The Industrial Resilience Of Hong Kong Requires A Thriving Capital Market – Analysis

By Kung Chan and Zhijiang Zhao

The downturn in the Hong Kong property market has persisted for several months, with both prices and transaction volumes remaining low. Despite the special administrative region (SAR) government's scrapping of the so-called “spicy measures”, a term referring to residential property demand management measures,

which caused some ripples in public opinion and elicited a positive market response, prices of primary market properties there have not shown significant increases. In fact, they have even declined slightly, leading to a stalemate where "volume rises but not the prices”.

This situation is somewhat disappointing for some, prompting Ronnie Chan, who recently stepped down as Chairman of the Hang Lung Group, to express his views at a recent Hong Kong Development Forum symposium. He believes that Hong Kong's economy cannot rely primarily on real estate. He pointed out that since 1997, the property market in Hong Kong has been extremely heated. However, land and property prices in Hong Kong have now reached the highest level in the world, and the price increases cannot continue indefinitely. When other aspects of the economy falter slightly, it becomes difficult to maintain high prices. Chan, 74 this year, has previously expressed pessimism about the island’s property market and economic environment. When he announced his retirement earlier this year, he lamented that the world has changed rapidly in recent years, and now is a time to find ways of surviving instead of dramatic development. Chan has also analyzed that the Hong Kong real estate industry is undergoing structural changes, not only because of the "immigration wave" and the three-year COVID-19 pandemic that has led many local Hong Kong people to leave but also because of increased land supply, which will slow down property price growth.

At some point, Hong Kong's real estate market will face challenges that render it unsustainable. But if real estate is no longer a viable option, what alternatives does the Hong Kong economy have? While there are numerous responses to this question, the prevailing and straightforward suggestion is to prioritize the development of the real economy. Since the era of Tung Chee-hwa as the Chief Executive of the SAR, discussions, proposals, and considerations regarding Hong Kong's economic diversification and the advancement of the real economy and technology have been pervasive in economic and academic circles, yet these are more often than not mere rhetoric. So, what lies ahead for the Hong Kong economy?

The current time is another critical moment, but compared to the past, the issues and troubles facing the Hong Kong economy are more urgent and the pressure is greater.

ANBOUND’s founder Mr. Kung Chan agrees with Ronnie Chan's views on the future of Hong Kong and its economy. However, he believes that the idea that Hong Kong can develop other industries without relying on real estate is a flawed linear thinking. Mr. Kung Chan believes that as a city-state economy, Hong Kong should indeed focus on real estate. If economic development goes smoothly, there will inevitably be prosperity in real estate. Subsequently, with the prosperity of real estate, there will be demand for investment, and to have investment products, there needs to be a thriving securities market. Therefore, after the real estate market, the normal economic and market logic for Hong Kong should be the development and prosperity of the capital market.

City-state economies are fundamentally different from mainland economies, and the two cannot share the same economic development model. Mr. Kung Chan has repeatedly emphasized this point since the last century. Therefore, as a city-state economy with "many people, few lands" Hong Kong should not try to expand its land space and turn into "Macro Hong Kong". This would be a change in economic structure, which is exceptionally difficult and costly. If not handled properly, it may drag down the Hong Kong economy, and other places may not necessarily benefit in the long run. Therefore, under normal circumstances, the correct direction for economic strategy should be to continue promoting from the real estate industry to the service industry, develop high-quality service industries in Hong Kong, achieve full employment on the island, increase residents' income, and form a solid and stable consumption base. This is the path taken by developed countries and market economies, and it aligns closely with the reality of the SAR’s economy.

Building on this foundation, leveraging the advantageous position of the capital market, Hong Kong can establish the capital market as its core, raising funds and capital, and then investing and reinvesting on a large scale in various industries worldwide, including tangible sectors. This will allow Hong Kong's industries to transcend beyond its limited geographical space and solidify their presence in the global market.

Hence, it is not a mistake for an economy to allocate resources into real estate during its development phase. The prevailing misconception among many residents and entrepreneurs in Hong Kong is the belief that real estate investment is sustainable indefinitely. Conversely, in Western nations, urbanization triggers a surge in real estate activity, and subsequent to its development, generated profits are often reinvested in the technology sector, which is a tangible component of the economy. Notably, significant capital investments are typically channeled towards ventures located in foreign countries and regions. We are of the opinion that Hong Kong can embrace this industrial trajectory. Notably, Hong Kong has successfully exemplified such practices, exemplified by the establishment of the Ryobi electric tool manufacturing industry, deeply rooted in the Hong Kong capital market and esteemed on a global scale.

Tellingly, Hong Kong's government development strategies tend to be inconsistent. When directives come from the central government, they immediately comply, regardless of whether they are suitable for the island's actual situation or are just general directives. When there is public pressure, they also adjust accordingly, regardless of the effectiveness. Whenever adjustments are needed, it is typically the same group of people, i.e., university professors and government department directors, all with titles and degrees, presenting results in charts and graphs, appearing to be in accord with the standard, but ultimately ineffective for Hong Kong's economy and its future.

The real issue lies in the government strategies of Hong Kong, which set up a dichotomy between real estate, finance, the real economy, and the manufacturing industry. These strategies are based on the premise that the development of one sector necessitates restrictions on the others. As a result, manufacturing industries in Hong Kong are shifting to mainland China, while the developed real estate and finance sectors in Hong Kong face criticism, leading to conflicts among the major industries.

In present-day Hong Kong, significant changes have occurred in both domestic and international circumstances due to factors such as geopolitical competition between the U.S. and China, the COVID-19 pandemic, and the National Security Law. As a regional international financial center and free trade port, Hong Kong's future development will face different directions and paths from the past. If mishandled, its international characteristics will fade, showing a clear trend towards "mainlandization". In this scenario, Hong Kong's ability to attract international capital will decrease, and local capital will continue to flow out. This situation is tantamount to stifling its urban economic growth.

According to the latest data from Hong Kong's Census and Statistics Department, in 2023, only 1336 overseas companies utilized Hong Kong as their regional headquarters, marking a 13.3% decline from 2019 and the lowest figure since 2012. This downward trend is anticipated to persist, potentially worsening in the future. To counteract this trend, it is crucial for the current Hong Kong government to swiftly implement robust policies and establish a clear, objective, and realistic positioning for the urban economy. By doing so, it may encourage capital and investors to remain.

From a developmental perspective, the current issues in the SAR revolve around real estate stability and the sustainability and growth of the service industry. However, the most significant challenge facing Hong Kong right now is its capital market. The capital market must be able to attract international capital, maintain active trading, and ensure long-term stability and prosperity. Hong Kong must be determined to develop its capital market and make every effort to ensure its prosperity and stability. Without a thriving capital market, the island has no future.

Mr. Kung Chan once pointed out that Hong Kong's positioning should be to become the "San Francisco of Asia". This requires it to formulate clear and specific industrial policies, seek a good industrial coordination model, and concentrate resources for development. In fact, the Hong Kong government started industrial reform early on, such as investing in the technology industry and establishing industrial parks. Although the general direction is clear, Hong Kong's industrial policy has obvious issues, such as overly ambitious goals, excessively broad industrial distribution, and following trends to invest in the most popular projects rather than pursuing stable long-term investments. The future of Hong Kong still holds opportunities, but appropriate adjustments to its policies are also necessary.

Final analysis conclusion:

In recent years, the Hong Kong real estate market has been sluggish due to various factors. However, this slowdown should not prompt Hong Kong to forsake real estate and pursue alternative paths. Rather, it should broaden its focus to encompass other industries alongside real estate development. This entails establishing a vibrant capital market as the cornerstone. Through investment and reinvestment, Hong Kong can diversify into various tangible industries, thereby enhancing the resilience of its economy.

• Kung Chan is the founder of ANBOUND, an independent think tank. Zhijiang Zhao is a Research Fellow for Geopolitical Strategy programme at ANBOUND, an independent think tank.