THE HOLLOWING OUT OF HONG KONG / THE WALL STREET JOURNAL

The Hollowing Out of Hong Kong

China’s tightened grip on the finance hub will make it harder for Hong Kong to diversify its economic base and keep pace with regional rivals in Singapore and Shenzhen

By Nathaniel Taplin


Riot police stood in front of a bank branch in Hong Kong on August 31 as pro-democracy demonstrators gathered to mark the one-year anniversary of a violent confrontation with police.
PHOTO: LAM YIK/BLOOMBERG NEWS



Does Beijing’s imposition of a draconian yet murky national security law mean the end of Hong Kong as we have known it?

For financiers, the answer is probably no: The city retains many of its core advantages, especially preferential access to Chinese markets, a stable currency, and open capital markets.

But in other ways, the damage from the law could be profound: it will make diversifying the economy away from finance to aid struggling middle class residents even harder. Everyday Hong Kongers face an unpalatable choice between relocating to faster growing mainland cities, emigrating further abroad, or worsening life prospects at home as good opportunities in Hong Kong remain scarce and civil rights erode.

Hong Kong’s incredible success as a banking center—the finance sector’s economic output has more than tripled over the past two decades—masks the reality of much slower average income growth than rival Asian hubs like Singapore and Shenzhen. Outside finance, businesses have found themselves squeezed between sky-high property prices, tycoon-led monopolies in domestic sectors, and rising regional competition in another of the city’s historic strengths—shipping and logistics. Hong Kong residents, wealthier than Singaporeans on a per capita basis in 2003, now earn nearly $20,000 less a year on average, according to the World Bank. Residents in Shenzhen, who earned 15% as much as their Hong Kong counterparts at the turn of the century, now earn 60% as much. 



To help average Hong Kongers thrive again would require developing new growth industries like tech or high-end manufacturing, as Singapore and Shenzhen have successfully done. Unfortunately the new security law makes this less, not more likely.

Most banks and insurers will likely stay put: Hong Kong’s legal protections remain stronger, even now, than on the mainland, and joint stock listings in Shanghai and Hong Kong remain a popular option for Chinese companies. But outside of finance, the picture looks bleaker.

Beijing is clearly hoping Hong Kong can follow the Singapore model in a different respect. Singapore scores poorly on measures like freedom of the press and government accountability according to the World Bank, but is ranked in the top 5% on rule of law. Global companies trust that commercial disputes will be fairly handled.




But so far, businesses in Hong Kong don’t seem assured the territory can achieve a similar balance. Nearly 40% of all U.S. firms surveyed by the American Chamber of Commerce in early August said they were considering moving assets or operations out of the city.

That marks a sharp deterioration in sentiment since just October of last year, when antigovernment protests were near their height and only 24% of surveyed U.S. firms said they were considering moving. The U.S. decision to remove Hong Kong’s special customs status will hit tech and logistics companies hard. And overall fixed capital formation in Hong Kong was already dropping at its fastest rate since the Asian financial crisis in the fourth quarter of 2019.

Hong Kong is very different from Singapore in one key respect: As an independent nation Singapore is free to give priority to its own core interests, including maintaining its reputation as a safe and fair place to do business. But the events of the last year have made clear that in a pinch, Beijing will always prioritize its perceived interests in Hong Kong, even if that entails considerable collateral damage to the city’s prospects. By leaving crimes like subversion ill-defined in the new law, Beijing has given itself plenty of latitude.

Even before the security law was passed, there was anecdotal evidence that companies were losing some faith in the ability of Hong Kong’s legal system to protect them. Hong Kong had already been overtaken by Singapore as a top spot for arbitration in the middle of last decade.

If Hong Kong’s government had acted more decisively to tackle other economic problems, the additional headwinds from the security law and the U.S. response might be less damaging. But high property prices make it more difficult to nurture capital and land-intensive industries like manufacturing and tech. Public funding for research has also been paltry —the government typically spends just 0.4% of GDP on publicly funded research and development, about half the equivalent figure for the U.S. and Singapore over the past decade.

Little wonder then that Hong Kong’s economy has become more finance-centric as other industries have largely withered on the vine. Finance, which was only 10% of the economy at the turn of the century, is now 20% according to official figures. Manufacturing has all but evaporated. Singapore, in contrast, has been able to maintain a significant manufacturing and high-tech sector even as finance has grown: in 2019, manufacturing still accounted for 20% of gross domestic product.

These trends now look likely to accelerate further. Hong Kong will survive, and even prosper, as a key Chinese financial center barring truly punishing U.S. sanctions. And Beijing’s solution to middle class woes— further integration with Guangdong across the border—may provide an outlet for some who are willing to seek jobs or housing there.

For others who stay put, the future looks less promising. Deng Xiaoping, China’s famous reformer, assured Margaret Thatcher in 1982 that after Hong Kong’s handover to China horses would still run and stocks would still sizzle. Forty years later, that is still true. But the promise of a better life looks ever farther away.