Can Hong Kong become indispensable to the nation again?
Lawrence J. Lau says 20 years after the handover, it’s time to abandon the policy of positive non-interventionism as the economic and social challenges facing the city cannot be solved without long-term planning and coordination
Despite all the predictions of doom by Western pundits in 1997, Hong Kong has done well since its reversion of sovereignty to China 20 years ago. The handover was a historic event, hailed by Chinese everywhere as the closure of the century-long humiliation suffered by China at the hands of the Western powers, beginning with the Opium War. Even Taiwan sent a delegation to Hong Kong for the handover ceremony.
The transition itself went smoothly under the leadership of Tung Chee-hwa, the first chief executive of the Hong Kong special administrative region. However, soon after, East Asia was engulfed by a currency crisis, leading to widespread devaluation and economic recession everywhere (and the bursting of the housing bubble in Hong Kong). This was followed by the outbreak of the severe acute respiratory syndrome in 2003, the 2008 global financial crisis and the subsequent European sovereign debt crisis, which all affected the economy negatively.
Hong Kong, ever so resilient and resourceful, survived all these crises. Today, the city remains ahead of South Korea and Taiwan in real gross domestic product per capita, but behind Singapore. The most significant change is the decline in the size of Hong Kong’s GDP relative to the mainland’s – it went from 8.7 per cent to just below 3 per cent, and on a per capita basis from 16.6 times to only 5.6 times.
However, during the past two decades, income inequality in Hong Kong has risen sharply, as has the cost of housing, which doubled between 1997 and 2016. A significant proportion of Hongkongers live in tiny, substandard, illegally subdivided rooms, which are a major fire hazard.
The outgoing chief executive, Leung Chun-ying, has tried his best to improve the housing situation. I believe his successor, Carrie Lam Cheng Yuet-ngor, will continue working on it. However, this problem cannot be solved overnight. We need a vision and a credible plan, so that people know decent and affordable housing will be available for all in, say, 10 years. This should help to dissipate a great deal of the latent anger among our people.
Politically, Hong Kong has not fared so well. The “one country, two systems” principle has been widely misunderstood. It is meant to be a single country, but with one part, the mainland, operating under the socialist economic system and the other part, Hong Kong and Macau, operating under the capitalist economic system. It is not meant to be two different political systems. Whatever happens to the “two systems” in 2047, it will always be “one country”. It is therefore essential to embrace the idea of “one country”, even if one does not support the current policies of the central or the Hong Kong government.
To this end, the teaching of Chinese history and culture in our schools, to help nurture the sense of nationhood, is important.
At present, both the mainland and Hong Kong economies are undergoing important transitions – with the mainland trying to achieve a “new normal”, with reduced reliance on exports and fixed investment and greater focus on domestic demand and innovation, and Hong Kong needing to find another role for itself. Before 1949, Hong Kong was an entrepôt port serving southern China. The establishment of the People’s Republic of China halted this trade and forced Hong Kong to develop its light manufacturing industries in the mid-1950s.
In the late 1960s and early 1970s, the rising wage rate in Hong Kong and the competition from Taiwan and South Korea caused light manufacturing to decline. But the Chinese economic reform and opening up in 1978 allowed Hong Kong manufacturers to re-establish their operations on the mainland, taking advantage of the lower costs of labour and land. Hong Kong once again became an entrepôt port and the source of the then much-needed foreign direct investment and foreign exchange for the mainland.
The Hong Kong stock exchange began to list the shares of mainland enterprises in the early 1990s, also helping to provide equity capital and foreign exchange. It is no exaggeration to say that Hong Kong was indispensable for the initial success of the mainland’s economic reform.
However, as the mainland economy continues to develop, Hong Kong’s role has gradually diminished. The growth of mainland trade has slowed as the mainland reorients its economy to its own huge domestic market; in any case, most of the trade is now carried out directly through mainland ports. The mainland has become a net capital exporter rather than importer. Thus, the Hong Kong economy has become more dependent on the mainland rather than the other way around.
Hong Kong is likely to lose the advantage of the full convertibility of its currency over the mainland in the next five years; it will also lose much of its advantage of a free trade port on account of the mainland’s continuing liberalisation.
The Belt and Road Initiative and the Greater Bay Area development plan can give the Hong Kong economy a new lease on life. They will open up significant economic opportunities for the city to reinvent itself once again.
The belt and road is a multicountry, multi-year development plan that aims to link and transform the economies of Asia, Europe, Africa and Oceania. Hong Kong is ideal as a centre for the financing of the belt and road infrastructure projects not only because of its complete capital mobility, full currency convertibility, stable exchange rate, rule of law, and low income tax rates (and no tax on interest, dividends and capital gains), but also its ready access to the huge mainland capital market and savings pool, and the support of the central government. Hong Kong can readily put together a financing package that includes both public and private participation, equity and debt, and short- and long-term bonds and notes.
Hong Kong is also an ideal home for a belt and road region-wide stock market, especially for enterprises in the developing economies. In 2015, the average daily turnover of mainland stock exchanges combined was more than US$41 trillion, compared to US$30 trillion for the New York Stock Exchange and US$2 trillion for the HKEx. This shows the huge buying power of mainland investors, and the opportunities for Hong Kong to get major enterprises elsewhere to list on the HKEx. Hong Kong can also serve as a springboard for outbound mainland direct and portfolio investment.
The belt and road will further increase demands for casualty, property and life insurance, which have already been growing by leaps and bounds, as do the derivative demands for reinsurance. In addition, since the mainland is potentially a major source of risk capital, an international reinsurance centre can be developed right here.
The Greater Bay Area, which comprises 11 cities of the Pearl River Delta, including Guangzhou, Shenzhen and Macau, will provide Hong Kong with its economic hinterland. Taking advantage of the presence of light and heavy manufacturers, hi-tech enterprises, inventors, entrepreneurs, venture capitalists, start-ups, investors and research universities in the region, Hong Kong can potentially become a truly full-service international financial centre that combines Silicon Valley, New York and Zurich into one. It can become the region’s venture capital and private equity hub, the market of choice for the flotation of stocks and bonds, and a centre for investment banking, including mergers and acquisitions, and reinsurance.
However, it is necessary to promote the free flow of goods and services, people, capital and information as well as the sharing of basic infrastructure facilities within the Greater Bay Area. One possible approach is to establish a pilot free trade area.
Positive non-interventionism, which provided a convenient excuse for the government not to do anything, no longer serves Hong Kong’s interests. Long-term planning and coordination are needed to realise the full potentials of both the belt and road and the Greater Bay Area plans. Hong Kong must make itself once again indispensable and irreplaceable, doing what other Chinese cities cannot do, but at the same time sharing the prosperity with them. Hong Kong cannot make it on its own.
Lawrence J. Lau is Ralph and Claire Landau Professor of Economics at the Chinese University of Hong Kong