuet-ngor lamented that tackling poverty, with Hong Kong's rapidly ageing population, would be "an uphill battle". With the plunge in growth in the post-crisis years, elderly poverty has 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 are in eclipse.
Four of every five visitors are from the mainland. In the first half of the year, the number of visitors increased only 2.8 per cent over the same period in 2014. Hong Kong is losing favour with mainland tourists. Meanwhile, over the recent National Day golden week, Chinese visitors' long-haul trips to the US, Russia and France surged.
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Accordingly, Hong Kong retail sales fell for the sixth straight month in August, slipping 5.4 per cent from a year earlier. The outlook remains uncertain.
What about trade? Until recently, Hong Kong benefited enormously from mainland China's growth, which was fuelled by net exports and investment. But the mainland's rebalancing means a massive shift towards innovation and consumption - away from net exports as the key source of growth.
In the first eight months of this year - amid stagnation in the US, Europe and Japan - Hong Kong's export value fell 2 per cent, year on year, with domestic exports falling 13.2 per cent. As a result, export growth forecast for 2015 was revised from 3 per cent to zero.
In the coming years, the mainland and Hong Kong economies may also take a hit from the Washington-led Trans-Pacific Partnership deal, assuming it is ratified by members.
Ever since the global crisis, Hong Kong has enjoyed ultra-low interest rates. But that, too, is coming to an end. The net effect is bound to affect the inflated property market, which may face a 25-30 per cent correction in the next two years.
Will global growth boost Hong Kong's expansion? That's unlikely. As clouds continue to hang over the global economy, the International Monetary Fund recently cut its forecast for global growth this year to 3.1 per cent.
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 centre. But neither is likely. As Chinese financial reforms are accelerating and capital convertibility is a necessary step towards the renminbi's role as a major international reserve currency, the financial clout of Shanghai - and other major mainland cities - is rising.
Until recently, Hong Kong has dominated the rapid expansion in renminbi usage outside the mainland. But its de facto monopoly is eroding. In Asia, it is followed by South Korea and Singapore, while British Prime Minister David Cameron hopes to make London a leading offshore renminbi centre.
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 Jinping's UK state visit this week. In the recent US-China summit, the White House also began talks about renminbi trading and clearing in the US.
According to the World Economic Forum, Hong Kong ranks seventh for global competitiveness. Measured by per capita income, the city ranks around 10th worldwide, ahead of even the US. Over time, these 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 research and development investment in gross domestic product. In the most competitive countries, it is 2.4 to 4.4 per cent (Germany and South Korea, respectively); 2.2 per cent in Singapore and close to that figure in mainland China. But in Hong Kong, it is barely 0.7 per cent.
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Despite all the rhetoric about innovation, Hong Kong's record is based largely on a piggyback ride on the mainland's research and development, while its traditional assets - free trade, investment and finance - are spreading in mainland China through the free trade zones.
Without the mainland, Hong Kong would be left with only half its trade, and a quarter of its foreign investment and visitors.
Only further economic integration with Guangdong can alleviate the erosion of Hong Kong's maturing economy and ageing population, while boosting entrepreneurship, venture capital and innovation across the region.
Neither complacency nor old policies are an option any more. 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 http://www.differencegroup.net