By Alberto Vettoretti, Managing Partner, Dezan Shira & Associates
2020 will certainly go down as one of the most challenging years in Hong Kong’s recent economic history. COVID-19 has taken a toll in every country around the world and Hong Kong has been no exception. While China and many of its world-beating cities have been able to weather the pandemic and lead the way in a still flimsy but steady recovery, Hong Kong has not been able to jump in the bandwagon yet and find a strategy to stir the boat in the right direction.
The SAR’s GDP contraction in 2020 will be in between 6 and 7% while 2021 projections indicate a mild rebound to the tune of 3.5%, amongst the lowest in the region.
Many of the problems the city is grappling with are of its own making and have old origins. The former British colony has been going through a roller-coaster of economic successes, setbacks, and emotions; if 2020 was another year of dismay, 2021 will hopefully pave the way for its revival and a new economic renaissance provided that both government and businesses are aligned on common goals.
The Hong Kong government has already disbursed over 330 billion HKD into its ailing economy, an amount representing over 10% of its GDP. Still, the outlook for the first half of 2021 is grim with tourism, F&B, hospitality the sectors most affected by the limitations in travels imposed under COVID.
What the pandemic did not affect in 2020 was Hong Kong’s stock market ability to raise funds. Over 50 billion USD were raised last year, the best performance in the last decade. Only the loss of Ant’s IPO did not allow the HKSE to claim the top spot in global IPO fundraising in its perennial battle with Nasdaq for listings supremo. Financial markets were obviously a bright spot in Hong Kong’s economy. Other sectors have been weakened by both internal and external factors.
The question remains: what does Hong Kong want to become? What are the plans to revive its economy going forward? Many are scratching their heads about Hong Kong’s future, its ability to start walking straight and unswervingly into its future. More importantly, how can the government instigate a more pragmatic dialogue at all levels, starting from the grass-root and become a lot more resolute, responsive, and accountable? And would the many business lobbies sacrifice self interest in favor of genuine improvements in the society? Given the deeply intertwined interest groups in the city, everyone would need to take one step back before, eventually, two forwards.
Hong Kong has been sitting on its laurels for a very long time, too long. Free capital and trade, low tax and minimal government intervention have been vital factors in shaping up Hong Kong successes but a lot more is needed now to overcome the real issues the city is unable to overcome.
Hong Kong needs a fresh start
Hong Kong government’s past and present laissez faire attitude and minimal intervention in business decisions have contributed to its prosperity as a global financial and trading center. At the same time, they have also added pressure to the city in term of inability to take those bold decisions needed to unhinge its true potential.
By letting businesses (or better the few lobbies being in charge behind the scene) run free in influencing the agenda, pace and level of its development, Hong Kong has ended up with a polarized society and a growing divide between the have and have nots, between those who have been shrewd in playing the system and those who saw the train pass by and are now under increasing pressure to make ends meet.
According to a recent report by Nikkei, the number of foreign companies with offices in Hong Kong has fallen for the first time in 11 years, particularly in the financial sector. The reasons behind the drop are multi-fold but add to the pressure of how Hong Kong is and will be perceived and utilized as a business hub in Asia. A recently published annual survey by the Hong Kong government also indicates a decrease of 3% in the number of foreign companies (excluding mainland companies) in the city. Many investors are also reducing headcounts and expand corporate functions elsewhere in the region particularly across the GBA.
Mainland Chinese companies, on the other hand, have been expanding into Hong Kong and their number doubled over the past several years. This increase, however, did not make up for the reduction in American, British, and Japanese companies according to the same report.
How would Hong Kong win back the hearths (and above all the wallets and commitments) of those who left or are planning to leave the city and give a fresh layer of paint to its status of preferred international business hub in Asia?
A few critical aspects need to be analyzed:
Hong Kong will not be able to thrive without its home-grown talents. This is the hardest task lying ahead given the level of discontent amongst the youth. Recent articles from mainstream Hong Kong media pointed out a growing unemployment rate (close to 7%) with the age group 18-24 particularly hit and hovering over 18%, the highest it has ever been in 16 years. The situation might get a lot worse before it eventually improves after the government handouts ended at the end of last year and the inability to curve the spread of COVID-19. With salaries stagnating over the past several years, GDP trending downwards, little confidence in the government and the most recent economic malaises there is no immediate silver bullet.
Sadly, trade war and COVID-19 were both not able to knock Hong Kong out of the world’s most unaffordable city podium with the real estate sector unaffected. Lack of action over subsidized housing, new land development delays and ineffective plans to alleviate the pressure on the youth are all contributing to the general discomfort amongst many of its citizens.
If you cannot even afford to own an apartment (not a shoe box!) then how can you even start planning for your future with peace at heart?
Whether high local unemployment would trigger a brain-drain over the border and push more young people into the four corners of the GBA remains to be seen. I doubt this might be the ultimate plan by bureaucrats and academia in Hong Kong, but it is certainly an intriguing option. It is certainly true that opportunities still abound across the river and this should not be a mere slogan but a concerted effort by all stakeholders across a much larger playing field. Not enough has been done in the past to convey the message about the opportunities coming from a positive and successful engagement and integration within the GBA.
How to encourage the HK youth to visit, engage and spend more time in the GBA at a time when the sentiments towards the Motherland hit new lows?
Education should play a key role as a start. Hong Kong is the only city boasting 4 universities in the world’s top 100 ranking. This has not automatically translated into providing more opportunities to broaden students international outlook, understand both Western but also Chinese values and equip them with the tools needed to succeed in this globalized, ever changing and extremely competitive business environment. Universities and higher education institutions should contribute to more international exposure “with Chinese characteristics” given the dominant role (which translates into opportunities) China will play going forward.
Financially supported internships opportunities in Guangdong shall be stepped up beyond the current numbers. Actual business experience should complement academic knowledge as a must do going forwards. This will also bring more interaction and engagement with peers across the border. Only this exchange of ideas, creativity and experiences will lead to more rewarding and fruitful employment opportunities beyond Hong Kong.
The concept is equally valid for local start-ups which should eventually look at the GBA as the new playground where to scale up and succeed. This would need to become a two-way stream by also allowing Mainland China younger entrepreneurs to have a fast-track access to Hong Kong’s financing and management expertise.
Overseas talents are also much needed to truly make Hong Kong Asia’s “world city”. The SAR needs foreign talents to complement its local pool of professionals and create a multi-cultural, energizing, and nurturing business environment. Hong Kong is also at risk of an exodus that could threaten the city’s “East meet West” reputation in the region. Many up-and-coming metropolises (from Bangkok to Singapore, from Ho Chi Minh City to Shanghai) are competing for the best talents out there and could hurt the city’s competitiveness.
Unfortunately (or fortunately for those few who own real estate in the city) Hong Kong has bene hanging onto the “most expensive city for expat” spot for too many years. Unaffordable rents cramped and run-down apartments, prohibitive schooling fees (if you can secure a spot) are a deterrent to anyone looking at pursuing a long-term career in the city. Flexible housing and work visa policies, fast track residency application (allowing for lower taxes on an apartment purchase), support over schooling would also allow many to look at Hong Kong as a place to potentially call home and not just a fragrant harbor from where to look at the next career move elsewhere in the region.
Doing business is hard enough, why complicating it further?
Hong Kong has always praised itself as the financial capital of Asia. Its banking sector is still thriving, and free capital is moving in and out at anyone’s will.
In this interconnected, increasingly transparent world, why is it still so difficult to open a bank account in the city? Why do you still need directors or investors to physically travel to Hong Kong to “tick the box”? It is quite frustrating the fact that while most banks in Shanghai, Bangkok and Singapore have been facilitating the opening of corporate bank accounts via video conferences and remote applications, the old financial dinosaurs in Hong Kong are still living in the Mesozoic Era. No wonder new financial players and fintech companies are disrupting the market and winning a lot of businesses away from the traditional banking institutions. Doing business across the globe is hard enough, even more so under this “new normal”, simplifying and digitalizing procedures would also help to improve Hong Kong’s attractiveness?
Is this the time to finally go digital and green?
Having lived across the border in Shenzhen for 20 years and having seen the city’s improvements and achievements in term of government efficiency, e-payments implementations, electric vehicle policies, smart city planning it is still hard to believe Hong Kong is only now trying to catch up with its forward-looking neighbor.
It is also quite telling the fact that fax machines are still in use in the city, many applications at government bureaus still require physical presence, cash is still the preferred form of payment and taxis are amongst the oldest in this part of the world. The implementation of a digital health code system allowing travelers to zip back into China and any other country implementing a “travel bubble” would be a good start to embrace the technology age. This could also be extended to smart cards enabling those with valid residence and work permits in either side of the border to easily commute in the GBA. The seamless movement of people as well as goods and capital will be a vital component in the success of the bay area.
The good thing is opportunities still abound
Hong Kong, just out of its own steam, will not be able to grow much further. Its future remains on how fast Hong Kong people and businesses of all sorts will integrate and play a larger role within the GBA.
The city’s geographical location and status (one country – two systems still here till 2047) are its biggest advantages. If taken as a single block, the GBA is the 12th largest economy in the world, made from 11 cities with a combined population of over 70 million and an economy which has the 2 billion USD GDP mark in sight (larger than Italy).
Hong Kong’s GDP accounted for 20% of China’s in 1997, this has now shrunk to around 3%. Over the same period, China’s growth has been nothing less than extraordinary and while Hong Kong has also played and is still playing an important role in the Middle Kingdom’s success story, it is now time to forget about past glories and start a new phase of proactive engagement across the border.
The integration of the cities and economic clusters within the Pearl River Delta is not a new subject. Discussion on how to achieve this challenging goal started many years ago but only recently, following a top-down executive decision by Beijing, the agenda is more coordinated at the very top and this has translated into better communication and projects implementation amongst the different governments in GBA. While the 11 cities in the region will also fiercely compete to attract best companies, talents and projects, Hong Kong could carve out a fundamental role based on its privileged status.
The SAR is the de-facto international aviation hub and offshore financial center (also the largest global RMB clearing center) of choice for the region. While the 5 international airports in the GBA will always expand their international routes, only Hong Kong will be the hub with more global connections and networks. The recent investment into the Zhuhai airport is a clear indication of Hong Kong trying to cater for a better and faster integration with Chinese internal routes and provide a seamless experience and journey to those global travelers doing business in this part of the world, particularly with China.
After the recent economic and political challenges in the city, promoting an integrated GBA brand and “concept” would help the whole region grow stronger. Cities rivalry will still be there and would also be beneficial to the overall GBA development but the sooner each city will play its strengths under a synchronized agenda the sooner the bay would become a model of sustainable growth for other regions in the world.
A few sectors are clear winners
Its status as (one of) primary financial center in Asia enabled Hong Kong to build up expertise in financial services (services account for 95% of its GDP) second to none. It is understood that this skillset would be in great demand to provide better ROI opportunities for both private individuals and corporates in the GBA. Clear winners would include those companies, firms and professional in finance, insurance, fintech, banking and related fields. The overall financial sector in China has been gradually opening over the years and Hong Kong always played a privileged role through the Stock Connect (2014) and the Bond Connect (2017) allowing for offshore money to tap into China’s growing economy and bourses. More recently promulgated regulations in 2020 on wealth management (with the insurance connect initiative on the launching pad) also provided abundant opportunities to those Hong Kong players eyeing over US$3 trillion of private financial assets in China of which over US$1 trillion is in Guangdong alone. Expertise in insurance and investment products, green finance, funds, securities and asset management, family offices, block-chain, fintech will all be in great demand.
Still, the role of Hong Kong withing GBA should not be limited to finance.
Besides its growing middle class looking at better returns, the GBA will also produce a large pool of greying population in the years ahead. The demand for world-class facilities, management systems, services for this rapidly aging population would also provide many opportunities for Hong Kong and global players involved in the medical, healthcare, elderly care sectors.
Back-office and customers relationship centers can also play on the GBA strengths where a large pool of technical, hard-working, and language-skilled talents is emerging. Many Hong Kong financial and professional organizations (including Dezan Shira & Associates) have already established outsourcing centers in the region. Trading and sourcing houses have also scaled down main functions in Hong Kong in favor of less costly location in China closer to their vendors or final clients.
The education sector in the whole GBA would also generate demand for best-in-class teaching, facilities, management, and services. The goal of the region is to build up a world class regional city cluster driven by innovation and R&D. Hong Kong has made a name for itself in higher education and boasts well known universities which could team up with Guangdong educational institutions to provide top research and development facilities and innovative laboratories.
I am particularly curious to see the impact of the “joint venture” between Hong Kong and Shenzhen once the Innovation and Technology Park at the border zone of Lok Ma Chau is completed. This will represent one of the bolder attempts to leverage both cities strengths in grooming technology talent and developing world class technological development in Hong Kong and the Mainland.
The ideal “GBA R&D and manufacturing loop”:
Trading has always been a cornerstone of Hong Kong’s economic development and the Mainland is Hong Kong’s largest trading partner (ASEAN is now its second). However, the importance of Hong Kong in term of trading and logistics hub is diminishing with other portal cities in China climbing through the ranks. Qingdao and Tianjin will be soon closing the gap with the SAR. Integration with the GBA would also mean leveraging other cities (and ports in this case) strengths. This will mean looking at other sectors to spur further growth and employment opportunities as Hong Kong, with declining traffic and throughput, is no longer a “must-call” port. Instead, the former British colony can play a leading role as global aviation hub for international passengers and cargo flights to further connect onto China’s 160 existing airports with 130 more currently under construction.
Recently, China has also been signing new trade and investment agreements with the rest of the world. These include the Regional Comprehensive Economic Partnership (RCEP) with 10 ASEAN nations, Australia, New Zealand, Japan, and South Korea which aims to create an integrated market with 16 countries, making it easier for products and services of each of these countries to be available across this region. Hong Kong is not yet part of RCEP.
The Comprehensive Agreement on Investment (CAI) between China and the European Union is also seeking to improve the level playing field in China which will mean further trade and services liberalization as well as more direct trading opportunities for EU companies in the Middle Kingdom.
This would add pressure to Hong Kong as a mere re-export/import and invoicing center (still a very attractive one with a potential zero corporate income tax on offshore transactions). Hong Kong past advantages are diminishing due to the rapid opening and growth of China and the other GBA cities.
The SAR can play the role of facilitator for them to grow even faster in term of advisory, capital investment and exchange with the rest of the world. Hong Kong was, is and will always be the “connector” between the West and China and between China and the world. Chinese companies will continue to use Hong Kong as a springboard to leap into international markets and, at the same time, Hong Kong will be the link for the rest of the world into the larger opportunities in the GBA.
This article was first published by Asia Briefing, which is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in China, Hong Kong, Vietnam, Singapore, India, and Russia. Readers may write to [email protected] for more support.
About the Author
Alberto Vettoretti was born in Italy and received his education in the UK where he obtained a Bachelor Degree in Chinese, Economics and Management (Durham) and an MSc with a specialization in Chinese law (Staffordshire). He has been living in Asia for over 20 years and speaks and writes fluent Mandarin, Italian, English and Spanish.
Alberto joined Dezan Shira & Associates as an equity partner in September 1998. Over the years the company has grown into a pan-Asia organization with over 300 professionals and 19 offices in China, India, Vietnam, Hong Kong, Singapore, Indonesia, and liaison offices in Italy, Germany and the United States. In 2014 the firm established the Dezan Shira Asia Alliance with offices in Malaysia, the Philippines and Thailand.