Shenzhen has been tapped to be a pioneer of “socialism with Chinese characteristics”. Which basically means it will be allowed to experiment with reforms while the rest of the country watches from a safe distance before deciding to follow suit. Commentators have seized on this announcement to foresee Hong Kong’s doom – finally – as its neighbour erodes its remaining competitive advantages. Parent-child metaphors are all the rage again, as commentators with little grasp of history or experience of policymaking portray Beijing’s decision as having been driven purely by exasperation at the audacity of Hong Kong’s youthful protesters. Others say that Hong Kong, “as we know it”, is over.
Perhaps perversely, such commentary is helping to achieve what Hong Kong’s bureaucrats have been unable to. It is necessarily dampening investor sentiment. This is reining in housing prices and releasing air from the stock market. So thank you, doomsayers. Much appreciated. Expectations for never-ending growth in asset prices had gotten out of whack. Now, Hong Kong stock valuations are among the cheapest in the region, and absurdly high property prices are wobbling. Some see this as cause for gloom, because IPOs are being delayed. It’s not. It’s a health check.
This is what happens when confidence shocks hit a small economy, especially one as open as Hong Kong’s. Unfortunately, it is also resulting in misguided calls for long-term decision-making to be brought to bear on the current crisis, ASAP. Cries to break the dollar peg are being given print space and airtime, because at times like this the peg suddenly seems like a bad idea, despite having served the city so well since 1983.
Such commentary is mostly misguided. Hong Kong stands to benefit enormously from Shenzhen’s anointment as a new kind of Chinese city. It remains to be seen if the SAR’s leadership has what it takes to seize the initiative, but the notion that Hong Kong and Shenzhen are locked in a winner-takes-all race ignores their shared experience. Every time Hong Kong has ceded responsibility for handling part of China’s inbound-outbound economy to its neighbour, it has been freed to leap further up the economic value chain. This time will be no different.
That is not to say it will be an easy transition. Hong Kong has grown fat and lazy on its seemingly ever-rising property and stock markets. It has rested too comfortably in its job as China’s money-laundering cesspool and capital-flight conduit. Sorry, all you bankers and lawyers and accountants and property developers who might take umbrage. It is not to suggest that you are criminals. It is to recognize that being China’s primary offshore capital storage and management facility has been a mixed blessing. It has provided some of its citizens with untold riches. But it has also created conditions that inevitably resulted in the outrage witnessed on the streets over the summer. It’s time for Hong Kong to get back on the treadmill and start doing some real work again. That will be tough.
Tough, but better to get off the couch now. The financial sector is a great place to start, where a bit of competition from Shenzhen is the catalyst Hong Kong needs to get its house in order. With the establishment of an anti-corruption-oriented government across the border, as well as the rise of digital payments, Hong Kong is sorely in need of change. One city cannot be expected to run forever as a fulcrum for capital flows into and out of China without some wear and tear showing up. Hong Kong’s financial community has been long overdue for a break, or at least for someone else to come in and help carry the load. The most likely candidate has just been asked to stand up.
With 70% of China’s foreign direct investment coming in through Hong Kong, there is plenty of ground to cede as a foreign-exchange hub. There is also, however, plenty that Shenzhen can do to make Hong Kong a better place. It is already doing this in the “fintech space”. Just watch how Tencent and Ping An, among others, are going to blow HSBC away in the coming years with their new virtual banks. And not a moment too soon. The Scottish banking cartel has been one of the leading “smothers brothers” in Hong Kong for far too long. It is trying desperately to leap into the 21st Century with PayMe and other new initiatives, but it is soon going to become a relic of a bygone age. As it is gradually cleared out of the way, a surge of innovation will be unleashed here.
Let’s be clear: there is going to be pain in this transition. Many of those red hexagon-adorned bank branches will disappear, along with many back-office jobs, thanks to the wave of change sweeping in from Shenzhen. Moreover, think of the disruption coming as jobs that manage to escape the fintech annihilation migrate across the Shenzhen Bay bridge to Qianhai, anyway. Already, that is where Hong Kong financial companies are stampeding to, taking advantage of cheap rents that they know won’t last forever. Or even to Zhuhai’s Hengqin, which is about to open a new IFC tower that needs tenants and is willing to pay for them.
This is all happening before Shenzhen launches itself as a “demonstration base”. Now start to think of all the lawyers, the accountants, and other members of the financial value-added chain, whose jobs in Hong Kong will be jeopardized once Shenzhen starts tinkering with legal, financial and administrative reforms. Let alone the asset-managers, private bankers, stockbrokers, curb-market moneylenders, and others who have been safeguarding the assets of people whom Deng Xiaoping allowed to “get rich first”. Shenzhen has “regtech” on top of its fintech. There won’t be a role in Hong Kong for practitioners of the darker financial arts in the foreseeable future.
Just wait, we are getting to the good part, the silver lining in all this. But first we have to recognize all the support jobs that have grown up around the financial industry, which are also likely to move to Shenzhen in the not-too-distant future. Think of the educators, the trainers, the communicators. Many of their jobs can be done more efficiently in Shenzhen, and once the financial industry starts to go, their livelihoods will, too.
Here it is, then. The good part. As the saying goes, necessity is the mother of invention. What can Hong Kong do that Shenzhen cannot? And what can Hong Kong and Shenzhen best do in collaboration, rather than in competition?
There is an obvious answer to the first question. Despite the furore caused by the extradition bill, Hong Kong remains a bastion of free speech, free association, and free thought. Red lines are being drawn more strongly by Beijing in public debates, but the core of Hong Kong’s freedoms are being left alone, and will be for the foreseeable future. Why? Because China needs Hong Kong to be Hong Kong. While Shenzhen is being asked to show China how to become more Singaporean, Hong Kong has a treasure that will allow it to morph into that which Shenzhen cannot: a freehold of new ideas for China’s future as a major world power.
Hong Kong has an incredible opportunity to learn how to think better: about quality of growth, models of economic and social development, and political reform. Innovation isn’t just about creating coffee-delivery apps. It’s about fixing society’s challenges. This cannot be left only to Hong Kong’s three world-class universities to grapple with. It requires a wide public debate on how to heal wounds caused by decades of unbridled growth and blind devotion to laissez-faire capitalism.
This is not to say that Hong Kong need become a city of navel-gazing philosophers. Rather, the city has an opportunity to become the world’s capital of cool. Think of it as the richest suburb on the outskirts of the world’s most dynamic CBD. It can continue to be a fulcrum of ideas and, yes, services, for the country as China continues to integrate with the world in a way that it has never done in its 5,000-year history.
That means thinking about a basic living allowance. It means thinking about a tiered-tax structure; how to build better living spaces; how to grow artistic and cultural industries. And yes, it means thinking about how to boost employment in the service sector. But it also means thinking about how to not be obsessed with having jobs at all. Artificial intelligence is putting an end to the productivity paradigm. Where better than Hong Kong to figure out what comes next? Shenzhen cannot take up this role. Only Hong Kong can.
Practically speaking, Hong Kong has a long to-do list to get cracking on. Massive public-works projects are crying out to be launched. Some will need concrete. The West Kowloon Cultural Hub seems to be coming along a bit better now. But Tamar and the whole of the Hong Kong waterfront have been in the clutches of property developers that are the epitome of uncool. This needs to change. Other projects, such as building a world-leading AI-enabled healthcare industry, don’t need anything but encouragement and visionary planning.
Then there are the projects that Hong Kong can get better at through collaboration with Shenzhen. Fintech is just one , where the global fintech industry needs both Shenzhen’s entrepreneurial drive and Hong Kong’s global marketing capabilities. That is why Fintech Week has become the “Superbowl of fintech shows”. In how many other industries could the HK-SZ duo become unbeatable partners?
Perhaps the most sensitive area in which Hong Kong and Shenzhen can collaborate to produce win-win outcomes is in political and legal reform. Hong Kong’s legal system has some great strengths. Technology is not one of them. Contracts are still written on pieces of paper and signed by pens, even if they are then scanned and viewed on an iPad. Court appearances have to be in person – witnesses cannot just plug in to a live group video chat on their smartphones. Data-verification procedures are excruciatingly slow.
The Legislative Council, meanwhile, could do with a burst of innovation: why not experiment with town hall meetings where laws are put up for public scrutiny and voted up or down by emojis? Or how about experimenting with open-source bill writing? In fact, why not go a step further and do blockchain-based opinion polls on the Chief Executive’s policy speech?
To be sure, there is a lot to look forward to. Hong Kong and Shenzhen may even grow to the point in the future where there will no longer be a physical boundary between them. Oh, hang on: there is a date set for that already. It’s 2047. Wouldn’t it be great if the boundary was already down, in effect, before then?
Having said all this, there is no way of knowing that Hong Kong won’t fumble this opportunity. As the small print in a standard prospectus says, past successes are no guarantee of future performance. There is a lot of hard work ahead, and clear thinking is required. But the chance is there for the taking. Hong Kong is not done yet.