May God bless Hong Kong

HK is now at high time. The normal functioning of the society is hampered. And the public at large is torn apart. And the real scar will not be shown in economic figures but the great divide afterwards.

Beijing has opted for the dominant strategy - keeping the status quo. Internally, the comments from People’s Daily reiterate the supremacy of party legitimacy cannot be challenged. Externally, it is not in the interest of Xi’s government to play a hardliner strategy on HK. Next month, heads of state from every country will attend APEC 2014 in Beijing. And the quick reversal of HK government’s strategy on protesters from using “smoke gas” to the dispatch of “negotiators” within 24 hours might suggest Beijing was involved in reversing the tide. That is seen from China’s perspective. It is about image of the nation as first priority.

If the movement persists, it will then be a slow burn for the HK economy. To the retailers, given the current high rental costs, a week of malfunctioning would suffocate them badly. And HK retail sales had been deteriorating rapidly to begin with this year as anti corruption program in China dampened sales substantially. It may take weeks to normalize as the first stage because China has already stopped issuing any visas for mainlanders traveling to Hong Kong. And this is far much more worst than SARS, which was just an event risk. Quantifying short term impact on the economy is not difficult. Benchmarking the behavior of the real economic variables during the SARS period with some intuitive judgment will do. HK GDP fell 0.5% in 2Q03 because of SARS but was quick to stage a broad-based recovery in 3Q03. Real GDP growth rebounded to 4.0% and 5.0% respectively. Indeed, the Hong Kong economy still attained 3.3%, which compared favorably with 2.3% in 02. Chance is high that we shall see similar pattern this time conditioning on the duration of the movement. Sharp fall of retail sales figure in the short term is for certainty and the real negative impact of “Occupy Central” will be in 4Q14. Real GDP growth in HK went up 2.2% in 1H14, after advancing 2.9% in 13. It looks like growth could be close to “0” or slightly negative in 4Q14. At this stage, I do not foresee any apparent negative impact on the labor market yet. But the real daunting challenges will be a long period of political uncertainty and mistrusts amongst all stakeholders in HK even after the normalization of economic activities.

The “Occupy Central” occurred at a time when unemployment rate is hovering around 3.3% (full employment level) alongside rising property prices. The economic landscape was completely the opposite in 2003 with unemployment rate shot up almost to 9% in 2003 and property prices had been plummeting for 5 years since 98. The launch of Article 23 alongside the poor management of the SARS epidemic situation was the trigger leading to the massive demonstration and the subsequent downfall of the Tung’s government. The massive protest happened in 03 was easier to understand in comparison.

The prime cause of the current movement is the demand for “universal suffrage” in 2017. In my subjective opinion, the underlying cause however is a complex mixture of various economic and political factors. After the SARs, Beijing assisted to revive the economic vitality of Hong Kong by implementing the “Individual Traveling Scheme”. The positive impact on retail sales was instantaneous. There is almost a perfect correlation between incoming Chinese tourists and property prices/unemployment rate since 2004. From 2004-2007, the HK society was largely stable without too much socioeconomic complaints.

The burst of the global financial crisis in 07 however did not trigger any meaningful correction on local property prices. On the contrary, HK was forced to import the ultra accommodative monetary policy from the US via the pegged exchange rate system. Then China launched the massive RMB4 trillion fiscal stimuli in 2008 to fend off potential negative repercussions from the global financial crisis at a time when GDP was already advancing at 10%. This chain of macroeconomic events pushed local property prices to all time high in both HK and China. Proliferation of big spenders from mainland China shopping in Hong Kong was fuelled by the persistent strengthening of the CNY against the HKD. Commercial rentals rocketed up in response. Most smaller/medium retailers began to suffer from high cost burden. Even public amenities are often crowded with mainland visitors nowadays. Hence, the “marginalization” feelings of HK people are not difficult to understand. The rapid ascent of property prices also widened up the income inequality gap in Hong Kong. The public blamed both the previous gov’t under Tsang and the current government for not responding swiftly to increase the supply of residential flats. The Gini Coefficient was 0.537 in 2012, far above the warning threshold of 0.4, and the highest in Asia.

A change in the political system will not be able to resolve such complex and structural economic issues in a short period of time. HK is a small and open economy by nature but our economic well being is dictated by two greatest powers in the world – China and the US. The weakening of the US economy was coincided with a strengthening China. What complicated matter further is that the political/legal institutions in China are completely different from Hong Kong. HK has no choice but to import whatever policies impacts from these two powers. That in turn created a vector of unforeseen socioeconomic problems that requires a strong government with an intelligent team of officials to tackle with foresights and determination.

There is no quick fix to the present situation and the great divide will likely last. German philosopher, Georg Wilhelm Friedrich Hegel once said, “We learn from history that we do not learn from history.”


  • Your essay is always well argued and presented. The viewpoint is very balanced. It is sad to see Hong Kong is dying day by day. I agree that HK will never the same after this incident.
  • Well written analytic. My wish is business shall get back to normal asap. It has been extremely tough for businesses when rental costs are so high.
  • HK is going to die slowly. Beijing has already chosen the death sentence for HK - "status quo".
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