CY Leung, Hong Kong’s new chief executive, has finished his first 100 days in office with his lowest-ever popularity rating. Much of this has to do with the non-democratically elected leader pushing more political integration with mainland China. Most upsetting to Hong Kong locals, Leung tried to introduce Chinese patriotism classes in schools before backing down following sustained street protests.
Hong Kongers are an unhappy bunch. They are suffering from a record-high wealth gap and extremely high-priced homes. It is popular to blame the mainland Chinese Leung wants closer ties with for social problems. Early this year, a nationalist group bought an advertisement in a local paper which called mainland Chinese people “locusts,” blaming them for filling up hospital beds and otherwise placing a burden on social services. At the other end of the financial spectrum, it is often said in Hong Kong that real estate is so costly because of an imagined flood of hot money sweeping in over the Chinese border. That is hard to prove, as Hong Kong’s government does not collect data on where homebuyers live.
Hong Kong’s economy is incredibly dependent on mainland China’s. The mainland is the territory’s biggest trading partner. Its companies dominate Hong Kong’s stockmarket. Hong Kong’s shopping malls are focused towards big-spending Chinese tourists, known in Mandarin as the “bao fa hu,” which translates loosely as “suddenly very rich.” Hong Kong’s high street, which in reality is mainly air-conditioned skyscrapers, is increasingly a place of “jewelers and places selling designer goods and expensive face creams, all paying very high rents and edging out independent retailers,” says David Webb, a Hong Kong private investor and much-followed financial commentator.
Leung needs to position Hong Kong better for the China slowdown. Hong Kong should reduce its financial services and retail sectors’ dependence on mainland China. Local politics, however, are stuck in an us-versus-them narrative that blames mainlanders for local issues but does not look to the future. Hong Kong media is still full of stories that, in a watered down way, recall that “locust” advert. The current popular gripe is about the sheer number of Chinese visitors, who are making the already crowded city more crowded and, locals believe, are pushing up the price of goods. “I have seen them talking loudly in public, eating on public transport and displaying other bad behavior,” complained a letter writer (paywall) to Hong Kong’s South China Morning Post about mainland visitors on Oct. 6.
He could start with the stock market, where mainland companies have, for years, been the main source of IPOs. “Hong Kong could attract more IPOs from emerging Asian economies in the way London has established itself as a fundraising center for Eastern Europe and New York has for Latin America,” says Webb. Laos and Mongolia are among the smaller Asian countries that are experimenting with domestic stock markets as a way to raise money for local companies. Hong Kong, where the market has much more depth, should be talking more to them. Hong Kong’s stock exchange officials have been rather China-focused in the last few years, working hard to develop financial products denominated in the mainland Chinese currency, the renminbi.
Land reform could help retailers diversify and thrive. Land is scarce in Hong Kong. And when officials believe a downturn is coming, they tend to restrict the supply of land for new development so it gets even scarcer, as independent economist Andy Xie explains well here. This aims to keep property owners insulated from negative equity. Now Hong Kong has the world’s most expensive (video) retail rents, so stores tilt their offer towards the “bao fa hu” and away from other potential customers. If Hong Kong government “stopped playing FarmVille with the economy,” as Webb puts it, and let the free market dictate land supply, the retail sector could possibly diversify and widen its offer and appeal. Selling expensive face creams while paying ever-higher rents is not an attractive busines model for shop chains anyway. Only landlords really benefit. As Hong Kong’s chief executive made a fortune in real estate himself, he may not be too interested in deflating the land bubble. It looks like Chinese tourists’ spending during last week’s national holiday, known as “Golden Week,” was lower than last year’s.
So far, Leung is pursuing a populist but ineffective agenda. Like a parent who does not know what to give a screaming child in order to make the tantrum stop, Leung has been flinging random policy sweeteners at Hong Kong’s agitated public. His manifesto included a plan he dubbed “Hong Kong property for Hong Kong residents,” which played to the xenephobic crowd but so far has made a very small number of low-cost homes available to Hong Kongers. Leung has also said that, from next year, there will be a ban on mainland Chinese mothers giving birth in Hong Kong to free up hospital beds. But he would do well to think beyond ethnic politics, and come up with some well thought out plans for Hong Kong to survive the China slowdown.