Economic diversification is defined by the United Nations as “the process of shifting an economy away from a single income source toward multiple sources from a growing range of sectors and markets”. The Hong Kong Special Administrative Region’s economy is already transforming in many ways, adapting to the new times, but this is what any financial center needs to do to catch up and not get left behind.
Indeed, for the city to remain one of the world’s most important financial centers and even enhance its status, it must not only keep doing what it has been doing well for many years past, but it must also try to diversify its economy in order to become competitive in as many areas as possible. Hong Kong Chief Executive John Lee Ka-chiu’s six-day visit to three ASEAN countries, namely Laos, Cambodia, and Vietnam, is a case in point.
Hong Kong needs to venture into new areas to acquire both friends and growth. The city does not need to rely only on its prowess in the services sector (mostly financial services) but it must embrace other opportunities to make its economy more dynamic, such as its integration into the Guangdong-Hong Kong-Macao Greater Bay Area, and its role as a fintech, green finance, and ESG hub.
In the past 27 years, Hong Kong has survived the Asian financial crisis, SARS, the global financial tsunami and the COVID-19 pandemic without any evident significant outflow of capital and without diminishing its role as one of the world’s most important financial centers, despite certain bumps in the road. This was because of the city’s strength and resilience.
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But Hong Kong cannot rest on its laurels and must look for any new opportunities to grow, since the competition from other financial centers is fierce.
In connection with this, a few months ago, a debate was started in Hong Kong on whether the city’s status as one of the world’s most important financial centers was “over”.
It is true that Hong Kong’s property prices remain depressed, as its housing market woes persist amid a chronic supply shortage and falling property demand caused by the continuing affordability crisis and surging interest rates.
It is also true that at the time of the handover in 1997, Hong Kong’s GDP was equivalent to around 18 percent of the Chinese mainland’s GDP. That ratio has dropped to less than 3 percent today.
It is also true that Hong Kong’s stock markets are not performing as well as they used to.
However, Hong Kong remains one of the world’s most important financial centers. Many investors and international organizations believe that.
On June 18, the International Institute for Management Development (IMD) based in Lausanne, Switzerland, ranked Hong Kong fifth globally in its World Competitiveness Yearbook 2024, up from seventh place last year, out of the 67 economies surveyed in the annual ranking of the world’s most competitive economies.
Hong Kong performs well in finance-related rankings aside from the IMD index. For example, it maintained fourth place in the 35th edition of the Global Financial Centers Index released by the China Development Institute and Z/Yen Group in March. Hong Kong was one of the two Chinese cities in the top 10, alongside Shanghai, which ranked sixth.
The city is also an innovation hub, as was demonstrated by the Global Innovation Index 2023, published in September by the World Intellectual Property Organization, which also ranked the Shenzhen-Hong Kong-Guangzhou science and technology cluster second globally for four consecutive years. It ranked fifth in Asia and 17th globally among 132 economies.
While Hong Kong will of course face many challenges, these rankings are remarkable and strong evidence of the city’s resilience. But its economy must keep diversifying. The following are areas in which Hong Kong has great potential, which can help its economy thrive in the years to come:
First, through its involvement in the GBA project, which is designated as a leading region for Chinese modernization, Hong Kong is expected to play a major role in the development of both the GBA and new quality productivity forces. With a population of 87 million, the GBA’s combined regional gross product output rose to more than 14 trillion yuan ($1.97 trillion) in 2023, which was equivalent to over 10 percent of the GDP for all of China, making it one of the most promising economic growth regions worldwide.
Second, Hong Kong’s accession to the Regional Comprehensive Economic Partnership (RCEP) would indeed be great news for the SAR and the mainland as it would reinforce their stance on multilateralism and an international free trade framework. The SAR can provide essential project financing and professional services support, innovation and technology. It also has the capacity to be a hub for Chinese State-owned enterprises to team up with other RCEP members in financing joint investments and opportunities in countries and regions involved in the Belt and Road Initiative.
The RCEP — one of the world’s largest free trade deals — was signed on Nov 15, 2020, after eight years of negotiations. Currently, it comprises 15 Asia-Pacific economies, including all 10 ASEAN member states. The pact accounts for 32 percent of the global economy, and 44 percent of the world’s population, reaching 3.5 billion consumers.
It is estimated the deal would raise national incomes by $186 billion annually by 2030 and add 0.2 percent to the economies of the group’s members. It aims to progressively lower tariffs, reduce protectionism and boost investment. Furthermore, it will allow for one set of rules-of-origin to qualify for tariff reductions with other RCEP members (a common set of regulations means fewer procedures and easier movement of goods). Once ratified by all parties, the RCEP would be the world’s largest free trade agreement in terms of members’ GDP.
Third, Hong Kong and the rest of the GBA are increasing their roles as fintech hubs. The Fintech 2025 blueprint aims at pivoting the SAR toward a friendlier regulatory regime for digital assets, proving that the city is positioning itself to become a virtual assets center and crypto hub.
The latest approach is also consistent with the Hong Kong Monetary Authority’s Fintech 2025 strategy, which was unveiled in 2021 with the aim of encouraging the financial sector to adopt fintech comprehensively by 2025, and, according to HKMA Chief Executive Eddie Yue Wai-man, “promoting the provision of fair and efficient financial services” for the benefit of Hong Kong residents and the city’s economy. In addition, the fintech 2025 strategy is aligned with the national 14th Five-Year Plan (2021-25), which recognizes Hong Kong’s economic potential at the national level.
Fourth, Hong Kong’s interest in strengthening its position as a green tech, green finance and ESG hub is not new. As I mentioned in an op-ed titled Hong Kong Rightfully Becoming a Green Finance Hub (China Daily Hong Kong Edition, April 23, 2021), by embracing green finance even more, the SAR would be acting in a way that is consistent with China’s carbon goals.
Therefore, Hong Kong’s tapping into green and sustainable finance is not only beneficial to the SAR, but is also consistent with the country’s focus on sustainability and climate change.
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Last, as one of its key elements of the 2023 Policy Address, the HKSAR government identified artificial intelligence and data science as one of the three areas of focus of new industrialization development. Since receiving Legislative Council funding a few years ago, Hong Kong now hosts 14 cross-industry AI research laboratories and three universities ranked in the world’s top 30 universities in AI-related subjects and research. Hong Kong’s AI industry is indeed becoming stronger. At the same time, the mainland’s AI industry is one of the world’s strongest, and is on course to become the AI world leader by 2030.
And, of course, Hong Kong needs to keep promoting tourism as well as organizing top-notch global events.
Despite some negative external circumstances, Hong Kong is constantly showing that it has the potential not only to maintain its role as one of the world’s most important financial centers but to enhance it. But for the city to do so, it can no longer rely on just being “the gateway to China” or a city with a very strong traditional finance industry. It must diversify its economy and grasp opportunities to grow. In many ways, Hong Kong looks as good as it looked in 1997 or even better, but it must continue to be innovative.
The author is a fintech adviser, a researcher, and a former business analyst for a Hong Kong publicly listed company.
The views do not necessarily reflect those of China Daily.
