A time to be bold: as traditional business strengths are eroded, Hong Kong must reinvent itself to survive
Hong Kong Free Press
By Andrew Collier
In my 25 years living in Hong Kong, I have seen the city perennially struggle with its position as a global financial centre. Between the Handover, Severe Acute Respiratory Syndrome (SARS), the Article 23 protests in 2003, the 2019 protests, the National Security Law, and increasingly fractious geopolitics, Hong Kong has frequently found itself in the eye of the storm.
These days, the optimists argue that few Asian cities can replicate Hong Kong’s unique set of strengths, including its educated workforce, efficient infrastructure, and position as a way-station for capital into and out of China. The pessimists point to the declining rule of law, the intrusion of Chinese Communist Party politics in day-to-day affairs, and the growing incompetence of the leadership as reasons for concern.
I was among the optimists when I first arrived in 1998 (leaving aside my visit to Hong Kong as a student in 1983 before attending Peking University). While I was dismayed by the city’s vast inequality, it was clear that Hong Kong offered a diligent workforce, sophisticated transportation system, and a knowledgeable financial industry, which all pointed to a bright future.
No longer. The declining rule of law and uncreative policymaking have rendered the city’s advantages less effective. Hong Kong has relied on a civil service operating on auto-pilot, a finance industry cosily protected by the Hong Kong dollar, elites happy to dine out on high property prices, and a government squeezing every last dollar out of its land bank for tax revenue. One of the main reasons for Hong Kong’s privileged position over the mainland – the rule of law – is rapidly eroding, leading global businesses to quietly skirt it for more stable climes.
Meanwhile, the Hong Kong government’s reputation as a “Swiss watch” of management is being unwound by the government’s eagerness to court favour in Beijing to the detriment of competent leadership. I made many trips to the provinces when I worked for the Bank of China, where I learned that local officials negotiate with Beijing to bend the rules as much as possible to suit their conditions. The Hong Kong government tends to assume policy mandates are a given and there is no room for discussion.
That doesn’t mean there is no hope for Hong Kong’s future. But let’s look first at the problems.
Take the finance industry. The western – and not so western – banks like HSBC and Standard Chartered once had a privileged position as the leading provider of capital to the mainland. My firm, Bear Stearns, earned a US$20 million fee for the listing of China Telecom in 1997. China needed western banks to privatise its state firms and were willing to pay handsomely for the access they offered. Nowadays, Chinese firms hire up to ten banks to arrange initial public offerings (IPOs), paying fees as low as US$100,000 per bank – barely enough to cover the expense of the market roadshow. China’s stock markets, once the little brother to Hong Kong, now have a market capitalisation of over US$10 trillion, compared with Hong Kong’s US$4 trillion. More important, the mainland banking system has exploded from $6 trillion in 2007 to over US$50 trillion currently.
While ample capital may no longer be its main advantage, Hong Kong has excelled in its trained workforce, international connections, and stable rule of law. Those advantages are evaporating. Western talent is being replaced by mainland talent, reducing salaries. I witnessed this while working for Guosen Securities in Hong Kong back in 2012. While the Hong Kong and western employees continued to make good money, Guosen operated an entirely separate staff a few streets away from the International Finance Centre in Central, paying as little as HK$9,000 a month for equity analysts just out of university. The Greater Bay Area – if it’s even a coherent programme – will serve to accelerate the decline in salaries for Hong Kong residents.
Given these problems, what is the attitude of the mainland authorities to the changes in Hong Kong? Double down on control, and focus on what they view as the cause of the discontent – property prices. According to University of Hong Kong emeritus professor John Burns, in 2020 the Party “reorganized and upgraded the coordination group into the Central Hong Kong and Macau Work Leading Small Group, a smaller, more focused, and more high-powered body with the imprimatur of the Politburo to direct policy on Hong Kong.” Then, in March 2023, the Hong Kong and Macau Affairs Office was moved from the State Council to the Party Central Committee, further centralising power.
According to Burns, Hong Kong officials are now “in direct and frequent contact” with the mainland liaison office. This extra layer of political control further stifles the opportunity for desperately needed creative policymaking. Xia Baolong, the most senior official in charge of Hong Kong, continues to stick to the messaging that “sabotage by foreign forces” is a principal threat to the city. The leadership ignores what foreign businesses are crying out for: a legal red line protecting their assets and personal safety. The Hong Kong Bar Association has called for increased clarity about Hong Kong’s national security legislation to avoid a “chilling effect” on the city.
Meanwhile, Hong Kong is confronting a maelstrom of economic headwinds, some not of its own making. China’s economy is in a tailspin. The property sector, which has accounted for 30 percent of the mainland’s economic growth, is in a structural decline, while the country is burdened with almost 300 percent of total debt to GDP, according to the IMF, which likely understates the problem. Hopes for a large financial stimulus were dashed at the two sessions in Beijing because – understandably – the leadership is concerned about throwing good money after bad. China’s switch to new engines of growth in semiconductors and other technology is unlikely to bear fruit in the near term. The potentially long-term structural decline in China’s fortunes will make it more difficult for Hong Kong to rely on the mainland. It will also force Hong Kong to reinvent itself.
Reliance on the property industry as an economic engine and source of tax revenue is not sustainable in the long-term. First of all, Beijing won’t allow it, because of a belief that lack of affordable housing helped to cause the 2019 protests. Second, squeezing tax revenue from a limited asset is not a good long-term plan. Hong Kong needs to find new sources of economic growth. It must differentiate itself from the mainland in order to fashion itself as an international city, rather than as a glossy and expensive part of the Greater Bay Area.
Competing with Singapore on fund management is one option but is risky. Hong Kong has just 400 family offices compared with 1,100 in Singapore. The bank Natixis estimates that Hong Kong’s net private-wealth inflows likely jumped more than fourfold in 2023 and may revert to near pre-pandemic levels in 2024. However, attracting new fund capital will depend on the state of the markets and whether western and mainland investors are comfortable parking their money in Hong Kong. This may be difficult because of the current state of Hong Kong’s legal situation. Attracting foreign capital for fund management looks like easy money for Hong Kong, but investors remain concerned and are likely to be hesitant.
But there are other paths forward. Hong Kong must further integrate with the global economy. Professor Peter Hamilton of Lingnan University argues in his book, Made in Hong Kong (2021), that Hong Kong in the 1960s and 1970s turned from Britain to the United States to generate growth in trade, which was a huge success. Instead of chasing Middle Eastern money, which is likely to be inadequate to support the city as a centre of fund management, Hong Kong should foster better relations with the US and with the European Union.
Beijing may not like that and it won’t be an easy road for the US, given the geopolitical atmosphere, but the returns are likely to be worth the pain. The expansion of Hong Kong’s remit could include encouraging multinationals to use Hong Kong as a base for control over shifting Asian supply chains. Hong Kong has an excellent financial and accounting infrastructure that is attractive to western corporates running pan-Asian operations. It’s also a nice place to live. But for this to occur, corporate employees must be comfortable that there are legal “red lines” in place that ensure personal safety and security of assets.
Elsewhere, Hong Kong’s singular most important contribution to the mainland – and its key differentiating factor – is the convertibility of the currency. Beijing views Hong Kong as a central part of its policy to internationalise the renminbi. This is a strength that Hong Kong should leverage. Leaving aside the currently dismal state of the equity markets, Stock Connect has been a success for Hong Kong. New products should be added.
James Fok, former head of strategy for the Hong Kong Exchange, has argued that financial derivatives could be a strategic advantage for the city as the renminbi expands. While many western funds are leery of China due to its economic doldrums, there are more aggressive funds that might be interested in investing in renminbi-denominated derivatives or other products. That means the monetary authority must not indulge in political policies such as banning short-selling and encouraging state buying of stocks, which will only further discourage international capital from expanding in a “rigged” Hong Kong market.
All of these strategies will require creative thinking by the government, and a willingness to carve a path forward through healthy negotiations with Beijing. It’s not clear that the government has the political skills, global understanding, or nerve to engage in blue-sky thinking. But the alternative – chasing quick fixes through ad campaigns and bright and shiny policies with little content – will not work over the long term. Hong Kong must reinvent itself with verve and imagination.
Andrew Collier is Managing Director of Orient Capital Research and the author of three books, China’s Technology War: Why China Took Down its Tech Giants (2022), China’s Global Acquisitions (2018) Shadow Banking (2017). He has been a Beijing correspondent for the South China Morning Post and president of the Bank of China International USA as well as Asia media analyst for Bear Stearns. He is currently a Senior Fellow at the Mossavar-Rahmani Center at the Harvard Kennedy School.
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