After 25 years in China, Hong Kong’s economy plunges into uncertainty

When Hong Kong passed from the UK to China, Edmond Hui was a trader in the bustling stock market, witnessing the dizzying growth of a city at the crossroads of Asia and the West.

Thanks to a pact signed with London before the July 1, 1997, backlash, China promised Hong Kong it could maintain its capitalist system for 50 years, an agreement that helped the city become one of the world’s leading financial centers.

But on the horizon, clouds of uncertainty hang over the economy of a city dependent on an increasingly isolated China and struggling to regain prestige due to political turmoil and border closures during the pandemic.

Hui, now CEO of a brokerage with 300 employees, says the market after the move to Beijing has undergone a drastic change and has become more focused on China.

“Before 1997, foreign capital represented half of the market”, he points out. “After 1997, things gradually changed until the entire market was supported by Chinese capital.”

China’s meteoric rise over the last two decades has brought enormous benefits to Hong Kong as a link between these two worlds: mainland companies seeking financing and foreign companies seeking a gateway to what is now the second largest economy converged. of the world.

“Hong Kong was something of a model child of free trade and open markets,” veteran pro-Beijing politician Regina Ip told AFP.

But tying its fate to China has also led to fears of overdependence and complacency.

Chinese companies accounted for 80% of the market capitalization on the Hong Kong stock market this year, up from just 16% in 1997.

And mainland companies occupy seven of the top ten positions in the selective Hang Seng, which used to be dominated by local companies like Cathay Pacific airline or Television Broadcasts Limited.

Meanwhile, Hong Kong’s share of the Asian giant’s GDP has dropped from 18% in 1997 to less than 3% in 2020.

Hui reacts to these changes with a shrug. “It’s just a matter of changing who’s boss,” she says. “We can only hope that our country’s momentum will surpass that of Europe or the United States,” she adds.

‘Gateway’

Along with the growth of China’s political and economic power in recent decades, Beijing’s tensions with the West have also increased, which has spilled over into Hong Kong.

The crackdown encouraged by communist authorities in the city after the massive pro-democracy protests of 2019 led the United States to revoke Hong Kong’s preferential trade status, arguing that it was no longer autonomous enough.

The US power also sanctioned some city officials, including the one who will be its chief executive, John Lee, starting on Friday.

“In 1997, we played the role of a very important intermediary. But now (…) everyone has doubts,” Yan Wai-hin, an economics professor at the Chinese University of Hong Kong, told AFP.

“If a trading partner feels that (Hong Kong) is not a neutral intermediary, mutual trust is lost,” he estimates.

This expert warns that regional rivals like Singapore are trying to seize what they see as an opportunity to replace Hong Kong, especially after the pandemic.

The growing political control made the local authorities adhere to the health strategy enacted in Beijing.

Severe travel restrictions still in place have kept this business hub isolated from China and the rest of the world for the past two years, causing a brain drain.

But Ip is confident they will overcome this once the restrictions are lifted.

“Our geographic location is extremely advantageous (…) We are still the gateway to China”, he says.

Some sectors, except financial, lagged behind after the devolution to China.

“Over the past ten years, our GDP growth has slowed and I think that has to do with the fact that people in Hong Kong are complacent and narrow-minded,” says Simon Ho, president of the city’s Hang Seng University.

Its port, once one of the busiest in the world, has dropped in the rankings since its peak in 2004.

“The government took a neoliberal, non-interventionist approach and there were no plans to develop industries and the economy,” Ho points out.

While acknowledging that the authorities have invested in sectors such as research and development, he indicates that the results are “green” and far from the competitiveness of neighboring Shenzhen, a Chinese technology hub.

“Hong Kong needs to understand its role,” says Ho. “In the past, we didn’t know how to complement the continent and in some cases even compete with it. In the long term, this will become increasingly difficult”, she warns.