Why Hong Kong’s makeover will founder

Traffic makes its way along Wan Chai district of Hong Kong. (AFP)
Traffic makes its way along Wan Chai district of Hong Kong. (AFP)

Summary

  • Hong Kong has achieved stability at a steep cost to its economy and freedoms, and the prospects for improvement look weak.

Hong Kong, newly reopened to the world, is still plastered with posters celebrating the 25th anniversary of the territory’s handover to China: “A New Era. Stability. Prosperity. Opportunity." The first of those aims has been achieved, at very high cost. The outlook for the other two, particularly the last, remains poor.

The city recently held a week of events—including a bankers summit drawing in the likes of Goldman Sachs Chief Executive Officer David Solomon and UBS Group Chairman Colm Kelleher. The events were designed to celebrate the end of its self-imposed isolation and repair reputational damage from years of heavy-handed Covid-19 policies and the government’s decision to crush the political opposition following the antigovernment protests of 2019.

Despite some notable hiccups, including the last-minute absence of several top executives who contracted Covid, and criticism from U.S. lawmakers, the summit mostly went smoothly. Few doubt that Hong Kong will remain a crucial port of call for Chinese companies looking to raise foreign equity capital—particularly since other avenues, such as U.S. capital markets, are increasingly being cut off or are under threat.

But in nearly every other way, the territory’s economic future looks bleak, and recent policy announcements—and economic data—have done little to reassure. Third-quarter data released last week showed Hong Kong’s economy contracting 4.5% year over year. Its population has fallen by more than 200,000 since late 2019 as residents fled political instability, a new national-security law criminalizing most forms of meaningful dissent, sky-high housing prices and strict—and oftentimes epidemiologically questionable—Covid-19 suppression policies. The only major sector to register significant growth since late 2019 was finance.

And that industry faces some major threats, notably from the brain drain, the possibility of future U.S. sanctions and deteriorating perceptions of the rule of law in the wake of the national-security law and China’s tightening grip. Hong Kong Chief Executive John Lee’s inaugural policy address in October echoed Chinese leader Xi Jinping’s talking points on “profound changes unseen in a century"—coded language for the rise of China and decline of the West. It also called for a new “Rule of Law Education Train-the-Trainers" program for promoting “consistent and correct messages on the rule of law in the community." That is unlikely to assuage the concerns of foreign businesses and their employees.

Meanwhile Singapore, Hong Kong’s longtime Asian rival, already has eclipsed it as a preferred arbitration hub for corporate disputes, and it is making a strong bid for the wealth management industry. Assets under management there grew 16% to 5.4 trillion Singapore dollars, equivalent to $3.9 trillion, in 2021. AUM grew by just 2% in Hong Kong, although at $4.6 trillion they remain significantly larger. Many wealthy Chinese—or anyone else concerned about the long arm of Beijing—seem likely to increasingly park assets somewhere other than Hong Kong in the future.

But the real problem for Hong Kong is outside of finance. Whispers notwithstanding, China remains effectively closed, meaning the strong headwinds to the city’s aviation and retail sectors will probably persist for at least another year. Hong Kong has been losing ground as a trade and logistics hub to other regional ports for years. It has little meaningful manufacturing capacity, and high property prices and chronic underinvestment in research make it a tough place for tech entrepreneurs. All of this raises the obvious question: For everyone who isn’t a banker, how exactly are they going to make a living?

On the city’s other most pressing economic problem, affordable housing, the government proposes to rapidly boost public-housing construction over the next half decade. Even before Mr. Lee took the helm, there were signs the government finally was moving more decisively to address the issue. Hong Kong completed more than 11,000 public-rental apartments in the first quarter of 2022, according to data from CEIC—the most since 2016 and over four times as many as a year earlier.

But the affordability hole Hong Kong needs to dig out of is deep. Thanks to years of underinvestment in public housing, low interest rates and a tidal wave of Chinese investment in post-2008-era Hong Kong, housing prices in the city have reached excruciating levels. In June 2022, median household incomes were about 55% higher than in 2009, according to official data. Housing prices were 148% higher. As a result, the city’s affordability ratio—defined as the ratio of prime rate mortgage payments to household incomes—has risen from about 35% in mid-2008 to roughly 55% in 2022, according to property agency Centaline. And that is after the lackluster housing market of the past three years.

If Hong Kong manages to solve its housing problem, it will probably be due to the tide of departures as much as due to new housing investment—in other words, because hundreds of thousands of residents believe they have no future there. That is one way of achieving success, but not one that many places would aspire to.

This story has been published from a wire agency feed without modifications to the text

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