Hong Kong’s Economy Is Failing. Here’s How It Could Be Saved
An employee stands in the entrance to a Salvatore Ferragamo SpA store in the Tsim Sha Tsui district of Hong Kong, China. (Photographer: Paul Yeung/Bloomberg)

Hong Kong’s Economy Is Failing. Here’s How It Could Be Saved

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Beyond Hong Kong’s current political turmoil, a long list of economic problems await the city’s current and future rulers.

Carrie Lam, Hong Kong’s chief executive, on Wednesday unveiled more than 220 initiatives in housing, land supply and livelihood support, in a recognition that economic policy has a role to play in alleviating some of the city’s frustrations. She also acknowledged that Hong Kong entered a recession in the third quarter and warned of an “unprecedented” economic challenge.

Hong Kong’s Economy Is Failing. Here’s How It Could Be Saved

That’s a start, though observers say the long-standing growth model -- as a low-tax, low-regulation entrepot for finance and trade -- has become an element in the political unrest, rather than the main solution.

Huge income inequality, markets controlled by insiders and a spiraling cost of living -- especially of housing -- are by now hallmarks of Hong Kong’s brand of capitalism, alongside the “world’s freest economy” label perennially awarded by The Heritage Foundation, a conservative-leaning U.S. policy group.

From using the city’s fiscal firepower to breaking the dominance of conglomerates and raising the standard of public facilities, there exists a range of proposals from economists and other experts for a way forward. In some areas, the government is already moving ahead. In others, a fundamental shift -- and the political consensus to make it -- is required.

Use Reserves to Tackle Housing

Many in the city question the political will of Hong Kong’s government officials to take bold, aggressive action in a range of policy areas. This criticism often arises in relation to the city’s HK$1.17 trillion ($149 billion) fiscal reserve, which some contend has grown steadily for years while the city’s problems were allowed to fester.

Hong Kong’s Economy Is Failing. Here’s How It Could Be Saved

“Sitting on HK$1.2 trillion in reserves, equivalent to the total government expenditure for over two years, is clearly unproductive,” said Paul Luk, assistant professor at Hong Kong Baptist University’s department of economics.

A shakeup of the property market is uniformly listed by observers as the first priority. The cost of a typical dwelling represents almost 21 years of an average family’s income in 2018, according to Demographia, a consultancy, and waiting times for public housing stretch to half a decade.

Hong Kong’s Economy Is Failing. Here’s How It Could Be Saved
  • Analysts argue that using the fiscal reserve to buy land and build government-owned public housing, hospitals, industrial buildings and offices is the right approach. Indeed, that’s the thrust of Wednesday’s announcement in Lam’s address to purchase 700 hectares of land in the New Territories, though doubts remain as to whether that will make much of an impact on housing affordability.
  • Ming Sing, associate professor in the division of social science at the Hong Kong University of Science and Technology, maintains that the government should shelve the HK$624 billion Lantau Island reclamation project. The massive effort to create islands adjacent to Hong Kong harbor is expected to take decades to complete. Land in the New Territories would be less expensive and faster to develop and could address the needs of citizens sooner.

Make Hong Kong’s Economy Fairer

One of the potential reasons the government has generally chosen to maintain the status quo is because of the outsize influence of the business elite in the city. That wealth is overwhelmingly concentrated in the hands of a small number of family-run property developers and conglomerates spanning multiple sectors ranging from utilities to supermarkets and telecommunications providers.

Hong Kong’s Economy Is Failing. Here’s How It Could Be Saved

As a result, decisions by the government are not necessarily made with the best interests of the wider population in mind, especially in areas like housing. That needs to change before more substantive shifts can be realized, said Donald Low, senior lecturer and professor of practice at the Institute of Public Policy with Hong Kong University of Science and Technology. The low-tax policy, prized as an example of the city’s business-friendly attitude, is seen as at the root of much social tension.

Property developers New World Development Co. and Henderson Land Development Co. have announced plans to provide or lend land for public use, a “proactive act of shouldering a share of social responsibility,” Lam said in her address.

  • Hong Kong should raise taxes on the wealthy, increase property taxes, introduce a capital gains tax, and combine that with social investments in areas such as adequate retirements, pensions, housing and possibly health care, Low said.
  • Levy taxes on empty apartment units that have been built yet remain unsold as a bid to artificially suppress supply, an approach that has also been floated by the government, Sing said. He advocates raising taxes on corporations and the wealthy, and then redistributing the wealth to social enterprises.
  • The government can initiate active talks with developers to loosen their grip on large land banks, particularly agricultural land, Ronald Arculli, former head of Hong Kong Exchanges & Clearing Ltd., suggested in an interview with Bloomberg TV.

Make Hong Kong More Competitive

Long viewed as the gateway to doing business in Asia, Hong Kong’s status has slowly eroded over the past decade with the emergence of other business hubs across the region, challenging the city’s competitiveness on multiple fronts.

Hong Kong’s Economy Is Failing. Here’s How It Could Be Saved

Singapore, one of Hong Kong’s long-standing rivals, has vied with the city in global rankings for such things as ease of doing business, cost of living and friendliness to expats. Once considered among the world’s most important container ports, Hong Kong has lost ground to the likes of Guangzhou and Busan. And upstart Shenzhen has transformed itself into China’s technology center within a matter of decades while Hong Kong has invested billions in a fruitless attempt to effectively compete in that space.

Hong Kong’s Economy Is Failing. Here’s How It Could Be Saved
  • The city’s economy must reduce its dependence on mainland China by diversifying into other Asian markets such as Vietnam, the Philippines, Thailand and Malaysia, Sing said. “Further economic integration with China will amount to greater political control by China,” he said. “And in the long run, that can stifle and undermine their economic competitiveness.”
  • Instead of trying to compete with Shenzhen to become a tech hub, Hong Kong should focus on its advantages in medical care to attract business from abroad. Lam is missing an opportunity here, and investment in this area will also help address the needs of an aging population, according to Iris Pang, an economist at ING Bank NV in Hong Kong. “Investments in areas such as building hospitals and training doctors take years and need to be addressed as soon as possible,” she said.

Improve Citizens’ Quality of Life

Hong Kong is dogged by gaping levels of poverty and inequality. While the city has one of the world’s heaviest concentrations of billionaires, almost one in five residents lives below the poverty level, according to a government report from 2017.

Hong Kong’s Economy Is Failing. Here’s How It Could Be Saved

This is also apparent in social welfare spending. The average country in the Organization for Economic Co-operation and Development spends the equivalent of just over 20% of its GDP on social expenditures alone, with countries including France and Finland spending north of 30%, according to OECD data.

By contrast, Hong Kong’s entire city budget equals about 22% of the city’s GDP, with spending on education, social welfare and health accounting for just less than half of that total.

“Hong Kong is among the most unequal societies in the world and the rich in Hong Kong seem to get richer every year and inequality keeps on increasing,” said David Gordon, director of the Bristol Poverty Institute and the Townsend Centre for International Poverty Research at the University of Bristol. “Instituting universal pensions, health care and child benefits will go a long way toward benefiting the least fortunate, including the young and elderly.”

Hong Kong’s Economy Is Failing. Here’s How It Could Be Saved

Whatever the outcome of the standoff in Hong Kong between protesters seeking to preserve their political freedoms and the government controlled by Communist China, these issues will be present, and observers say there must be a mechanism in which city residents can help arrive at solutions.

The disruption of Lam’s policy address Wednesday by pro-democracy lawmakers -- which required her to give it via video -- highlights the difficulty in achieving policy consensus in Hong Kong, especially amid a political crisis.

“The chief executive says we will listen deeply and consult widely, but it needs to go far beyond that,” said Donald Low at HKUST. “You need mechanisms to include citizens in government decision making.”

©2019 Bloomberg L.P.

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