Hong Kong’s Cloudy Economic Future

Hong Kong’s lingering turmoil suggests that its economic future is not assured.  Recently, the Chinese People’s Daily accused Washington for colluding with Occupy Central protest organizers to try and foment a “color revolution.” In the West, the charge has been downplayed.  Today, Hong Kong must cope with political, economic and external risks.

Hong Kong’s lingering turmoil suggests that its economic future is not assured.  Recently, the Chinese People’s Daily accused Washington for colluding with Occupy Central protest organizers to try and foment a “color revolution.” In the West, the charge has been downplayed.  Today, Hong Kong must cope with political, economic and external risks.

Political risks

According to Chinese media, Louisa Greve, director of the National Endowment for Democracy (NED), met with Hong Kong protest leaders months ago. In effect, the NED has long supported the pro-democracy groups. It “underwrites color-coded ‘people’s revolutions’ overseas,” as Republican politician Ron Paul has put it. It also funds Uyghur organizations, which channel funds to violent separatists in Xinjiang. 

Some leaders of the protest organizers have sought to “internationalize” the Hong Kong turmoil for months. In early April, Anson Chan Fang On-sang, the convener of pro-democracy group Hong Kong 2020, and Martin Lee Chu-Ming, founding chairman of Hong Kong’s Democratic Party, met Nancy Pelosi, the Democratic leader of the House of Representatives. At the White House, they told Vice President Joe Biden that Beijing has been “tightening its controls” over Hong Kong. 

The two asked for “a clear assurance that members of Congress are watching developments in Hong Kong closely.” Afterwards, Senator Sherrod Brown, chairman of the Commission on China, warned that Hong Kong’s democracy was “under threat.” Like Ellen Bork, director of the Foreign Policy Initiative who once served as Martin Lee’s counsel, the Commission has called on the State Department to revive congressional briefings on human rights in Hong Kong. 

In July, the two had a similar agenda in the UK, where they addressed the UK Parliament and met with Deputy PM Nick Clegg.  In the U.S., the two have cultivated ties with neoconservatives, in view of possible Republican gains in the fall midterm-elections and presidential elections in 2016.

In one way or another, similar alleged associations involve other protest leaders, including law professor Benny Tai Yiu-ting’s links with the NED and its subsidiary NDI; the donations in Joshua Wong’s “Scholarism” group; the media tycoon Jimmy Lai Chee-ying’s business dealings and payments to neoconservative leader Paul Wolfowitz; and his right-hand executive Mark Simon’s past links with the CIA. 

Perhaps efforts at foreign interference in Hong Kong are not entirely unfounded.

Economic risks

Even if political destabilization will slow down at home, Hong Kong may have to cope with darker clouds abroad. As a small and highly open economy, the city is heavily influenced by global developments, particularly China’s economic transition. Moreover, since the Fed is expected to hike policy rate by mid-2015, Hong Kong stands to benefit from tapering as in the past, but only if the latter is associated with a recovery in U.S. demand. And that is no longer assured. 

The external risk is only a part of the story. As the protest movement began to escalate its activities, retail sales plunged 9.8 percent in April, which unleashed panic in the markets. Normally in early October, Chinese tourists would have visited the city en masse during the “Golden Week.” But as civil unrest escalated during that week, Hong Kong’s economy took a heavy blow. Nonetheless, the city is critically dependent on China, its largest export (58%) and import partner (45%). Over 75 percent of foreign investment and foreign visitors can be traced to China. Without China, Hong Kong would be left only half of its trade, one-fourth of its foreign investment and visitors.

The downtrend in retail sales is likely to extend beyond the six-month slide. Firms in Hong Kong have been underperforming for months amid perceived threats in key sectors, including retail, tourism and property. Since 2008, cheap mortgages, constrained supply, GDP growth and demand from overseas have pushed up property prices by 135 percent, which far exceed the increase in rents or wages. Steep price declines are to be expected in the future. 

While Hong Kong remains the main offshore RMB center, it will thrive only as long as it is attractive to the mainland companies’ fund-raising activities. As China’s economic reforms are expanding and Shanghai’s is evolving into the mainland’s global hub for trade and finance, the role of the city as a “gateway” is diminishing. 

Hong Kong’s greatest threat is not that of “becoming just another Chinese city,” but fading into irrelevance. 

What next 

What’s most worrisome is the huge discrepancy between Hong Kong’s economic gains and its eroding social fabric. Despite all the wealth that the city has reaped from China’s economic reforms and opening-up policies in the past three decades, its income inequality is worse than in Zimbabwe, as measured by the Gini Index. But this polarization is not the result of economic integration with China, but of inadequate social cohesion in Hong Kong. Nor will it get better by severing ties with the mainland. 

The universalist rhetoric of the Occupy Central is not credible when some students call mainlanders “locusts” who should “go back to where they came from.” Nor can one see Gandhi or Martin Luther King Jr feel nostalgia for flags that once legitimized massacres and slavery in the name of empires. 

What Hong Kong needs is not less but more cooperation with China. The city will not overcome its challenges by emulating Pyongyang. It is with further integration into the neighboring province of Guangdong that Hong Kong can significantly alleviate the challenges associated with its maturing economy, aging population and entrepreneurial innovation. 

Before the long hot summer, Hong Kong’s growth was projected at 2.8 percent in 2014 and less than 2 percent in 2015. But that was then. In the short term, the political protests in Hong Kong are likely to have minimal credit implications in the short term, as Standard & Poor’s has stated. However, if the situation continues to deteriorate, the probability of a negative impact on credit fundamentals will increase.

What Hong Kong desperately needs is responsible political development, adequate social policies and truly inclusive economic growth. It is time to choose between gradual integration and slow decay.

HONG KONG’S TURMOIL IN THE BIG PICTURE is republished with permission from The Difference Group

Dr. Dan Steinbock is Research Director of International Business at India China and America Institute (USA) and Visiting Fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore).