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Hong Kong’s Changing Dynamics

Among the four pillar industries, there have been revolutionary changes in the target clients of Hon  

Among the four pillar industries, there have been revolutionary changes in the target clients of Hong Kong services providers in the last 15 years (photo: EyePress)

 

Since Hong Kong’s return to the Chinese mainland in 1997, its economy has repeatedly been tested. The Asian financial crisis that same year, the bursting of the “dotcom bubble” in 2001, the SARS outbreak in 2003 and the global financial crisis in 2007 to 2009, are probably the main milestones leading to the present.

The latest, of course, is the lingering European sovereign debt crisis. With this volatile factor affecting Hong Kong’s external economic environment, economic prospects remain uncertain. The past 15 years have also seen dramatic changes, specifically in Hong Kong’s industrial structure. The city has now entered a “post-industrial” era where its services sector is faring far better than its manufacturing-related industrial base.

Yet, it would be incorrect to say that manufacturing no longer matters to Hong Kong’s economy. As Hong Kong’s manufacturing industries continue to move to lower-cost regions, local production activities have dwindled. But you only have to observe the production-related activities of the numerous vibrant trading firms – many with corporate headquarters here – to recognise the relevance of Hong Kong manufacturers to today’s commercial fabric.

The difference now is that the today’s manufacturing-based activities are largely hidden. Yet, behind the production (largely on the mainland), Hong Kong-based corporate headquarters are planning their entire production processes (and capitalising on Hong Kong’s geographical advantages) to achieve the most efficient division of work. Their existence has also generated huge demand for trade support services.

  Trading acts as a multiplier for business (photo: iStockPhoto.com)
 

Trading acts as a multiplier for business (photo: iStockPhoto.com)

As Hong Kong changed, trade support and professional services have subsequently flourished, causing the city’s economic structure to tilt heavily towards the value-added services sector.

In 2010, services’ share of Hong Kong’s GDP surged to a record high of 93 per cent, with trading and logistics taking up 26 per cent of GDP and making it the largest sector in Hong Kong. It has to be conceded that a declining manufacturing industry and a rising services sector come with both pros and cons.

Massive job opportunities have been created by this expanding services sector. But factory workers and people even indirectly reliant on the manufacturing industries have struggled to cope with finding new jobs.  

Industrial Diversification

 Hong Kong is witnessing a changing economic scenario  

Hong Kong is witnessing a changing economic scenario

 
It is perceived wisdom that Hong Kong’s economy is powered mainly by the “four pillar industries” of trading and logistics, financial services, producer and professional services, as well as tourism, which are reaching maturity.  

In 2010, these four sectors contributed 58 per cent of local GDP, and employed nearly half of the total workforce. To promote industrial diversification, the government is striving to expand six industries where Hong Kong enjoys clear advantages: cultural and creative industries, medical services, education services, innovation and technology, inspection and certification services, and environmental industries.

Logically, to some, Hong Kong should head towards sharpening the competitive edge of the four traditional pillar industries and expanding the six industries where Hong Kong enjoys clear advantages to further economic growth.

The development of the six industries, however, remains at a fledgling stage. Apart from the cultural and creative industries, which have grown to a sizeable scale, the remaining sectors have only just got off the ground, and together, contribute just eight per cent of Hong Kong’s GDP.

Among them, the relatively better-developed medical and education services are often seen as public services, making their commercialisation very difficult and leaving little room for the government to provide leverage.

Even given the benefits brought about by the booming mainland economy, their growth is expected to be  limited. It’s hard to imagine how they can compete with the four traditional pillar industries in terms of economic contribution and employment.

Economic Integration: Pros and Cons

  Mainland visitors have become the lifeblood of Hong Kong’s tourism industry
 

Mainland visitors have become the lifeblood of Hong Kong’s tourism industry (photo: EyePress)

Even among the four pillar industries, there have been revolutionary changes in the target clients of Hong Kong services providers since the handover in 1997. Take the trading sector as an example. Trade between Hong Kong and the mainland has continued to grow.

The Closer Economic Partnership Arrangement (CEPA), signed by the two governments in 2003, enhanced economic and trade links, making Hong Kong the city with the  closest mainland economic and trade ties. As a result, the share of Hong Kong-mainland trade in Hong Kong’s overall external trade has soared from 36 per cent before the handover to 49 per cent last year.

Hong Kong also continues to contribute to China’s foreign trade, and its re-exports of mainland-originated goods have more than doubled from US$152 billion in 1996 to US$419.4 billion in 2011.

The “individual visit scheme,” allowing mainland visitors to come to Hong Kong, has become the lifeblood of the city’s tourism industry, and has changed its retail landscape. Last year, the number of mainland tourists accounted for 67 per cent of all tourists in Hong Kong, making them the largest visitor-source market.

Mainlanders come into more frequent contact with Hong Kong people: from major branded stores to small local shops, from the Peak to the beaches, and from restaurants to the local property market. Such interactions are slowly becoming an integral part of Hong Kong people’s daily lives.

     
 

A Comparison with Singapore

 
 

Hong Kong has benefited from its geographical advantages and its support from mainland authorities in cementing mutually closer economic and trade relations.

Since 1997, ties have grown even closer and more direct. While some people believed that Hong Kong’s dependence on the mainland economy would cushion it from external economic fluctuations, such had not been the case.

Some believe that Hong Kong’s economy should be growing at a faster pace than those without the backing of a powerful motherland. Hence there’s comparison in some quarters between Hong Kong and Singapore. One conclusion by these critics is that Singapore’s economic development and industrial policies are better than those of Hong Kong.

For the past 15 years, Singapore’s average annual economic growth has been 5.6 per cent, outperforming the average 3.7 per cent in Hong Kong. In 2010, Singapore even overtook Hong Kong in the size of its economy.

On the other hand, the Hong Kong Government has often been slammed for its industrial policies (or lack of them), and particularly, its failure to diversify Hong Kong’s industrial structure.

In fact, while both Hong Kong and Singapore are small, export-oriented economies, Hong Kong has all along operated as a free, open market economic model.

Even its efforts to support and develop the four pillar industries and the six emerging industries, the Hong Kong Government’s role is limited to that of an active promoter, helping to clear the civic system’s hurdles.

 

 
With China rising as the world’s second-largest economy, Hong Kong, with its geographical advantage and benefits under the “one country, two systems” framework, is integrating with the mainland in such sectors as trade, tourism and investment in an irreversible way.

Hong Kong is building on its strength and past success to provide a firm, reliable support platform. This platform will help the mainland drive its economic development in such sectors as high-end services, as well as implement its “go global” policy and further internationalisation of the renminbi.

To date, Hong Kong channels nearly half of the mainland’s direct investment overseas every year, and has attracted over 3,000 mainland-funded enterprises to the city, with more than Rmb150 billion worth of bonds issued.

These developments have made significant contributions to advancing the mainland’s economic development. They’ve also helped promote Hong Kong-mainland trade and economic integration.

There have been debates on whether the government can or should fuel Hong Kong’s economic growth by nurturing “industry winners.” By contrast, the Singapore government proactively draws up and guides the nation’s industrial, land and population policies and development. The Singaporean model of governance is quite distinct from Hong Kong’s.

Hopes Ahead

Further thought clearly needs to be given to whether Hong Kong should formulate more proactive and targeted primary policies, if nothing else than to respond to a similar process on the mainland.

Since the handover, the mainland economy has prospered. The two catchphrases “made in China” and “Chinese investment” today carry far greater resonance in the global economy.

Building on past experience, China will continue to transform its industrial structure, spurred by increasing production costs, a higher renminbi exchange-rate and rising consumerism.

To avoid losing its edge, Hong Kong has to pick up the pace, match the mainland’s economic restructuring and seize available opportunities under the country’s 12th Five-Year Plan. In the new economic environment, Hong Kong has to focus on assisting mainland enterprises to “go global” and guide international companies to tap business opportunities arising in China. That greater integration should also be mirrored by better use of Hong Kong’s resources, including by proactively considering how to enhance the city’s economic blueprint, its land and population policies. This is needed to resolve the longstanding problems in the industrial sector, where new initiatives are stifled because of inadequate land supply and a population structure that has yet to measure up to meeting Hong Kong’s pressing new circumstances.

For more on Hong Kong economic trends, please see the September issue of the HKTDC Trade Quarterly.

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