Hong Kong’s border with China was reopened on Sunday, January 8 as travellers made the cross-border trip at Lok Ma Chau MTR station. Photo: Kyle Lam/HKFP.
Hong Kong’s authorities’ initial handling of the COVID pandemic commands praises. Building on their previous experience of the 2003 SARS outbreak, officials imposed a mask mandate and a quarantine on inbound travellers as early as March 2020. Despite episodical surges, the virus was mostly kept out of the city’s premises, and by December 31,2021 (Worldometer, 2023), Hong Kong had recorded 213 deaths and cases totalling 12 650. Life within the Special Administrative Region (SAR) was relatively normal, albeit sealed from the world. However, a botched vaccination campaign (especially among its numerous elderlies), and the absence of herd immunity meant that a serious Omicron outbreak wreaked havoc through most of 2022, bringing the death toll to 12 018 (Worldometer, 2023). Worryingly, this asynchronous surge isolated the HKSAR just as the world was reopening.
Consequently, when on September 23, 2022, John Lee Ka-chiu - Hong Kong’s Chief Executive (CE) - announced the deployment of a new “0+3” policy, with just one month to go before the Hong Kong Sevens - the “most popular annual sporting events in Asia” (Hong Kong Sevens, 2023) – was due to take place, Hong Kong’s largest press organisation– the South China Morning Post – echoed the feelings of many with the headline “Hong Kong is finally axing hotel quarantine for arrivals” (Heung, 2022). “We made this decision after we took factors such as livelihoods, economic activities, Hong Kong’s competitiveness, convenience for arrivals into account, as well as striking a balance between various needs,” explained John Lee Ka-chiu, then in the third month of his tenure as the newly appointed CE of the Hong Kong Special Administrative Region (HKSAR). Indeed, increasingly loud voices from local residents, the international business communities and even lawmakers had been calling for a scrapping of international travel hindrances in light of Hong Kong’s economic woes.
This is unsurprising: the staggering economic success of this Asian Dragon primarily rested on its integration within global supply chains, and its unique position as a gateway between China and the world. Almost three years of quasi-isolation from the rest of the world in the immediate aftermath of major protests and concomitant to Scholz’ Zeitenwende, an epochal shift, potentially lastingly damaged Hong Kong’s economic potential.
Making Asia’s World City
Following the 1997 handover of Hong Kong, the newly created SAR ensured its appeal remained unimpeded by creating Brand Hong Kong. This government programme extensively consulted with experts, professionals, and the public both locally and abroad to craft Hong Kong’s iconic nickname: Asia’s World City. Brand HK’s sole mission was to “provide a greater focus to the international promotion of Hong Kong as ‘Asia’s World City.’” (Chan, 2011). Emphasis was placed on its location on the doorstep of Mainland China, but also on its identity as a vibrant beacon of cosmopolitanism, “a hub of Asian creative industries” (Chan, 2011), a place of “creativity, entrepreneurship, global connectivity, security ,and rich diversity”.
This campaign was remarkably successful because Hong Kong was, in many regards, Asia’s World City. Since 1842, HK has constituted a bridge linking East and West, not only geographically, but also economically, culturally, and symbolically. Economically, Hong Kong is an Asian Dragon that pioneered the region’s development and stands as a successful model of economic governance. Financially, Hong Kong ranks fourth on the 2022 Global Financial Centres Index (China Development Institute & Z/Yen Partners, 2022) and companies listed on the Hong Kong Stock Exchange have a combined market capital of USD 3.36tn (7th in the world, Statista, 2022). Culturally, Hong Kong draws talents from around the world, and expats make up some 10% of its population (Arcibal, 2022). On almost any metric, pre-pandemic Hong Kong championed globalisation: it was the 7th most Michelin Starred city in 2019 (Ott, 2022), it consistently topped Euromonitor’s City Destinations Index until 2019 with almost 30 million visitors spending $6.84bn in 2019 and 2016 respectively (Euromonitor, 2019; Mastercard, 2016), the University of Hong Kong remains the most international university in the world (Times Higher Education, 2022), and the SAR housed 1379 regional headquarters (RHQ) of Multinational Corporations (MNCs) in 2016 (KPMG, 2017).
A myriad of factors helps us understand Hong Kong’s miraculous rise. Chief among those lies Hong Kong’s unrivalled geographic location. Not only does the SAR occupy the Northern Bank of the Pearl River Delta, which constitutes the economic backbone of Southern China, it lies on the shore of the South China Sea through which an estimated one-third of global shipping transits – representing $5.3tn in value(ChinaPower Project, 2021). Those factors turned Hong Kong into the eighth busiest container port, with almost 18mn TEU in 2019 (World Shipping Council, 2019). Besides, Hong Kong is at the juncture between East, Southeast, and South Asia, lying at the centre of the Valeriepieris circle – home to half of the world’s population. Located within less than five hours by flight from Delhi, Tokyo, Beijing or Singapore, the Hong Kong International Airport was the eighth busiest in the world in 2019 with 74.5mn passengers (Chrisman, 2019).
Second, Hong Kong’s legal system, largely inherited from the colonial era, guarantees the rule of law and independence of the judiciary. In 2021, Hong Kong ranked seventh globally in the World Competitiveness Yearbook 2021, and number one under the item Business Legislation (IMD, 2022). This has turned Hong Kong into a legal hub, an international dispute resolution and arbitration centre, and an optimal location to do business in.
Third, Hong Kong boasts one of the best education systems in the world, ranking fourth in the 2018 PISA study (OECD, 2019), and hosting five universities amongst QS’ top 100 (QS, 2022). It enjoys a large pool of local and international skilled talents, enabling it to thrive in our knowledge-based economy. The availability of a multilingual, tech-savvy, financially literate workforce has been a prime driver in MNCs choice to implement RHQs in Hong Kong.
This tightly knitted dynamic network of companies of various sizes has been the fourth driver of Hong Kong’s growth. Not only is Hong Kong home to big names such as AIA, MTR Corporation, and Hang Seng Bank, but it also counts some 340 000 SMEs, and has bred 18 unicorns (Zhang, 2022) in five years in promising sectors such as biotechnologies and artificial intelligence.
Such success is attributable to the fifth factor: the HKSAR Government’s flexible approach to policymaking. Whilst heading one of the freest economies – consistently topping the Fraser Institute’s ranking (HKSARG, 2022) – and leaving markets a free hand, the government has known when to step in, either as a regulator or as an investor. One such fabled tale occurred towards the end of August 1998, when the Hong Kong Monetary Authority saved the SAR’s economy and took on currency speculators at the height of the Asian Financial Crisis (Chan, 2019). Meanwhile, its investor role is best epitomised by the success of the public incubator Hong Kong Science and Technology Parks Corporation, which has channelled HK$68bn of investment between 2014 and 2021 (Zhang, 2022), doubling Hong Kong’s start-up count from 1558 to 3755 over the same period.
Other factors include a world class public transit system (the most valuable in the world (Chan, 2021)), a low tax rate and simple tax system – leading to Hong Kong regularly flirting with the OECD’s blacklist of tax havens, political stability, excellent financial and physical infrastructures, virtual crimelessness, iconic landscapes, etc. The list could go on.
The great unraveling
Those practically surreal competitive advantages were blunted as the 2019 protest and the subsequent crackdown, combined with harsh COVID restrictions, created a perfect storm. Some of the world’s longest quarantines effectively neutralised its geographic edge. The border with China closed just as the hyped Greater Bay Area was finally taking shape, and the 19-minute train ride to Shenzhen became a thing of the past whilst the much-advertised Hong Kong-Zhuhai-Macau Bridge remained free of cars. International business travel grinded to a halt in the SAR, whilst rival Singapore fully reopened on April 1st, 2022 (Al Jazeera, 2022).
The city is now derided as “just another Chinese city” (Yuen, 2022) as the erosion of Deng Xiaoping’s model of “one country, two systems” – which enabled the success of the 1997 retrocession – is put on full display by the repression of the 2014 Umbrella movement and the 2019 protests. The undermining of the rule of law and the flourishing grip of the CCP, cast a shadow over Hong Kong’s future. Additionally, the government haphazardly engineered a two-stage brain-drain: first by cracking down on protesters and (albeit somewhat forced) introducing a draconian National Security Law (NSL), and second by imposing some of the world’s harshest pandemic restrictions. The former triggered an exodus of local workers, especially young graduates, whilst the latter exasperated expats and discouraged immigration. As a result, some 140 000 workers have left the city in the past two years, many of them to talents leaving for rivals Singapore or Shanghai or settling in Canada and the UK (Kim, 2022). Closures of schools decreased the quality of education, especially in a city where having one’s own bedroom is a luxury, and frustrated expats who could compare the situation in their own country. Scandals over conditions at the dreaded Penny Bay quarantine centre convinced many that the much discussed yet little materialised transfer into an authoritarian dystopia had started.
Hysteresis?
So, can the Hong Kong government reclaim the city’s lost standing and reverse three years of catastrophic image degradation? It certainly hopes so, and has already launched a ‘Top Talent Pass Scheme’ providing two-year working visas for ‘top talents’ whose annual salary must have surpassed HK$2.5mn in 2021. Whilst certainly a welcome initiative, avoiding long-term scarring will likely require substantially more.
Indeed, Hong Kong’s economy has suffered gravely from the restrictions, the exodus, the protests, and the closure of China. Its GDP is forecasted to have contracted by 3.2% in 2022, following a 1.7% and 6.5% recession in 2019 and 2020, respectively, for a rebound of only 6.3% in 2021. Whilst inflation remains largely subdued, output remains well below pre-pandemic levels.
Additionally, two trends could further threaten the recovery. First, the world appears to be heading for a recession in 2023. A combination of monetary tightening, elevated energy prices, and deteriorating consumer confidence mean that the three major economies (the EU, the US, and China) are undergoing their first concomitant slowdown. Whilst China’s reopening offers hope – both for the Mainland and Hong Kong - the first half of the year will likely amount to some degree of chaos, and a rebound is not predicted until summer (Goldman Sachs, 2022). More worryingly, the current liquidity crunch will likely further depress financial markets, whilst the probability of a financial accident compounds the risk. Should it happen when Japan ends its yield curve control, Hong Kong would be at the forefront of the ensuing meltdown.
Second, mounting geopolitical tensions between the US and China could pressure Hong Kong’s position as a bridge between East and West, potentially making it untenable. China squandered its appeal - and thereby that of its gateway, i.e., Hong Kong -, and a great upheaval of global supply chains is in the making as ‘the West’ is ‘reshoring’ (“the practice of moving a business or part of a business that was based in a different country back to its original country” Cambridge) and ‘friendshoring’ (“a kind of reverse offshoring in which supply chains are redirected to stable, ideally allied countries, rather than those invading their neighbours or pursuing self-harming covid policies” The Economist, 2022), whilst the US and China appear to be decoupling. Hong Kong’s status as an SAR is increasingly felt: the Heritage Foundation – whose Index of Economic Freedom was topped by Hong Kong for most of its 27 years of existence – decided to remove Hong Kong and Macau starting in 2021 because: “developments in recent years have demonstrated unambiguously that [economic] policies are ultimately controlled from Beijing.” (Feulner, 2021).
Still, Hong Kong has weathered several serious crises in the past and should not be cast aside. Many feared the 1997 handover would mark the end of the city’s economic miracle. In the subsequent 25 years, the SAR’s GDP per capita doubled (MacroTrends, 2023). Besides, Hong Kong retains a unique position vis-à-vis China, and Beijing appears willing to leverage it: the HKSFC and the CSRC announced on 19 December 2022 that the Stock Connect scheme would be expanded to include more stocks (HKEX, 2022). The main challenge for the city will likely be to rebrand itself after years of catastrophic public image debasement, successfully leverage the promises of the GBA, and attract new human capital, potentially from the Mainland’s ever-expanding talent pool.
Overall, the city is unlikely to return to its former shape: the new Hong Kong will undoubtedly be more Chinese and less British, mirroring the global shift towards a more multipolar world. Nostalgics of the colonial period should be reminded that it was a golden era for westerners only. Proponents of a false mirage of “One Country, Two Systems” must acknowledge the city’s unique identity. It can only be hoped that Hong Kong’s authorities manage to manufacture a new version of Asia’s World City, one that builds on existing strengths whilst correcting its numerous flows, starting with sky-high inequalities.
About the Author
Nicolas Guignard is a master student candidate within the Economics and Public Policy
track of Sciences Po’s school of Public Affairs. He holds two bachelor’s degrees from
Sciences Po and the University of Hong Kong (in Economics and Finance). His experiences nurtured his long-time interest in China’s development framework. His main area of expertise revolves around economics and economic policymaking. He currently works for Amundi Asset Management as a macroeconomic researcher. You can find him on LinkedIn. https://www.linkedin.com/in/nicolas-guignard-7790b71a0/
The opinions expressed here are those of the writers and do not represent the views of
European Guanxi.
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