Hong Kong's Declining Economic Fortunes

6 MINS READJun 21, 2013 | 10:10 GMT
The Hong Kong skyline on June 3.

Sixteen years after returning to mainland control, Hong Kong is experiencing an identity crisis. The enclave is anxious over its declining competitive edge and is growing antagonistic toward surging mainland cultural and economic influence into Hong Kong. This in turn is prompting a rising tide of nativism that could make Hong Kong less appealing to outside businesses just as other cities in the region are poised to seize investment opportunities. While Hong Kong's economy is by no means doomed, the special region is again at a critical junction. If it is to keep its competitive edge, it is going to have to abandon the complacency born of its advantaged position and start seeking new opportunities for growth.

In a recent poll by Hong Kong University, less than 23 percent of people in Hong Kong reported positive feelings toward mainlanders, considerably lower than the 41 percent reported in 2008. When asked to name their identity, a majority of responders chose "Hong Kong Chinese" and "Hong Kong people" over "Chinese," the least preferred option, especially among youths. A series of incidents has highlighted Hong Kong residents' declining affinity for the mainland's culture and people, including a boycott of donations to earthquake victims in Sichuan and displeasure with a new China-oriented national education curriculum.

For many Hong Kong natives, mainland business elites and tourists have strained already limited space and resources. The mainland-Hong Kong cultural clash has become increasingly visible. Beijing had hoped intensive economic and cultural exchanges would promote ties with Hong Kong, easing the 50-year transition process toward direct rule of the special region. Instead, Hong Kong has continued to disassociate itself from the mainland.

The Hong Kong Exception

Despite being a free port for mainland China for centuries and having a population where 95 percent is of Chinese descent, Hong Kong has long maintained a unique identity distinguishing it from the rest of China in part due to its long period of British rule. Ever since the late Qing dynasty, it has been a popular destination for mainland political refugees seeking refuge as well as dissenters subscribing to various political movements in China. This gradually led to general acceptance of a society that combined elements of Eastern authoritarianism and Western representative democracy. The resulting dynamic civil society, liberalized economy and rule of law were not always reconciled with traditional Asian culture.

Hong Kong's Declining Economic Fortunes

Hong Kong's GDP by Major Service Sector

Hong Kong is also marked by a great sense of local pride given its fast-paced socio-economic development under a capitalist system, which transformed the small port into one of the world's most important financial centers — far outpacing just about everywhere in mainland China. Thus, Hong Kong's identity in large part was shaped by a sense of remaining distinct from the mainland. This has created a strong desire among Hong Kong residents to preserve the city's traditional values and autonomy.

But at the same time, many people in Hong Kong feel strongly about events on the mainland. This has given rise to sympathy for the mainland democracy movement and mistrust toward Beijing, feelings that coexist with pride in the past decades' rapid economic development on the mainland. Even after Beijing's takeover in 1997 and the consequent deeper integration between the two, the clash between an affinity for and rejection of China has become central to Hong Kong citizens' views of the mainland.

A Declining Competitive Edge

Hong Kong is experiencing another significant trend: Its competitive edge is slowly eroding, according to annual reports from the International Institute for Management Development business school in Switzerland that rank global competitiveness. Citing slow integration with the mainland and growing business costs, such as soaring real estate prices, the development institute dropped Hong Kong's global ranking from first to third place, behind the United States and Switzerland. Within China, joint research by think tanks in Hong Kong and on the mainland also found that some mainland cities and provinces such as Shanghai, Beijing and Zhejiang are gaining on Hong Kong. Since the global financial crisis hit its highly vulnerable trade and finance sectors, Hong Kong's overall economic performance has been sluggish. Its wealth gap has been widening in recent years, too.

For some time, Hong Kong could count on its plentiful cheap labor and free trade zone to attract foreign investment. In the 1950s it began developing into a manufacturing base and logistic center while mainland China transformed into a closed society. Just as Hong Kong started to suffer from rising costs and growth of industrial states in the region, China re-opened to the West in the 1970s, enabling Hong Kong to take its place among the most prominent hubs of the international economy. The rise of nearby manufacturing hubs in the Pearl River Delta, along with favorable policies from Beijing aimed at integrating Hong Kong, saw the special region soon transform into the world's leading re-export and financial center. This greatly facilitated mainland China's opening up to the outside world through its Western-style regulatory system and liberalized economy. Its distinctiveness from the mainland is what made Hong Kong competitive. For its part, mainland China cultivated Hong Kong's uniqueness under the framework of "one country, two systems" for its own economic and political experiments and as a doorway to the outside world.

Hong Kong's Declining Economic Fortunes

Hong Kong's GDP by Economic Activity

However, Hong Kong's privileged position began to wane as deepening integration with the mainland economy took hold in the post-reunification era. The booming trade, capital injections and opening up to mainland investment initially helped Hong Kong's recovery from a series of financial crises since 1997. But the Chinese takeover also had negative effects. The inflow of capital and investments overheated the real estate market, and soaring labor and technological costs cut into Hong Kong's role as a service hub — a role that accounts for more than 90 percent of gross domestic product — and as an investment destination. Unable to develop a high-tech industry, the city continued to rely on trade and financial industries. Meanwhile, key mainland cities such as Shenzhen, Shanghai and Guangzhou have emerged since 1997 as similar financial and industrial hubs and bridges from China to the outside world. This deprived Hong Kong of its previous monopoly, which is likely to be further undermined by the mainland's ongoing attempt to reduce its dependence on exports

As a result, many Hong Kong residents fear Hong Kong will become economically marginalized. This fear, combined with resistance to the mainland's authoritarian political system, is driving Hong Kong citizens to consider how they should respond to the region's changing dynamics. The lack of a long-term strategy already has left Hong Kong behind.

While Hong Kong's uniqueness will inevitably decline, Beijing still needs Hong Kong to facilitate its own economic and political transformation, and simultaneously Hong Kong needs mainland markets, opportunities and human resources to re-emerge from the economic crisis and restore its competitiveness. The difference is China now wants multiple links to the outside world. 

Hong Kong continues to serve as a tax haven and is still very attractive to business and technological elites, sustaining its competitiveness. But its government lacks a clear strategic vision for diversifying its economy and enhancing its ability to facilitate the mainland's transformation into a value-added economy and consumer base

As the special region struggles to reorient its economy, growing nativism may cut even further into the competitive advantage of Hong Kong, long lauded abroad for its inclusiveness. With the rest of the region prepared to capitalize on new economic trends, Hong Kong may thus increasingly find itself trying to strike a balance between its competitiveness and protecting its identity.

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