Rajiv Biswas, Asia Pacific Chief Economist for IHS Markit
- Since Hong Kong’s handover back to China on 30 June 1997, Hong Kong’s economic role in the region has faced significant challenges due to the ongoing decline of its relative competitiveness as a manufacturing hub and competition from mainland Chinese ports for the shipping trade.
- The relative size of Hong Kong’s economy relative to mainland China has declined substantially as mainland China’s economy boomed over the past two decades. Although the size of Hong Kong’s economy has almost doubled since the handover, growing from USD 177 billion in 1997 to an estimated USD 335 billion in 2017, mainland China’s economy has become 11 times bigger over the same time period, growing from USD 960 billion in 1997 to an estimated USD 11.6 trillion by 2017.
- A key challenge facing the Hong Kong economy is its rapidly ageing population, with the share of people aged over 65 having risen from 10% in 1997 to an estimated 16% in 2016, and projected to rise sharply to 30% by 2034.
- From its position as the world’s largest container port in terms of shipping volume in 1997, Hong Kong has now slipped down the rankings to fifth place in 2016, after Shanghai, Singapore, Shenzen and Ningpo-Zhoushan. Hong Kong has faced increasing competition from Shenzhen, which has developed a modern, efficient port infrastructure to service international trade with the Pearl River Delta, one of the world’s leading manufacturing hubs.
- A key strength of the Hong Kong economy continues to be its role as one of the world’s top international financial centres, underpinned by the Hong Kong dollar (HKD) fixed peg to the USD. Total assets under management in the Hong Kong financial centre were estimated at USD 2.2 trillion at the beginning of 2016. The Hong Kong financial centre also benefits from the Hong Kong-Shenzen Stock Connect and the Hong Kong-Shanghai Stock Connect platforms.
- The Hong Kong financial centre has also become the most liquid offshore renminbi business hub and a leading financial centre for renminbi trade settlement. However, the Hong Kong international financial centre has also faced increasing competition from other financial centres in Asia Pacific, most notably Singapore, which has emerged as a leading global financial hub with total assets under management of USD 1.8 trillion at the beginning of 2016.
- Singapore’s economy has outperformed Hong Kong since 1997. In 1997, the per capita GDP of both Hong Kong and Singapore was around USD 27,500, but by 2016, Singapore’s per capita GDP had risen to USD 52,000 while Hong Kong’s per capita GDP had lagged behind at an estimated USD 43,700.
- Over the next decade, Singapore will increasingly challenge Hong Kong for the position of world’s third largest international financial centre after London and New York. Hong Kong’s financial centre is also expected to face increasing competition in the medium to long term from the rise of financial centres in mainland China, notably Shanghai, Beijing and Shenzhen.
- While the rapid growth of per capita GDP in mainland China has driven strong growth in tourism flows from the mainland to Hong Kong over the past two decades, this has faltered in the recent past. In 2016, mainland Chinese visitors accounted for 76% of total visitor arrivals into Hong Kong, with a total of 42.8 million visitors. However, the number of mainland visitors fell by 6.7% year-on-year in 2016, resulting in a significant negative impact on Hong Kong retail sales, which fell by 8% year-on-year in 2016. Hong Kong Disneyland reported losses for both fiscal 2015 and fiscal 2016 due to softening tourism visits.
Hong Kong Economic Outlook:
The Hong Kong economy grew at a pace of 2.0% in 2016, with IHS Markit forecasting that the Hong Kong economy will grow at an average annual rate of around 2.5% per year over the medium-term outlook from 2017-2022. The Hong Kong economy has already suffered from the gradual erosion of its competitiveness as a manufacturing hub, as manufacturing production has shifted to lower cost manufacturing hubs in mainland China. Hong Kong’s traditional role as a major shipping hub has also been impacted by the development of modern ports in mainland China, which has resulted in growing competition and the relative decline in importance of Hong Kong’s port compared to ports in Shanghai and Shenzen.
While Hong Kong’s role as a leading global international financial centre remains a key competitive advantage and an important factor underpinning economic growth, in the long-term the financial centre will face increasing competition from other mainland Chinese financial centres, notably Shanghai, Beijing and Shenzhen.
Hong Kong has also faced significant competition from Singapore for regional headquartering for global multinationals, with the Singapore government having taken a more strategic approach to infrastructure development and central business district planning as well as encouraging the development of Singapore as a leading APAC knowledge hub for international universities, think-tanks and international government organisations such as the World Bank.
Aging demographics are another key negative factor impacting on the long-term growth rate for Hong Kong, with the share of the population aged over 65 projected to rise from 16% in 2016 to 30% by 2034,which will be a negative factor impacting on Hong Kong’s long term potential growth rate.