Developments to Watch
Longer-term retrenchment in the financial sector. Global downsizing in financial intermediation may affect Hong Kong’s financial services sector, which together with trade services has contributed the majority of employment growth in recent years. Its sizeable asset management and hedge fund industries are most at risk. Then again, continued demand for more traditional financial services from mainland China will provide an offset. While the gap is closing, Hong Kong has a considerable lead over mainland financial centres, including Shanghai, due to its superior financial infrastructure, regulatory environment and workforce.
Political tensions. The recession could lead to rising demands for more meaningful political reform in Hong Kong, creating frictions with Beijing. The popularity of the territory’s chief executive Donald Tsang is already starting to wane. Realistically, though, there is no likelihood of a change in the status quo in the near term. It was only recently that the National People’s Congress decided that universal suffrage for the chief executive will not be implemented until at least 2017.
Exchange rate regime. The Hong Kong authorities have reaffirmed their commitment to the US dollar peg. In fact, the low US interest rates are very welcome given the sharp reversal in activity. The peg also provides a source of stability against heightened volatility in global financial and foreign exchange markets. The authorities’ large foreign exchange and fiscal reserves and the entrenched current account surplus will enable the peg to withstand any speculative attack.
Pearl River Delta. Hong Kong-owned factories in the delta and trade service providers are being severely affected by the drop in global demand. Even before that, these factories were getting squeezed by rising labour costs, stricter enforcement of labour rights and more rigorous environmental standards. If Hong Kong is to leverage further growth from the delta, much will depend on the success of the government’s strategy to transform the area into a centre for high-tech manufactures, with further integration of Hong Kong as the trade and financial services hub. On this front, plans for advanced transport links between Hong Kong, Macao and the mainland are a positive development. The recent opening up of China’s domestic market to goods produced by Hong Kong-owned factories should provide more immediate support.
Dougal Crawford is Senior Economist for the Export Finance and Insurance Corporation (www.efic.gov.au)
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Frankie Fook-lun Leung
It used to be Hong Kong regional headquarters to overseas the mainland china activities. Now, the reverse is happening. Multi-national corporations which are keen to do business in China will set up shops in Shanghai and Beijing instead of Hong Kong. Hong Kong retains its position mainly in highly regulated industries such as investment and finance because the regulatory agencies in Hong Kong are not corrupt. Otherwise, the advantages enjoyed by and in Hong Kong are fast eroding.