Hong Kong’s economy of the future: plugged into Greater Bay Area, but still a global financial centre?

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At the peak of Hong Kong’s fifth wave of Covid-19 infections in March, the city ran out of vegetables and fresh pork, leaving supermarket shelves empty for several days.

With a large number of workers falling sick and disruptions in cross-border logistics, the shortages sent prices shooting up.

Hongkongers, used to having ample choices and supplies all year round, had to endure the inconvenience for about a week before Beijing stepped in and opened additional modes of transport for deliveries to arrive from across the border.

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Hongkongers had to deal with food shortages during the city’s fifth wave of Covid-19 infections. Photo: Dickson Lee
Hongkongers had to deal with food shortages during the city’s fifth wave of Covid-19 infections. Photo: Dickson Lee

That episode underlined the nature of cross-border trade, which has grown significantly since Hong Kong returned to China in 1997.

Total trade with mainland China surged from HK$1.04 trillion in 1996 to HK$5.38 trillion last year. The mainland, which accounted for slightly over a third of the city’s total trade in 1996, made up more than half last year.

The mainland has become the dominant supplier of basic necessities ranging from food to electrical machinery, telecommunications equipment, clothes and more.

With its international hub status, Hong Kong has played an important entrepot role between China and the rest of the world. Last year, 60 per cent of the city’s exports were shipped to the mainland, up from 34 per cent in 1996.

Hong Kong is now the mainland’s largest source of foreign direct investment, while China has become the city’s second largest source of direct investment after the British Virgin Islands.

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In terms of capital market development, the average daily turnover of a scheme that invests in mainland stocks hit 120 billion yuan (HK$141 billion) last year, while daily trading of mainland bonds hit 26.6 billion yuan.

Hong Kong’s rule of law, low tax rate and minimal red tape all contributed to making the city unique within the “one country, two systems” model of governance since its return to China.

Leading Hong Kong businessman Victor Fung Kwok-king summed up the city’s economy over the past 25 years in two words: “Steady progress.”

Using the analogy of an hourglass, with mainland China, Korea and Japan at the top and Asean countries, India and Australia at the bottom, the Fung Group chairman said Hong Kong had sealed its position at the funnel between the two.

“Increasingly, the flows within Asia, between the northern part and the southern part, are going to be the most important flows in the world and we are really in the middle of intermediating these flows,” he said.

Some like Fung remain bullish about Hong Kong’s future as it grows ever closer to the mainland, while others fear the next 25 years will see its position as a global city diminish.

Hong Kong has to stay ahead of competition from Singapore and Taiwan. Photo: Dickson Lee
Hong Kong has to stay ahead of competition from Singapore and Taiwan. Photo: Dickson Lee

As a mature but open economy, Hong Kong needs new sources of growth to up its game against unrelenting competition from regional economies such as Singapore and Taiwan.

With the mainland now the world’s second largest economy after the United States and poised to overtake it by 2030, Fung said Hong Kong was best positioned to gain, especially from its key role in the Greater Bay Area.

China’s ambitious bay area vision unveiled in 2019 aims to create a global innovation and technology powerhouse by linking Hong Kong, Macau and nine Guangdong cities.

In 2020, the Greater Bay Area had a total population of more than 86 million and a combined GDP of US$1.67 trillion.

Fung likened the potential of the Greater Bay Area to joining together the financial centre of New York, California’s Silicon Valley and the manufacturing hub of Chicago.

“Can you imagine that kind of power in one proximity?” he asked.

He described the Greater Bay Area as a “permeable membrane, though separate always”, rather than an integrated zone.

The importance of attracting senior Tech Talent to the Greater Bay Area – and overcoming the challenges that come with it.

“Always maintaining ‘one country, two systems’ is important,” he said. “The legal, tax systems, even the regulatory, the cultural, there is always a distinctiveness and that’s what allows us … to play a unique role for China as a whole. If Hong Kong is just like the rest of China, there is no unique role to play.”

‘Just another Chinese city?’

Hong Kong moved closer to the heart of the bay area with two mega infrastructure projects completed in 2018 – the 26km stretch of the Guangzhou-Shenzhen-Hong Kong high speed rail link and the 55km Hong Kong-Zhuhai-Macau Bridge that slashed cross-border travelling times significantly.

While mainland authorities have also rolled out measures to push forward cross-border integration and innovation, Peter Burnett, chairman of the British Chamber of Commerce in Hong Kong, said the Greater Bay Area vision still remained “something of a concept”.

However, he pointed to schemes that have helped in the move towards greater integration.

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The Wealth Management Connect scheme, launched last year, was Beijing’s first tailor-made scheme for the 11 bay area cities and marked a further opening up of the mainland’s capital market.

It allows Hong Kong and Macau residents to invest in onshore Chinese fund products through banks in the development zone, while residents in the nine Guangdong cities can invest in Hong Kong and Macau wealth products through local lenders.

Burnett said he believed that Hong Kong would continue to add value to the mainland by retaining what made it unique, such as its legal, accounting and financial systems.

“People talk about Hong Kong becoming just another Chinese city. If that were to happen, it would just be subsumed into a sort of greater Shenzhen and that is certainly not what Hong Kong wants and I don’t believe it’s what the mainland wants either.”

He said he believed integration with the mainland was happening because of geographical proximity and the way business operations worked together.

Initiatives like a proposed InnoLife healthtech hub in the Hong Kong-Shenzhen Innovation and Technology Park at the Lok Ma Chau Loop would allow some kind of freedom of movement across the border.

A general view of Lok Ma Chau checkpoint at the northwestern border in Hong Kong. Photo: May Tse
A general view of Lok Ma Chau checkpoint at the northwestern border in Hong Kong. Photo: May Tse

Artificial intelligence software company SenseTime is an example of a local company that has developed operations in the bay area, but continues to have its headquarters at Hong Kong’s government-backed Science Park and was listed on the city’s Stock Exchange last year.

The Hong Kong General Chamber of Commerce has called for government-to-government negotiations on policies to help Hongkongers moving to or working in bay area cities with their different systems, public administration and culture.

The number of Hongkongers living in mainland cities in the Greater Bay Area and Macau rose slowly since records were started in mid-2013.

In mid-2021, there were 538,800 Hongkongers living in mainland cities in the Greater Bay Area and Macau, a 4.2 per cent rise from 2013. However, it was a decline of 0.6 per cent from a peak of 541,900 in mid-2019.

In 2021, the Hong Kong government launched the Greater Bay Area Youth Employment Scheme through which Hong Kong firms receive HK$10,000 (US$1,280) per month for every local university graduate offered a job in the bay area’s nine mainland cities. As of January, 1,091 young people benefited and took up jobs mainly in Shenzhen and Guangzhou. More than 700 were aged between 20 and 24, and nearly 500 took up professional roles.

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Hong Kong universities also made their presence felt in the Greater Bay Area. Hong Kong Science and Technology University’s new campus at Nansha of Guangzhou is due to open in September 2022.

Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis, which is part of a French banking group, said it was clear that Hong Kong would become less of a global city in terms of the proportion of foreigners in the population, with a decrease in the number of foreign branches of corporations and banks.

She predicted a trend of the population of Westerners gradually declining as Hong Kong attracted more mainland or overseas Chinese talent in the future.

“I’m not so negative about Hong Kong, I think Hong Kong will simply be different,” the University of Science and Technology professor said. “I’m negative about the Westerners living in Hong Kong, because I think there’ll be fewer opportunities for them, but that doesn’t mean that there will be no opportunities for anybody else.”

There may be fewer opportunities for Westerners in Hong Kong, economist Alicia Garcia Herrero says. Photo: Sam Tsang
There may be fewer opportunities for Westerners in Hong Kong, economist Alicia Garcia Herrero says. Photo: Sam Tsang

With more businesses from the mainland in Hong Kong, there will be a need for more Mandarin speakers, more mainland Chinese, or Chinese talent.

“It will be an integrated city with the mainland with some specific characteristics, possibly still a different currency, possibly access to global capital,” she said.

‘Speaking Mandarin will be more important’

Hong Kong has four pillar industries – financial services, tourism, trading and logistics as well as professional services and other producer services. They contributed 49.4 per cent of the city’s GDP in 2000 (when records began) and 55.1 per cent in 2020.

Over the past three years, the Hong Kong government has earmarked HK$16 billion to grow a global IT hub in the next few years.

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May Tan, former CEO of Standard Chartered Bank, said Hong Kong should do more to strengthen its position as a financial centre for the mainland to reach the world, sharing incoming investment more with Shanghai and Beijing over time.

Much depended on how quickly the renminbi was internationalised, though she expected it would take time as China remained cautious about liberalising the currency.

She said Hong Kong’s role would evolve over time to become more of a Chinese city with its financial centre serving both the Greater Bay Area and the rest of the world.

“When the renminbi internationalises, Shanghai will serve the north and Hong Kong will serve the south. It will be like the United States with multiple financial centres such as Chicago, Los Angeles and New York. The economy will be so big that it doesn’t matter,” she said.

What was vital, she added, was for Hong Kong to continue being a magnet for talent over the next 20 years.

“We’ve got the trains, we’ve got flights, we’ve got the roads, the financial systems, and with Beijing’s blessings, we can have greater regulatory flexibility, for instance within the Greater Bay Area. But we must have the talent,” she said.

Hong Kong residents may find speaking Mandarin becomes more important, says May Tan, former CEO of Standard Chartered Bank. Photo: Bloomberg
Hong Kong residents may find speaking Mandarin becomes more important, says May Tan, former CEO of Standard Chartered Bank. Photo: Bloomberg

While English would still be used in Hong Kong, she expected Mandarin to become more important.

Simon Lee Siu-po, an honorary fellow at Chinese University’s Asia-Pacific Institute of Business, warned that the keen competition among mainland cities meant that Hong Kong had to work hard to remain relevant and maintain its international status.

He said the standard of English had been deteriorating compared with Singapore, and Hong Kong had to keep speaking it, especially in the business community, and for it to be an attractive international hub. He said it should remain an official language.

Business leader Fung warned that the city was now at a critical juncture and had to grab the Greater Bay Area opportunities or risk missing out on growth and losing its position as the business centre for overseas Chinese.

“We must focus outward,” he said. “Definitely, we need to know mainland China, the Greater Bay Area, but that is not enough.

“We need to know the rest of the world and familiarise [ourselves] with our neighbours, for example, Asean. We need to re-establish our position as the centre for overseas Chinese.”

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