INFRASTRUCTURE & REAL ESTATE - Ahead of the Curve

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Despite a free economy, a sophisticated financial sector, a sound legal framework and an efficient tax system, Hong Kong must seek closer integration with China and expedite the development of infrastructure and technology to secure future economic growth, according to a new Colliers report

By Daniel Shih and Zac Tang


Priding itself as Asia’s World City, Hong Kong’s economic competitiveness – primarily in financial services, trade and logistics, professional services and tourism – has enabled the city to earn the status as the world’s freest economy for the 23rd consecutive year and an accolade for being the most competitive economy.

The economic growth rate of Hong Kong, however, has been slower than those of neighbouring cities, and it is particularly falling behind in the areas of technology, innovation and infrastructure development. While the city remains very free and quite competitive, it has been losing ground to other Asian cities in the prospect of further growth.

Over the past 20 years, Hong Kong’s economic structure has not changed much given that the four major pillars remain dominant and constitute nearly 60 percent of total GDP (2015). Although financial services grew from 10.6 percent to 17.6 percent, trade and logistics has come under pressure amid a shift of Chinese manufacturing away from Guangdong province and improved infrastructure and operation efficiency at local ports.

Coupled with the challenge of land scarcity and an aging population, Hong Kong needs to leverage China’s growing economy to secure future economic growth. For the next 20 years, Hong Kong’s international experience and cultural diversity will be key assets, and China’s emergence as a global leader will provide Hong Kong with an opportunity to rise as a global city.


Growing ties with Mainland

Like other mature economies, Hong Kong faces similar constraints on future growth. The government has been working with China in promoting Hong Kong’s competitive advantage as an international market that is nonetheless part of China. This status means that Hong Kong is a key gateway city for national policies and RMB internationalization.

China’s economic influence has been on the rise in Hong Kong. Chinese enterprises now account for over 60 percent of the value of the Hong Kong stock market, while Hong Kong looks set to become the top destination for Chinese overseas property investment. Chinese capital has also driven up demand for local commercial and residential properties.

China’s growing economic prowess presents ample opportunities for Hong Kong to expand its realm of influence. The Belt and Road initiative (OBOR) and the plan to develop a Guangdong-Macau-Hong Kong Greater Bay Area will provide a visionary blueprint for Hong Kong’s economic development and determine Hong Kong’s role on both the international and domestic fronts in the coming decades.

On a global scale, Hong Kong can be a “super-connecter” between China and the Belt and Road countries in a new geo-political structure led by China. The finance and professional services sector will have plenty of room to grow as Hong Kong becomes the new financial center for the region covered in OBOR, which comprises 65 percent of the world’s population and one-third of global GDP.

At a regional level, further integration with nearby cities in the Pearl River Delta under the Greater Bay Area plan will further expand Hong Kong’s economic hinterland with increased cross-border flows of people, capital and business as Mainland Chinese residents and companies continue to diversify their portfolios and expand globally.

The Greater Bay Area is poised to become one of the most dynamic economic regions in the world. The Lok Ma Chau Loop, for instance, is proposed to be developed into a future high-tech hub for Hong Kong and Shenzhen, leveraging Hong Kong’s strength in soft skills and Shenzhen’s experience in high-tech hardware. It is a good illustration of how integration can benefit the territory and provide a potential solution to the entrenched problem of land shortage.

Closing the innovation gap

Hong Kong has a critical role to play in China’s Belt and Road initiative and development of the Greater Bay Area in South China, but it must first strengthen its infrastructure, business districts and high-tech parks, facilitate the venture of start-ups, and integrate more closely with the economy of Shenzhen as well as the rest of the Greater Bay Area.

Despite a well-developed and highly sophisticated financial sector, Hong Kong is facing a new challenge: how to incorporate new technology and innovation into its economy to retain its global status in the future. Hong Kong has only started to see more investment in fintech in 2016, and is a few years behind other global financial centers such as New York, London and Singapore.

Besides, Hong Kong has lagged in R&D investment, spending 0.8 percent of domestic GDP in 2015, well below the levels of 2.4 percent in Singapore and 4.2 percent in Shenzhen. Singapore, in particular, has repositioned itself as a high-tech hub and successfully outpaced Hong Kong in terms of real GDP per capita, from US$7,110 in 1995 to US$15,700 in 2015.

Shenzhen and Shanghai are two of China’s top tier-one cities having grown much faster than Hong Kong in the last 20 years: Shanghai as China’s top financial center outgrew Hong Kong by 3.5 times while Shenzhen as China’s Silicon Valley did so by five times. If Hong Kong is to remain economically competitive, it will need to adopt an approach geared for the technology-based “New Economy.”

 

Daniel Shih and Zac Tang are Director of Research and Senior Research Analyst, respectively, at Colliers International. They produce thought-leadership content on demographic, economic and political movements that give rise to the latest developments in commercial, industrial, residential and retail property markets.