Hong Kong’s economy needs reinvention to become more than just China’s superconnector after a lost half decade

Hong Kong’s superconnector status has not enabled its economy to outperform other rival Asian hubs such as Singapore
Instead of blaming external factors for its underperformance, Hong Kong should engage in an exercise to remodel its economy

Donald Low

Published: 11:00am, 18 Feb 2024

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The Hong Kong economy has had a lost half decade. It shrank in two of the last five years; 3.2 per cent GDP growth last year did not make up for the 3.5 per cent contraction in 2022. Growth in the coming years may continue to be sluggish as the mainland Chinese economy grapples with high levels of debt – especially in property – excess capacity and insufficient demand, deflationary pressures, and a persistent decline in asset values.

Hong Kong’s economic woes should trigger a deep rethink of what it needs to do to maintain its relevance in a global economy that has changed dramatically since the global financial crisis of 2008-2009, changes accelerated by the Covid-19 pandemic.

The evidence of the last 26 years points to an inescapable conclusion: even if being a superconnector to the mainland is a necessary condition of Hong Kong’s growth and prosperity, it is not a sufficient one. The city should strive to be much more than just a superconnector of mainland China. Three arguments support this conclusion.

Tourists along the Tsim Sha Tsui promenade in Hong Kong. Photo: Bloomberg

Hong Kong’s superconnector status hasn’t helped it outperform other Asian hubs

First, despite being the superconnector for China – the world’s fastest-growing economy over the last three decades – Hong Kong’s growth has lagged behind Singapore’s by a considerable margin. As recently as 2003, Hong Kong’s GDP per capita of about US$26,000 was roughly the same as Singapore’s. Today, Singapore’s GDP per capita, at over US$82,000, is nearly 70 per cent higher than Hong Kong’s despite mainland China growing much faster than Southeast Asia during the last three decades.

Clearly, Singapore’s superior performance was not just because it was the superconnector of Southeast Asia. Instead, Singapore established itself as a key node in global value chains in a number of high value-added industries – electronics, petrochemicals, pharmaceuticals and biotech, and precision engineering to name a few. By contrast, Hong Kong’s economy has become too specialised in a few highly correlated services – finance and insurance, real estate, trade and logistics, business services and tourism – and is too reliant on growth in the mainland.

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Defenders of Hong Kong’s model say that compared with Singapore, it is more productive because it is more market-driven, less dependent on government interventions, and therefore less vulnerable to governmental mistakes and corruption. About three decades ago, economists such as Alwyn Young argued that Hong Kong’s growth model was more sustainable than Singapore’s because whereas growth in Hong Kong was led by total factor productivity (TFP, a measure of innovation), growth in Singapore was driven mainly by factor accumulation (perspiration rather than inspiration).

Young’s predictions have not come to pass. There is little evidence in the last 30 years to indicate that Hong Kong’s economy has had higher TFP growth or is more innovative than Singapore’s. Meanwhile, as the Hong Kong economy became ever more specialised and reliant on the mainland, its gains in efficiency may have been outweighed by the loss of diversity and resilience.

Staff lower the mainland Chinese flag in front of screens showing the index and stock prices outside Exchange Square in Hong Kong. Photo: Reuters

Being a superconnector has reduced Hong Kong’s economic diversity

The literature on regional integration is largely positive: economies grow faster when they integrate with larger markets. But the literature also highlights some risks for smaller economies – risks that Hong Kong should always have been alert to. For instance, firms and talent may leave for better opportunities in larger, faster-growing markets. The manufacturing sector may be hollowed out, and the loss of manufacturing reduces opportunities for technology learning and upgrading.

In addition to these risks of integration, Hong Kong has also given up a vital tool of macroeconomic stabilisation – monetary policy – because of its pegged exchange rate.

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Rather than enable it to enjoy the best of both worlds, being a superconnector combined with the US dollar peg may have consigned Hong Kong to the worst of both worlds in the last two years. China’s structural problems have meant there has been no post-Covid rebound, while the US dollar peg has deprived Hong Kong of the ability to lower interest rates or the exchange rate to support the economy.

Looking ahead, interest rates in the United States are likely to be reduced this year; this would relieve the pressure on the Hong Kong dollar and allow interest rates in Hong Kong to come down to levels more suited to its context. But Hong Kong’s excessive reliance on growth in the mainland will not be reduced any time soon. With GDP growth in China likely to slow to 3-4 per cent in the next 10 years, one would have to be blindly optimistic to believe that growth in Hong Kong would not be adversely affected.

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It has also reduced Hong Kong’s policy space and undermined its international character

The Covid-19 pandemic forced Hong Kong to choose between its connections with the mainland and its connections with the rest of the world. Rightly or wrong, it prioritised the former over the latter. But because China’s zero-Covid policy was increasingly misaligned and out-of-sync with global norms and practices, Hong Kong found itself isolated and perceived as “just another Chinese city”.

More so than the National Security Law, zero-Covid did considerable harm to Hong Kong’s reputation as an international city. It also showed how maladaptive the Hong Kong government had become. As the virus evolved to become more transmissible and less deadly, and as the rest of the world outside China adapted to live with the virus, Hong Kong’s persistence with draconian zero-Covid restrictions – even after Covid-19 had become endemic in the city in early 2022 – showed the rest of the world that policymaking in Hong Kong had become less pragmatic and scientific.

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Zero-Covid also produced disastrous consequences for Hong Kong: it neither saved lives nor protected the economy. Compared with other jurisdictions in East Asia, Hong Kong has had more excess deaths during the pandemic, even as it delayed its economic recovery unnecessarily.

Zero-Covid also inflicted more trauma on Hong Kong’s economy than the National Security Law did. At the height of zero-Covid madness in early 2022, tens of thousands of professionals in the business and financial sectors left Hong Kong – many to Singapore. And the trauma continues, not least because the Hong Kong government has not convened an independent inquiry on its handling of Covid-19, without which the authorities will not have the opportunity to learn from their mistakes, businesses will persist in their belief that the quality of policymaking has deteriorated, and residents will remain sceptical and cynical of the government – deepening Hong Kong’s existential crisis.

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Avoiding stasis and blind optimism

In many of the Hong Kong government’s public pronouncements, there is a tendency to blame external factors for Hong Kong’s problems – high interest rates in the US, geopolitical tensions, Western efforts to contain China – while disregarding or downplaying domestic factors such as China’s slowdown, Hong Kong’s US dollar peg, and zero-Covid. While these stories may be understandable from a political communication perspective, they hurt Hong Kong more in the long run.

First, these narratives do not do the Hong Kong people or the economy any favours. They create the impression that all of Hong Kong’s problems are created by outsiders or enemies abroad. Not only does this damage Hong Kong’s standing as an international city, it also does not help Hongkongers understand the complex challenges the city faces in a less globalised, more polarised world. These narratives create simplistic, binary, and ultimately false, stories that Hong Kong is caught in a battle between East and West, between good and evil. In so doing, they polarise society even more.

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Second, these narratives give the authorities a crutch and an excuse not to engage in a deeper, self-critical reflection of what Hong Kong needs to do to stay relevant. Why bother to change if we can easily scapegoat the West or blame others for Hong Kong’s problems?

Third, these narratives are often based on blindly optimistic predictions of China’s rise, and of the West’s decline. While this is a possibility, it is by no means guaranteed no matter how sincerely or strongly we hold these beliefs. They also promote excessive optimism in the face of our problems and failings. While optimism is usually a good mental disposition, we should avoid the denialism, defensiveness, and self-delusion that the writer Lu Xun described so well in The True Story of Ah Q.

Rather, Hong Kong’s policymakers should seize the opportunity that the current economic malaise offers to engage in a far-reaching exercise on how the Hong Kong economy should be adapted, even reinvented, for the future. Doing so would not only signal to the world that Hong Kong has every intention to remain an essential node of the global economy, it would also give Hongkongers more reason to be confident in Hong Kong’s future.

Donald Low is Senior Lecturer and Professor of Practice, and Director of Leadership and Public Policy Executive Education, at the Hong Kong University of Science and Technology (HKUST). This commentary is based on his remarks at a policy dialogue on “Hong Kong in a Polarised World: Still a Superconnector and East-West Intermediary?” organised by HKUST and the Education University of Hong Kong.