Authors: Jae Young Lee, Group Head and Lead Economist; Fan Zhai, Senior Economist and Suan Yong Foo, Senior Economist
The past several years have been very difficult for Hong Kong due to a series of shocks ranging from domestic unrest to U.S.-China tensions and the COVID-19 pandemic. Domestic unrest was a key factor that tipped the economy into recession in 2018 and deepened its contraction in 2019. Just as forceful policy measures got the situation under control, high hopes for a V-shaped rebound were dashed by the global pandemic. Escalating U.S.-China tensions have only compounded the challenge by worsening the business climate.
Now, the city is finally seeing light at the end of the tunnel. The ASEAN+3 region has moved to COVID endemicity and China has done likewise in recent weeks. There are high hopes that, in the coming year, mainland China’s rapid shift into “living with COVID-19” will lead to a strong economic rebound as containment measures are fully lifted and activities return to pre-pandemic normal. Given these conditions, Hong Kong’s own economy will reap the benefits of the economic spillovers from its giant neighbour, to recover, strengthen, and thrive. Once “living with COVID” becomes the norm in Hong Kong, with limited adverse effects on public health and a manageable load on its healthcare system, economic conditions will normalize, the job market will pick up further, and conditions will be much more conducive for Hong Kong to ride on China’s and the region’s growth. This would allow rebuilding of resources for infrastructure building, housing, healthcare, and social welfare.
Risk and uncertainty
Yet, risks and uncertainties remain in the near term, and challenges loom large in the medium- to long- term. In the near term, economic growth is slowing in the U.S. and Europe, while interest rates are rising, and financial conditions are tightening. Consumers and businesses are cautious, as the growth outlook is mixed, inflation eats into households’ purchasing power and enterprises’ profit margins, and there are just too many factors that can disrupt supply chains. In the longer term, U.S.-China tensions will continue, and the idea of “decoupling” may never quite go away. This threatens Hong Kong, a small open economy, which has always thrived on global growth, trade, and cross-border investments. Domestically, Hong Kong needs to think harder than ever how to extract more growth from an already mature economy with a greying, shrinking population for which socioeconomic inequalities are stark and housing costs are high.
The complexity of these near-term and long-term challenges and the high stakes involved mean that a fully laissez-faire approach is unlikely to be optimal. Indeed, in his blog on October 23 last year, Financial Secretary Paul Chan, referencing Chief Executive John Lee’s 2022 Policy Address, wrote: “The whole development concept has clearly moved from ‘positive non-interventionism’ and ‘big market, small government’ in the past towards a direction that would better integrate a ‘capable government’ and a ‘highly efficient market’. This is a clear and obvious choice for Hong Kong.”
It may be useful to look through the past few years to see if there are some clues for how Hong Kong might tackle future challenges. One option is to have the government play an even more proactive role in socioeconomic policy, while allowing market forces to help maintain the vitality of one of the freest economies in the world. Indeed, the global pandemic has highlighted that governments can and should play a crucial role in addressing large-scale socioeconomic difficulties. But even where there is no crisis, the Hong Kong government ought to take the lead in tackling the multiple socioeconomic challenges that it faces, including population ageing, social inequalities, housing affordability, and some healthcare issues.
Here are five proposals that could help secure Hong Kong China’s future.
Hong Kong has done well in providing comprehensive high-quality basic healthcare services to its people, with the government bearing the overwhelming bulk of the costs. The organization and operation of the healthcare system is solid – which is why the city has by and large done well in dealing with five or six waves of the pandemic. Looking ahead, it can do more to improve the accessibility of specialist services, which will be in increasing demand as the population ages. Key areas may include upgrading the hardware of hospitals and other infrastructure and the software of the healthcare system and workers’ skillsets, and finding ways for cost-sharing between the government and the people.
Over the past few years, Hong Kong authorities have strengthened efforts to tackle the lack of affordable housing. This is commendable. As the authorities’ efforts yield more concrete results, living conditions should become more comfortable for many people, and help the fight against the next pandemic if it occurs. The authorities can also consider having improvements in housing affordability for Hong Kong people as a more explicit policy priority. This would help to alleviate pressure on people, particularly during economic downturns when adverse conditions take a toll on jobs and incomes.
3. The real estate market
The real estate sector has had a massive run up over the past decades. This has brought both benefits and challenges to the economy and people of Hong Kong. While the wealth effects of asset appreciation have provided a significant boost to the economy, the flip side is the increase in business and living costs. It is not easy to determine, in any economy, the point at which high value of real estate becomes more socioeconomic cost than socioeconomic capital. Singapore – with which Hong Kong is often compared – faces the same challenge. However, in Singapore, the problem is not so acute because the government provides subsidized public housing to the vast majority of the population. In contrast, the “free economy” of Hong Kong has resulted in a housing deficit of about half a million units – for a population of 7.2916 million and high costs of doing business. In this critical area, the city’s laissez-faire approach has not worked as well.
4. Jobs and wages
Employment creation has been driven by private sector enterprises that thrived before the city went into a multiyear recession, while minimum wage increases have been restrained for years due to concerns that businesses could face irreversibly higher costs. Perhaps Hong Kong might have benefited from a less laissez-faire approach, with the government doing more in areas such as putting in place a formal unemployment benefits scheme and mandating higher minimum wages. These would have boosted the safety net for a shrinking and ageing workforce.
The situation is quite pressing. Available data and information suggest that a substantial segment of elderly people in Hong Kong are below or just above the poverty line. Among the middle-aged, those who are lower-skilled and have more modest incomes are likely to struggle to deal with rising costs of living when they get older or retire. If the authorities create a more integrated, comprehensive, and sustainable pension system, this could be a big help. For example, the authorities could introduce a universal, contributory “pillar one” public pension scheme to serve as the backbone of Hong Kong’s safety net for protecting the elderly. The most useful elements of existing social welfare programs could be consolidated and adjusted to become more targeted to focus on other vulnerable groups. The Mandatory Provident Fund scheme could be strengthened by expanding its coverage, increasing contribution rates and replacement rates, and relaxing its investment restrictions.
Looking to the future, there is a compelling case for the government to tackle the complex challenges proactively, allow Hong Kong to develop further as a free-market economy, and shape a social consensus on the city’s long-term fiscal policy for strengthening the socioeconomic compact. Hong Kong is a mature economy growing at a much slower pace than in the early years. Therefore, every bit of growth and job creation matters; every possibility to accumulate fiscal resources and financial buffers matters. As the city addresses multiple challenges, mainland China’s economic growth may also trend down gradually, while U.S.-China tensions will continue for decades − with Hong Kong in the crossfire.
In Hong Kong’s great success story, there is much to retain and further strengthen – a determination to keep macroeconomic fundamentals sound, a well-capitalized and innovative financial sector, consistent fiscal prudence, and a strong embrace of globalization. At the same time, if the government does more to tackle the several socio-economic issues that cannot be solved optimally by the free market, then Hong Kong will enjoy more inclusive growth and resilience for many years to come. If that happens, Hong Kong people can look to the future with renewed confidence and optimism.
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