The Growing Irrelevance of Hongkong

Is Hongkong people doing the right thing clamouring for universal suffrage and more autonomy? After all, we are almost halfway there to the 50 year of "one country two systems". If I was pragmatic and rules from Beijing, I would allow Hongkong to find its own feet - they will find that they barely have two legs to stand on.

Prior to 1997, HK was regarded as the pathway to venture into China. Paramount to that strategy was the ability to rely on Hongkong's rule of law, adhering to global best practices when it comes to accounting reporting and industrial law. The seemingly steadfast independence of the judiciary, ICAC and the police was a strong pull factor as well. 

The robust capital markets was another drawcard plus the large availability of English speakers and using mainly English as the business language.

Are those advantages still apparent?

Over the past 10 years or so we have seen Hongkong being more as a recipient of investments and deals/listings from the mainland. It seems the flow has reversed substantially. 

Tourism, tourist consumption, and real estate investments have been thoroughly influenced substantially by the Chinese from the mainland. Imagine Beijing issuing an edict that their citizens stop traveling to Hongkong and to divert all new IPOs by Chinese firms away from Hongkong for the next 2 years, with zero involvement by any firms based in Hongkong. You can see property prices even halving from here.

The Greater Bay Area

In 2018, Shenzhen’s economy surpassed Hong Kong’s for the first time. While economic growth in Hong Kong rose by just 3 per cent to HK$2.85 trillion (US$363 billion) last year, Shenzhen’s gross domestic product last year grew by 7.6 per cent to 2.42 trillion yuan, or HK$2.87 trillion based on the 2018 official exchange rate.

If you have been to Shenzhen and Guangzhou, you will note that both areas are more advanced thank Hongkong in so many ways. Guangzhou is about 5 years ahead and Shenzhen even more so.

Free Port?

Indeed, the international ranking of the port has fallen over the years – from first to fifth place – behind Shanghai, Singapore, Shenzhen and Ningbo in overall throughput. This year, Hong Kong is slipping out of the top five. Clear, firm and swift measures are needed to arrest this decline.

Hongkong's status as a re-export port economy has been dwindling over the past 10 years if you ask the experts. Just judge by the figures. The Hong Kong port’s cargo volumes fell 3.9 per cent in the first six months compared to last year, while other bay area ports, notably Guangzhou (Nansha), surged by over 9 per cent. Meanwhile, the Guangzhou government gives aggressive support, funneling financial incentives to the Nansha port, related shipping lines and the nascent maritime cluster.


Shrink, Shrank, Shrunk

Hong Kong is clearly less important than in the past. Its GDP has shrunk from 16% of China’s in 1997, the year it was returned to Chinese control, to around 2% today. That has led many inside China and abroad to conclude that Hong Kong is fading towards economic irrelevance. 

Hong Kong does remain a major global financial center but it isn’t the only economic jewel under Chinese rule. Shanghai has a larger stock exchange with total market capitalizations overtaking Hong Kong’s by more than 9 trillion yuan ($1.3 trillion) this year. Shenzhen, which borders Hong Kong, isn’t far behind. Shenzhen also happens to be at the cutting edge of China’s boom in technological innovation, giving rise to giants such as the world’s largest consumer drone-maker, Dajiang Innovation, as well as gaming titan, Tencent Holdings.

Hong Kong is also a top offshore yuan trading center, leading the way for wider use of the Chinese currency in trade and finance -- a priority for Beijing as it pushes for the yuan’s internationalization. Hong Kong can also do more down the road. It can foster an ecosystem for the yuan currency, developing derivatives and indexes to convince people to hold the yuan in larger amounts.

Remains Of The Day

There is still significant advantages that Hongkong has, and they will need to play them properly with Beijing:

a) Rule of law - I don't see how Beijing can go around that issue.

b) Independence of judiciary - ditto.

c) Adherence to International Accounting Standards - This may be possible to adopt.

d) Legal disputes - This one is even worse than the first two for Beijing.

e) Free flow of funds - This can be loosened more by Beijing for foreign entities.

f) Capital markets - This can still flourish in Hongkong due to the "existence and availability" of the above in Hongkong.