At an economic crossroads, Hong Kong needs a proactive strategy

Although the Greater Bay Area will provide an economic relaunch pad, the city can’t afford to be a passive player adapting to paths defined by others
With Hong Kong facing a supply bottleneck in land, labour and capital, opening multiple routes for talent from around the world is also vital

Anthony Cheung

Published: 5:30am, 5 Nov 2023

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The theme of Chief Executive John Lee Ka-chiu’s second policy address was “A vibrant economy for a caring community” and more than one-fifth of the speech was devoted to consolidating Hong Kong’s advantages and building a diversified economy.

A range of measures were set out – to raise competitiveness, grow the innovation and technology ecosystem, attract companies to redomicile in the city, attract and retain talent, revitalise tourism, and press ahead with the Northern Metropolis as the new engine for growth.

All are laudable directions. But while advantages and opportunities remain, the challenges are deeper than often recognised.

Financial Secretary Paul Chan Mo-po has just warned that the deficit for this fiscal year could exceed HK$100 billion (US$12.8 billion), far more than the HK$54.4 billion estimated in the budget at the beginning of the year. This follows an equally significant underestimation last year, for which the deficit estimate more than doubled from HK$56 billion to HK$140 billion.

In his budget, Chan forecast the economy to grow between 3.5 and 5.5 per cent this year, riding on expectations of post-Covid “revenge” consumption and inbound tourism, while assuming a strong rebound on the mainland.

In August, the forecast was revised to 4-5 per cent. Now, given the lacklustre performance in exports and investments, actual growth is likely to be lower.

Hong Kong is at an economic crossroads. The city faces the double whammy of a sluggish global economy and a setback on the mainland, with the bursting of its real estate bubble.

A disproportionate share of global growth in 2023 – around 70 per cent – will come from Asia. Asia also receives the largest share of global investment – 44 per cent, according to McKinsey Global Institute. China’s economy is crawling back up on a bumpy road, driven mostly by consumption.

Hong Kong’s outlook is at best mixed. Inbound tourism is gradually picking up, so are retail sales and consumer spending, with unemployment at a four-year low of 2.8 per cent. However, both the property and stock markets are performing poorly.

The initial public offering market could hit its lowest fundraising level in 11 years, according to Deloitte China. Foreign direct investment inflows have slackened.

Between 2018 and this year, the global gross domestic product grew by 13 per cent in real terms. Mainland China grew by 27 per cent and Singapore by 11 per cent, but Hong Kong’s figure is negative 0.9 per cent. Putting aside the pandemic disruptions experienced by all economies, Hong Kong has also suffered immensely from the 2019 unrest and its political aftermath.

Structurally, Hong Kong faces a supply bottleneck in land, labour and capital. While investment from the public sector in machinery, equipment and intellectual property products has doubled over the past decade, that of the private sector has been on steady decline especially since 2019, with the 2022 level at only 40 per cent of 2012.

At this critical juncture, opportunities and challenges are two sides of the same coin.

Hong Kong’s future lies in a rising China and a rising Asia. The mainland is now the main supplier of capital and talent. As the city’s finance becomes dependent on mainland corporations and their performance, it is increasingly exposed to risks and twists and turns in the mainland economy.

Such dependence might also mean less effort made to attract international capital and a further distancing from Western economies, with which Hong Kong used to enjoy strong connections.

While the Greater Bay Area, and Asia on a larger scale, will provide a relaunch pad for the local economy, regional competition has become fiercer. The city cannot afford to be just a passive player adapting to paths defined by others. A proactive regional strategy is necessary.

In fostering an innovation and tech hub, Hong Kong must partner with other cities in the Greater Bay Area and learn to better leverage its existing strengths in finance and professional expertise, as well as its hub status and global connectivity.

Its world-class universities are not short of top-notch researchers in science and technology. Yet local firms have long thrived in trade, real estate and finance instead.

A view of the HKU Business School Shenzhen campus in Futian district, Shenzhen. In fostering an innovation and tech hub, Hong Kong must partner with other cities in the Greater Bay Area. Photo: Xiaomei Chen

Re-industrialisation requires a paradigm shift and transformative reskilling on the part of both enterprises and government agencies. Innovation should be a potent force of change in all parts of society, including industries, public services and social innovation.

Opening multiple routes for talent from around the world is indeed essential. Bill Gates once said that cutting-edge companies base their location decisions on the availability of talent and a culture for innovation, rather than tax policy. Hence retaining talent is as crucial as recruiting new talent.

Hong Kong is seeing a steady brain drain partly due to political reasons. It has drawn talent from the mainland but seems less attractive to foreign talent, especially from developed countries, apart from ethnic Chinese scientists relocating from a less welcoming America.

As of early this year, 95 per cent of approved applicants for the Top Talent Pass Scheme are from the mainland.

Hong Kong’s immediate challenge is economic, which also affects the city’s public finances and ability to invest in infrastructure and human capital. The response strategy cannot lose sight of politics.

As conspiracy theories abound, mainly about the national security law and patriots-only administration, local anxieties about the future and international doubts breed uncertainty over the economy.

Intense US-China rivalry defines the new normal. Hong Kong needs to map out a workable path and re-conceptualise its intermediary role so that it can still purposefully serve China and the world. The onus is on it to underscore its determination to remain a city of pluralism, possibilities and best practices despite all odds.

Anthony Cheung is a former secretary for transport and housing