The summer of Hong Kong’s discontent, 20 years after its return to China

Friedrich Wu says the political and socio-economic malaise that has been brewing here for the past decade is coming to a head with recent economic headwinds that are exposing the city’s fading competitiveness in its key industries. The anger that led to the Occupy protests in 2014 is still roiling

Hong Kong handover 20th anniversary

Friedrich Wu

Published: 5:18pm, 22 Jun 2017

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Hong Kong’s “fault lines” stem from chronic income stagnation and growing inequality, the soaring cost of living driven by ever-rising housing prices, and depressing employment prospects for the young. Illustration: Craig Stephens

On July 1, Hong Kong will commemorate the 20th anniversary of its transfer of sovereignty from Britain to China. The Hong Kong government has budgeted an extravagant HK$640 million to celebrate this milestone, but ironically has also revealed that it will mobilise 10,000 police officers to “protect” the attending state leaders, including President Xi Jinping ( 習近平 ). The local authorities also disclose that “huge barriers” will be erected to cordon off the hotel where China’s VIPs will take up their three-day residence.

For those who have followed Hong Kong’s tumultuous political developments in the past three years, such tight security measures do not come as a surprise. Rather than aiming to deter assassination attempts or terrorist attacks, they are more intended to shield state leaders from the embarrassment of being harassed by unruly local pro-democracy protesters and pro-independence “separatists”. Tellingly, these over-the-top procedures only serve to highlight the political and socio-economic malaise that has been brewing in the SAR for nearly a decade.

Imagining a far better Hong Kong, and rueing 20 years of misrule

On the pretext of the lack of progress in constitutional reform and universal suffrage, the eruption of the “Umbrella Revolution” in September 2014, which spurred tens of thousands of protesters to occupy public areas over a three-month period, was a clear manifestation of the local people’s discontent with what they perceive to be an unresponsive and unrepresentative SAR government. They hold it accountable for the development of several economic and social “fault lines” that have a detrimental impact on their livelihoods.

A man sits inside his “coffin home” in a subdivided flat in Hong Kong. The city’s Gini coefficient, which measures its income disparity, has climbed to a record high. Likewise, housing prices have become severely unaffordable. Photo: Bloomberg

Hong Kong’s “fault lines” stem from chronic income stagnation and growing inequality, the soaring cost of living driven by ever-rising housing prices, and depressing employment prospects for the young. According to official statistics, the real wage index for non-professional and non-managerial employees has been on a downward trend for several years. Even graduates are facing increasingly bleak employment prospects due to oversupply by eight government-funded academies plus a myriad of privately-funded post-secondary institutions, as well as a mismatch between salary expectations and skills.

Meanwhile, Hong Kong’s Gini coefficient has climbed to a record high, from 0.518 in 1996 to 0.539 in 2016. Likewise, housing prices have become severely unaffordable, with the median home price being 18 times the median household income, the world’s highest ratio.

The root causes of Hong Kong’s “fault lines” originate from the government’s fiscal dependence on high land prices through its continued collusion with property developers. The recent convictions and jail sentences of former chief executive Donald Tsang Yam-kuen and former chief secretary Rafael Hui Si-yan, in 2017 and 2014 respectively, for accepting bribes and favours from real estate and banking tycoons, illustrate the decay within public administration.

Former chief secretary Rafael Hui appears in court in December 2014. His conviction and jailing for accepting bribes and favours from tycoons illustrate the decay within Hong Kong’s public administration. Photo: Sam Tsang

How Carrie Lam can boldly lead the change Hong Kong needs

Adding to this, chief executive-elect, Carrie Lam Cheng Yuet-ngor, who received much of her election campaign donations from business magnates, is being investigated by the Independent Commission Against Corruption for “transferring benefits” by appointing an architect for a public building project without an open tender.

Even before these episodes, The Economist had already in 2014 placed Hong Kong at the top of its Crony Capitalism Index, which measures the extent of business tycoons profiting from close relationships with government officials.

The small, tight circle that runs Hong Kong

Besides alleged business-government collusion, the SAR suffers from an unsustainable economic structure which deepens the “fault lines”. Specifically, Hong Kong’s industry pillars – financial services, entrepôt trade and logistics, and regional headquarters services for multinationals – are increasingly facing fierce competition from China’s ambitious first-tier cities.

In financial services, market capitalisation of the Shanghai Stock Exchange has surpassed Hong Kong’s since 2011, followed by the Shenzhen bourse since 2015. These advancements, coupled with encouragement from the China Securities Regulatory Commission, have led to a rising diversion of mainland Chinese initial public offerings from Hong Kong to China. Likewise, offshore renminbi payments are increasingly handled by centres beyond Hong Kong, with the combined share of these surging from 17 per cent in 2013 to about 30 per cent in 2017. This is clear evidence that Hong Kong is losing its edge as the premier offshore renminbi centre.

Last but not least, the inception of the Shanghai free trade zone in 2013, with a clear Beijing mandate to become “the global centre of yuan trading, clearing, and pricing”, will pose a long-term threat to the SAR. In short, facing multiple challenges, Hong Kong’s status as a financial hub will be less secure going forward.

Containers sit at the Yangshan Deep Water Port, part of the Shanghai free trade zone, in 2013. The rapid expansion of mainland Chinese ports, which offer lower costs and competitive services, is eroding Hong Kong’s hitherto tight grip on this industry. Photo: Reuters

In trade and logistics, rapid expansion of mainland Chinese ports, which offer lower costs and competitive services, is eroding Hong Kong’s hitherto tight grip on this industry. For example, the SAR charges US$276 per 20-foot equivalent unit (TEU), whereas Shanghai’s port charges only US$185 per TEU. Beijing’s relaxation of “cabotage rules” since 2013, which now allow foreign-flagged ships to move their cargo between China’s coastal ports, is a severe blow to Hong Kong as it sets in motion an irreversible decline of the territory’s role as the key transshipment centre for China. As a result of these negative developments, the SAR’s container-cargo throughput has recorded a persistent downward trend in recent years, averaging an annual contraction rate of 4.7 per cent between 2011 and 2015. From being the world’s busiest port in the early 2000s, Hong Kong has now fallen to fifth position, outpaced by Shanghai, Singapore, Shenzhen, and Ningbo-Zhoushan. Guangzhou and Qingdao (青島), currently ranked seventh and eighth, are catching up expeditiously.

It’s official: Hong Kong’s port is on the way out so let’s get building

Last but not least, Hong Kong also faces challenges to its attractiveness as a hub for multinationals’ regional headquarters. Exorbitant operating costs, pervasive air pollution, and aggressive self-promotions by some of China’s ambitious tier-one cities are the key threats to the SAR’s stranglehold on this business segment. Mercer has rated Hong Kong as the most expensive location in Asia for expatriates, while CBRE Research ranks its prime office market as the most costly in the region.

To lure multinationals to locate their headquarters there, Beijing and Shanghai, aided by the Ministry of Commerce, have launched attractive schemes, offering generous tax rebates/exemptions, special distribution and export/import rights, wider market access and so on. Today, Beijing can boast nearly 200 multinational regional headquarters, while Shanghai hosts over 500. This trend is clearly developing at the expense of Hong Kong.

Protesters take to the streets in Mong Kok during the “Umbrella Revolution” protests in November 2014. The protests may be seen as a manifestation of the people’s desire to directly elect a more responsive government that can help reverse the SAR’s declining economic fortunes. Photo: Felix Wong

With the steady erosion of Hong Kong’s competitive advantages in its key industries, a fractured legislature split between Beijing-leaning and pro-democracy lawmakers, an executive government beholden to vested business interests and hiding behind an archaic policy of “positive non-interventionism”, and an “old” economy captured by self-serving crony capitalists, Hong Kong’s descent seems as inevitable as it is inexorable.

Beijing should make its own people understand Hong Kong’s Basic Law

The Umbrella Revolution may thus be seen as a manifestation of the people’s desire to directly elect a more responsive government that can help reverse the SAR’s declining economic fortunes. However, with constitutional reform stalled and the government in limbo, unable to secure a policy consensus and support from the divisive legislature and deeply entrenched business interests, the territory’s “fault lines” will only deepen and widen. On July 1, Xi will come to town to “celebrate” the 20th anniversary of a Hong Kong SAR under a cloud.

Dr Friedrich Wu, a former Hong Kong resident, is an adjunct associate professor at the S. Rajaratnam School of International Studies in Nanyang Technological University, Singapore

This article appeared in the South China Morning Post print edition as: Discontented in HK

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