Overcoming HK's economic woes

For three decades, Hong Kong has thrived economically along with the Chinese mainland. Now its economic future is at a crossroads. According to a poll conducted by South China Morning Post, Hong Kong residents are far more unhappy with life than those in cities on the mainland.

Usually, people feel happier when their living standards are better. In Hong Kong, the per capita GDP at purchasing power parity is $52,000. In the polled mainland cities, it is between $16,000 and $21,000, that is, only 30-40 percent that of Hong Kong. But instead of being twice as happy as their compatriots on the mainland, Hong Kong residents are unhappy. Why?

For all practical purposes, different reasons are responsible for the increasingly grim mood Hong Kong residents find themselves in. Some observers argue that it involves the "tumbling" popularity of the city's leader Leung Chun-ying. Others blame high property prices for the gloom. Some parents dislike the new education curriculum, while others complain there are not enough discretionary seats in primary schools.

Still others want more democracy. On Jan 1, thousands of protesters took to the streets in Hong Kong demanding more democracy and returned to the streets with the same demand on July 1, the 16th anniversary of Hong Kong's return to the motherland.

Then there are people who grumble that the influx of people from the mainland is straining the city's resources and pushing up prices, from real estate to baby formula. Indeed, recent surveys show that negative views in Hong Kong toward newcomers from the mainland are at their highest in years.

And yet, the fact remains that mainland tourists and residents are now a vital source of revenue for Hong Kong. And as Hong Kong is maturing and aging, the mainland offers youthful demographics and growth injections - great complementary benefits that Hong Kong urgently needs.

When the Chinese mainland was insulated, Hong Kong thrived. In fact, Hong Kong continued to thrive for years after reforms and opening-up were launched in the mainland. But as the mainland's economic development is catching up with that of Hong Kong, the latter risks becoming marginalized.

True, Hong Kong still tops the ranking of international financial centers by foreign direct investment (FDI) in terms of services. But it is followed by Shanghai, which seeks to become a world-class financial, trade and shipping center by 2020. The mainland's financial reforms, along with the likely internationalization of the renminbi in the near future, are boosting Shanghai's advantages.

Last year, FDI flows into Hong Kong dropped by more than 20 percent, whereas they increased by more than 20 percent into Shanghai. With the launch of Shanghai's Free Trade Zone, some of the FDI that used to go to Shanghai via Hong Kong are moving directly to Shanghai.

According to the International Institute of Management Development, Hong Kong recently lost its status as the world's most competitive economy, falling behind the US and Switzerland. In competitiveness among cities, it has dropped from being China's second most competitive region to the fifth. Furthermore, Hong Kong's high-tech sector's percentage in its exports has shrunk.

Further, since the global financial crisis, Hong Kong's prospects have been overshadowed by record-low US interest rates and "hot money", in part driven by spillovers from the mainland, which has increased property prices.

With the US Federal Reserve expected to tighten its monetary policy in the near future, financial risks are likely to increase in Hong Kong's property market. This is not good news for Hong Kong, because instead of pushing new emerging industries and looking into the future, it relies on its old economic legs, such as finance, logistics, trade, tourism and professional services. The latter evolved when the mainland was still a low-income economy. But with the mainland becoming a middle-income economy, competition has intensified.

To sustain its high prices and costly living standards, Hong Kong needs to foster its high-end advantages soon. Most importantly, the city could upgrade its economic advantages through deeper integration into the Pearl River Delta region's economy, which hopes to replicate Shanghai's FTZ advantages in the future.

For three decades, Hong Kong has grown with Beijing's support and mainland savings. Today, the mainland accounts for 54 percent of its exports and 47 percent of imports. If one were to take away the mainland's role in Hong Kong's trade, investment, financial markets and initial public offerings, Hong Kong's economy would be in severe jeopardy.

Flirting with a political cul-de-sac will not make economic realities any easier, but more challenging. It's precisely the wrong stance to take at the wrong time.

Once Hong Kong thrived without the mainland. Tomorrow, it can excel with the mainland. It doesn't have to feel unhappy, for it can share the future.

The author is research director of International Business at India China and America Institute (USA) and visiting fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore).