20 Years On. The Economy - A Tale of Two Cities.

Any opinion on the state of Hong Kong’s economy depends on your position in society. Some folks are doing well. Others are struggling. In some sectors, wages that have not grown in real terms for decades. Meanwhile, salaries for graduates are stagnant. Yet, property prices boom, placing them beyond even professionals earning a decent wage.  Shaping any narrative on the economy is personal prospective. The banker working in Central see things as fine and dandy. The cleaner at the Airport on hourly rates has a different take. It’s almost a tale of town cities.

Writing about the Hong Kong economy is a challenge because its a complex beast. The best I can do here is skim the surface talking through the major trends and challenges. Dictating the ebb and flow of the Hong Kong economy since the British landed has been politics. In particular, events to the north. As China has settled on a steady course, Hong Kong's position has stabilised. 

The Gini coefficient, that cold calculation of the wealth gap, tells a story. Higher figures show a greater wealth gap. Hong Kong’s Gini coefficient is around 0.537. The figure was 0.45 in 1981. As a comparison, Germany has a figure of 0.28 and Singapore is 0.47. Thus, Hong Kong has one of the highest wealth gaps. Although, you don't need the Gini data to tell you that. Look around. An underclass is developing that exists on the 'minimum wage'. 

Starting in 1978, the Hong Kong economy underwent a significant restructuring. Driven by the opening of China, industries moved there to enjoy cheap labour. The Pearl River Delta region became Hong Kong's workshop. Hong Kong then transitioned towards a high value-added, knowledge-based economy. In the process, well-paid jobs in manufacturing disappeared. Replacing them was low-paid service jobs. The service industries absorbed most of the workers displaced from manufacturing.

Other factors are also at play. Part of the increase in Gini is due to low-income households made up of recent arrivals from China.  Arriving at a rate of 150 a day, this influx has a disproportionate impact on low-paid workers. Only 6% of the new arrivals have high school education.

Today, Hong Kong is a leading international financial centre with a service-based economy. Anchoring the economy are policies of low taxation, a free port and positive non-interventionism. Yet, it could be argued that Hong Kong's main advantage is its geographical position. Sitting on China's southern coast is a distinct blessing.  With links to adjacent regions in Asia, Hong Kong remains the gateway to China.  

Employing the majority of the workforce are the service industries. Retail, hotels, restaurants jobs make up 43%. Manufacturing is only 6.5%, whilst finance, insurance, and real estate jobs are 20.7%. As regards export partners, China takes 54.8% of all trade. The UK is 7.2% and the US 9.3%.

Hong Kong's scores well on competitiveness. In 2016, it came second in a survey by the International Institute for Management Development, Switzerland. The World Economic Forum has Hong Kong in seventh place. As regards ease of doing business, the World Bank has us in the top five. All satisfactory results. Yet, the data hides some issues that are a grave concern. The wealth gap is the most pressing. 

Those with skills have managed to migrate up the professional ladder. It's the better educated that tend to seize the opportunities. No surprise there. Other factors at play are an ageing population and smaller households.

The economy has had a roller-coaster ride. This started almost immediately after 1st July 1997. The Asian financial crisis prompted an attack on the Hong Kong dollar in October 1997. Seen off by deploying our massive reserves, it nonetheless demonstrated a vulnerability.  The stock market lost 23% in three days. Then property prices fell as confidence slipped. In 2003, SARS hit hard. Again, the stock market and property prices took a beating. What is striking is that in the face of these shocks, Hong Kong’s economy rapidly rebalanced. The doomsday commentaries proved wrong.

At these times of crisis, China has sought to prop up things. After SARS, tourists from the Mainland arrived in controlled phases. This restarted a floundering economy, creating jobs in retail and hotels. It also led to ugly scenes.  Resentment amongst Hong Kongers came to the surface. They disliked their Mainland cousins 'flashing the cash'. In sudden, it dawned on them that the Mainlanders had spare cash plus a willingness to spend. This notion undermined the Hong Kong people’s  sense of superiority. The country-bumpkin image of 'A Chan’ the unsophisticated Mainlander no longer applied. Ouch!

China has gone out of its way to invigorate and sustain Hong Kong's economy. Moreover, the fact remains, that Hong Kong cannot survive without the patronage of China. This simple assumption is often lost on some of our politicians.

Looking to the future, the Pearl River Delta conurbation will continue to grow. This economic powerhouse needs Hong Kong and we need it. Both physical and financial connections are crucial to leveraging our position. Thus, integration with the Mainland will gather pace. Those who speak of independence for Hong Kong are swimming against the tide. A tide that may bash them onto the rocks

In my opinion, Hong Kong will integrate with the Chinese economy, whilst retaining some unique features. I expect the common law legal system will continue, given the advantages it offers. Likewise, border controls won't relax. This will prove that Hong Kong is a distinct customs entity. 

However, a few issues will need tackling if everyone is to benefit. I’ve spoken about the wealth gap. Also troubling is the cartel practices evident in some activities. The petrol companies appear to be operating in unison to move fuel costs. Likewise, new supermarket ventures have faced problems getting access to sites. Dominated by two players, the existing supermarket businesses have property developer parent companies. Some argue that competition is kept at bay by denying floor space.

Moving forward, Hong Kong will remain a knowledge-based economy. And for that to succeed, education will play a key role. Our young people need new skill sets. Skills that must come from education. That, unfortunately,  is proving a potential vulnerability. More on that subject later.
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It is gratifying that Hong Kong’s economy has proved robust. After a crisis it bounces back and adapts with haste. Today it is one the world’s most externally focused economies. It controls more manufacturing than at any time in its history. Although little takes place within its boundaries.  Also, it’s remarkable that the political impasse has had no significant impact,

In summary, the economic changes seen over the past two decades were underway before 1997. A service economy has replaced manufacturing lost to the Mainland. It's anticipated that high-tech industries and IT related businesses will drive growth. Although competition is tough from Singapore, Taiwan and South Korea.  Hong Kong will need to invest in training its people. What is more, the emerging industries need innovative thinkers, not rote learners.  So how we train the young is crucial if we are to avoid a permanent underclass of unemployed. That's the challenge.

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