U.S. Secretary of State Michael Pompeo has said Hong Kong is no longer autonomous from China after a monthslong crackdown on pro-democracy protesters. This has paved the way for the Trump administration to strip the territory of some of its privileged trade status. But alas, sometimes, I wish Hong Kong could be just another Chinese city.
Hong Kong is defined by its financial hub. With a common law system, a currency pegged to the U.S. dollar, and sitting at the gate to mainland China, the city’s banking industry has blossomed, especially since the global financial crisis.
Seeking exposure to China’s great economic engine, investors have funneled billions of dollars into the city. For evidence, look no further than its monetary base. The so-called aggregate balance has swollen to as much as $51 billion since the collapse of Lehman Brothers Holdings Inc. in 2008.
It’s no surprise the economy has morphed. Financial services now contribute about 20% of gross domestic product, from 10% two decades earlier. Meanwhile, manufacturing has become almost nonexistent. Once we include real-estate services, the finance industry would overtake trading and logistics — Hong Kong’s traditional bread-and-butter — as the city’s most important sector.
But such economic growth hasn’t been matched by a surge of good jobs. In the decade after the 2008 crisis, the added value from financial services grew an annualized 6.8%, but employment rose only 2.5%. As of 2018, the sector comprised 6.8% of the workforce, or 263,000 people. Tourism, which constitutes only 4.5% of GDP, employed almost as many.
This is because finance is capital intensive, not labor intensive. An experienced banker can arrange a mega initial public offering just as well as a mid-cap listing, and a star trader can execute a $1 billion order just as efficiently as a $100 million one. As the industry grew, what it needed was experience and access to China, not more headcount.
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Across the border, Shenzhen has taken a very different turn. A dozen years ago, it was a still a small city, where Hong Kong residents went for cheap food and shopping. Now, its economy is bigger than Hong Kong’s. Industrials, a labor-intensive sector, remains prominent, accounting for about 40% of the city’s GDP.
Many technology companies made Shenzhen their home: Tencent Holdings Ltd., Huawei Technologies Co., Foxconn Industrial Internet Co., ZTE Corp., Warren Buffett-backed electric-vehicle maker BYD Co., to name a few. Along the way, billions were made and millionaires were minted. Publicly listed companies headquartered in Shenzhen now command $1.5 trillion in total market cap, almost three times as much as those based just across the border. Hong Kong is where bankers live, but Shenzhen — China’s Silicon Valley — is where they spend their time, searching for the next Tencent.
This is the outcome of a deliberate decision made by the Shenzhen government. Its most recent five-year land plan says it all. Just like Hong Kong, the city has vowed to keep at least half of its land in its natural ecological condition. Of the space allocated for urban use, at least 30% is intended for industrial development, such as traditional manufacturing and science parks. By comparison, Hong Kong’s planning department reserves only 3.6% of its usable land for such purposes.
Along with big plots came generous subsidies. Always keen to lure tech firms, Shenzhen mandated that corporate tax rates at the Qianhai free trade zone be lower than Hong Kong’s. To weather the coronavirus-induced slowdown, the local government is offering to reimburse up to 70% of tech startups’ bank-loan interest repayments.
Most likely, Hong Kong’s high-finance industry will survive all the negative headlines, because the conditions that have spurred its prosperity remain. U.S. President Donald Trump’s China rant at his press conference Friday has been seen as all bark, no bite. The billions of dollars unleashed by the Federal Reserve’s new quantitative easing programs will once again find their way to Hong Kong, and bankers and corporate lawyers have shown some willingness to stomach Beijng’s new security law.
The industry may even thrive from a great divorce between the U.S. and China. Mega IPOs are on the horizon again, this time not from China’s state-owned giants, but its U.S.-listed technology titans such as JD.com Inc. and Netease Inc. Both are seeking refuge in Hong Kong in case they get kicked out off U.S. stock exchanges. And despite all the political uncertainty, index provider MSCI Inc. said last week it would move licensing for 37 derivatives from Singapore to its rival financial hub, simply because Hong Kong Exchanges & Clearing Ltd. has “the access to Chinese institutional and retail investors.” Hong Kong is still the gateway to China.
But this is bad news for the rest of the city. It takes a crisis for a government to devise drastic measures. If its key industry remains intact, Carrie Lam’s administration has no incentive to seek new sources of economic growth.
The dominance of finance has created a social mobility problem in Hong Kong. The industry naturally favors bilingual “sea turtles” like me over local university graduates, for our business and cultural connections to China. But in Shenzhen, your socioeconomic background doesn’t matter as much. Oftentimes, all it takes is a product prototype, a PowerPoint presentation, and suddenly you’ve got office space — and subsidized housing nearby, too. Hong Kong has a lot to learn from its tech savvy neighbor. – Bloomberg
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