Editor's Notes:

  Recently, the United KingdomZ/YenThe group released its “Global Financial Centers Index,” which is updated twice a year.”(GFCI), in9In the latest rankings for the month, Hong Kong ranked third, behind only London and New York. This ranking is primarily based on5The scores are derived from the following categories: business environment, financial sector development, infrastructure, human capital, reputation, and general factors. In this index ranking, Hong Kong is recognized as Asia’s highest-ranked financial city—both a highly developed financial center and a gateway to China.

Some argue that Hong Kong’s status as an international financial center undoubtedly depends on the economic development of the mainland. However, if a democratically elected Hong Kong government continually challenges the central government’s red lines and fails to foster a harmonious political environment with the mainland, its position as an international financial center will be severely undermined in the future.

When it comes to Hong Kong’s future, some are strongly in favor while others are pessimistic, and the two sides often clash. The following is a “pessimistic” piece written by a member of the Hong Kong Special Administrative Region Legislative Council who wishes to remain anonymous. The views expressed in this article represent only the author’s personal opinions and do not comprehensively or objectively reflect the full range of issues currently facing Hong Kong. Setting aside political stance and focusing solely on the logic presented in the text, I do agree with this simple truth: the process of upgrading and evolution is painful; it requires innovation and the courage to experiment—and one must be willing to pay the price for it.

It's worth a read.

To understand why Hong Kong has declined, we must first examine why it rose to prominence.

When it comes to summarizing the factors behind success, there are always as many interpretations as there are people. However, the committee member believes there is only one truly reliable reason: Hong Kong served as a hub for economic and trade exchanges between the mainland and the West. This advantage reached its peak in the second half of the 20th century, propelling Hong Kong to become a world-class metropolis—though such a golden opportunity has been hard to come by, both before and since.

First, let’s rewind to1840Years. More than a century elapsed between the United Kingdom’s initial annexation of Hong Kong and the outbreak of the Korean War. While Hong Kong certainly experienced solid economic growth during this period, it was nowhere near as remarkable as it would become later on. This was because, at that time, Hong Kong did not occupy an irreplaceable position within China’s economic landscape. At that time, China was almost completely open to Western markets; foreign personnel, capital, and goods could all enter the Chinese mainland directly and without hindrance. Consequently, there was naturally no need to take a detour through British-controlled Hong Kong, adding an extra layer of complexity. Hong Kong’s role at the time was primarily that of a military port rather than a commercial hub.

After the outbreak of the Korean War, the young People’s Republic of China’s economic ties with the Western world were almost completely severed. However, this did not cause China any particular inconvenience, as it had aligned itself with the socialist bloc. The Soviets were able to provide China with the capital and technology urgently needed for economic development. Since China did not place much hope in economic resources from the West, Hong Kong—as a gateway to the West—was left with little more than a token role to play.

The turning point began with the Sino-Soviet split. As Sino-Soviet relations broke down, China’s channels for obtaining capital and technology from the Soviet Union grew increasingly narrow. Meanwhile, China’s demand for external resources to support its economic construction and scientific and technological development continued to grow. Under these circumstances, China naturally turned to the West in search of alternative sources of resources. A landmark event in this shift was the famous “April 3rd Plan” of the 1970s, which involved importing a complete set of industrial production equipment from the West to meet the needs of economic construction. This was the first time since156Following a Soviet aid program, this marked China’s second large-scale import of foreign industrial technology and equipment. Represented by the “43 Plan,” China and the Western economic system began to reestablish ties. These ties grew from small beginnings and eventually evolved into a nationwide policy of opening up to the outside world.

By the way, the Central Committee official who directly oversaw the “April 3rd Plan” back then was none other than the late architect of China’s reform and opening-up.

However, although mainland China had already established a basic policy direction of opening up to the West, in practice, this opening faced numerous challenges. There was a lack of familiarity between China’s administrative practices and Western trade rules, a shortage of intermediaries familiar with the circumstances on both sides, and various policy and legal restrictions on personnel, goods, and capital coming directly from the West. These various difficulties have meant that China’s demand for Western economic resources has consistently been difficult to fully satisfy. This, in turn, created the conditions for Hong Kong’s rise. Hong Kongers were familiar with the mainland; even during the 1950s and 1960s, when relations between China and the West were at their coldest, relatively stable exchanges of people and trade were maintained between mainland China and Hong Kong. Hong Kongers were also familiar with the West; after all, they had spent more than a century under British rule and were well-versed in Western laws, trade rules, and other relevant matters. This advantageous position enabled Hong Kong to rapidly establish itself as a transit hub for economic and trade exchanges between mainland China and the West.

In addition, Hong Kong has also served as a bridge connecting mainland China and Taiwan. From the thaw in cross-strait relations in the 1980s until the establishment of the “Three Links” between the two sides, the vast majority of people and goods traveling between mainland China and Taiwan passed through Hong Kong.

The massive volume of transshipment trade propelled Hong Kong to become Asia’s preeminent transportation hub and trade center. This was accompanied by the emergence of a financial center, which also benefited from the Chinese market: capital from the Western world flowing into mainland China likewise required a convenient trading hub. In contrast, Taipei, Singapore, and even Kuala Lumpur have all failed in their attempts to compete for the position of Asia’s financial center; essentially, they lack a market large enough to absorb substantial capital. In this regard, the only rival that can truly compete with Hong Kong is Tokyo, which is naturally backed by the entire Japanese market.

However, after the 1990s—and especially following Hong Kong’s return to China—this advantageous position began to fade gradually. Many Hong Kong residents attribute this to the incompetence of the SAR government. This argument does not hold water. As we will discuss later, the SAR government is no more incompetent than the British colonial government was. The real reason lies in the fact that ties between mainland China, the Western world, and Taiwan have grown increasingly close, and direct economic and trade exchanges have become easier—so why go through Hong Kong as a detour? Hong Kong’s status as a trade hub fundamentally stemmed from the lack of direct communication between the East and the West. This is a temporary phenomenon rather than a permanent problem, so naturally, once this opportunity is missed, it will never return. However, since this temporary phenomenon has persisted for an entire generation, it is often taken for granted by that generation. People tend to be forgetful when it comes to earlier history.

Of course, we’re not saying that Hong Kong should put all its eggs in the basket of being a re-export hub. As long as we find the right tools for the job, we certainly won’t have to worry about a lack of new opportunities. To use a corporate transformation as an analogy: both Fujifilm and Kodak were companies that produced photographic film, but when faced with the threat of digital photography technology, they took two very different paths—one successful, the other not. Fujifilm leveraged its expertise in chemical formulations to transition into cosmetics and health products, and today it is a major player in that industry. Kodak, on the other hand, chose to pivot toward the printing and publishing industry—which, as it happens, is a sunset industry being squeezed out by the digital information sector. Consequently, Kodak’s transformation was fraught with difficulties, and the company was ultimately wiped out during the global economic crisis. The question for Hong Kong is: How can we follow Fujifilm’s example rather than Kodak’s?

The key to a successful transformation is to identify promising growth industries with the potential for significant expansion—and industries that can be developed given local conditions. So, what should Hong Kong’s growth industries look like?

First of all, there’s no future in any low-end industries. To put it simply, Li Ka-shing made his fortune, but in doing so, he blocked the path for the next Li Ka-shing. Back in the day, Mr. Li started out in the plastic peg business—a typical labor-intensive light industry and the first step on the path to industrial upgrading for many countries. But after making his fortune, Mr. Li, now a tycoon, turned to real estate, driving Hong Kong’s land prices skyward. Sky-high land prices are fatal to the development of industry and agriculture; few companies can sustain profit margins high enough to cover such soaring land costs. Consequently, with the exception of a few small but specialized high-tech industries, most industrial and agricultural enterprises shut down long ago. Of course, another reason for the decline of industry and agriculture is the natural law of industrial upgrading: as Hong Kong became wealthier and average wages rose, low-end industries that relied on low wages to turn a profit naturally collapsed. In short, industrial upgrading is a one-way street with no turning back. These two factors limit Hong Kong’s future prospects to the service sector, specifically industries that are insensitive to labor and land costs.

The second factor is that the industry must be one that is difficult to relocate. Today’s mainland is clearly a larger and more dynamic market than Hong Kong. If an industry could easily relocate, it would simply move its entire operations to the mainland—why stay in Hong Kong? A prime example is Hong Kong’s film and television entertainment industry, which was once hugely popular. Today’s big stars are Hong Kong residents in name only; in reality, they spend most of the year filming and doing promotional appearances on the mainland. What does Hong Kong’s future have to do with them? Genuinely locally produced Hong Kong films have long since lost the dominance they once held in the mainland market during the 1990s, precisely because both the talent and the capital have long since flowed to the mainland—they’ve found a better life there and have no desire to return.

The third factor is that the target industry must be able to absorb a substantial number of workers. After all, Hong Kong is a city with a population of over 10 million. An industry that only makes a handful of people fabulously wealthy cannot serve as a pillar industry. A society composed of a few super-rich individuals and a large number of poor people cannot even be considered stable—let alone achieve development. That’s right—the committee member is still referring to the real estate industry. While Mr. Li, the real estate tycoon, has made a fortune in this sector, ordinary Hong Kong citizens still live in cramped “birdcages” that don’t even measure up to the living conditions in many major cities on the mainland. The continued distorted prosperity of such an industry is certainly not in Hong Kong’s best interest.

At this point, some readers may have already spotted the problem. There are conflicts among the factors mentioned above. For example, if an industry absorbs a large workforce in Hong Kong, it will inevitably face heavy labor costs, leading to a decline in competitiveness.

As I said earlier, this is a dilemma—not to prove that Hong Kong’s industrial transformation cannot succeed, but to point out that industrial transformation, no matter where it takes place, requires painful adjustments, sacrifices, and the assumption of considerable risks, while walking a tightrope between various factors. The good old days of making a fortune sitting at home are long gone. The path ahead requires boldness and sacrifice to yield rewards. Of course, given Hong Kong’s previous advantages, as long as there is a willingness to put in real effort, there are naturally still many avenues to explore. For example, tourism is a viable target industry. After all, Hong Kong is a more affordable and convenient travel destination than going abroad, and tourism is one of the few industries that meets the criteria mentioned above.

The real problem for Hong Kong people, however, is that most of them are not yet aware of the shift in the development model and are not mentally prepared for it. From many perspectives, the mindset of quite a few Hong Kong people could even be described as “reckless.”

Over the past two years, we have been seeing more and more news reports of conflicts between Hong Kong residents and mainland tourists. A quick online search reveals headlines such as: “Hong Kongers Call Mainland Tourists ”Locusts’” and “Hong Kong Tour Guide Verbally Abuses Mainland Tourists.”

That’s quite interesting. Tourism has been one of the few thriving industries in Hong Kong in recent years, and it could be said to represent the hope for Hong Kong’s industrial transformation. However, the repeated negative news reports give the impression that Hong Kong is nothing more than a place similar to many substandard tourist development zones on the mainland. What kind of mindset leads to such reckless treatment of the local tourism industry’s reputation?

Then there’s the recent formula milk issue. There have been numerous news reports about mainlanders coming to Hong Kong to buy formula milk in bulk, leaving the shelves of many stores completely empty. The reaction from Hong Kong residents and the local media has not been, “This is a rare business opportunity—let’s stock up,” but rather, “Mainlanders are snatching up our formula.” For a commercial city that built its foundation on re-export trade and prides itself on free trade, it has come to the point where administrative and legal measures are being used to prevent customers from shopping… This brings to mind the Qing Dynasty before the Opium Wars: upon learning that foreign merchants were buying up large quantities of porcelain and silk, causing shortages in the market, the Qing government’s response was not to expand production, but to ban the export of these goods. Back then, the Qing Dynasty had not yet been exposed to capitalism, so this reaction was somewhat understandable. But what about Hong Kong today?

The committee member believes that the above facts sufficiently demonstrate that the majority of Hong Kong people do not understand the reasons behind Hong Kong’s prosperity. On the surface, they are outstanding representatives of a capitalist market economy, but deep down, they still harbor the small-scale farmer’s mentality of focusing only on their own immediate interests. While they boast of being a trade hub, in reality they do not know (or do not care) which market or which customers this trade serves. They fail to understand that Hong Kong’s rise was the result of its reliance on the mainland market. Consequently, they developed haphazardly amid confusion. Today, they are once again stagnating haphazardly amid confusion. Therefore, the committee member can certainly predict that they will also decline haphazardly amid confusion.

Of course, many Hong Kongers won’t admit this; they prefer to blame today’s stagnation on the SAR government. They claim that the reason Hong Kong has ended up in its current state is precisely because the SAR government is inferior to the British colonial government.

This is absurd. The SAR government is, in fact, no different from the British Hong Kong government; both are colonial governments.

The British Hong Kong government prior to the handover was unquestionably a colonial government; it had no decision-making authority, only the power to implement decisions. Decision-making was the responsibility of the British government, while the British Hong Kong government focused solely on how to implement the British government’s decisions. At the time of Hong Kong’s handover, in order to maintain social stability in Hong Kong to the greatest extent possible, the Chinese government pledged that Hong Kong’s existing political system would remain unchanged for fifty years. This meant that the Hong Kong Special Administrative Region (HKSAR) government, just like the British Hong Kong government, remained merely a colonial government. Taking various factors into consideration, the Chinese government has never made significant adjustments to the structure or operating model of the HKSAR government to grant it decision-making authority.

So who makes decisions for Hong Kong? Is it the Chinese government? We need only recall another promise to understand: “Hong Kong people ruling Hong Kong, with a high degree of autonomy.” Aside from retaining a say on a few fundamental issues—as a manifestation of sovereignty—the Chinese government is generally unwilling to interfere in Hong Kong’s internal affairs regarding most specific policy matters.

So this is the problem with the Hong Kong SAR government: it is a colonial government, yet it no longer has a colonial power to answer to. It has unconditionally retained the governing framework left behind by the British and lacks the ability to adjust it in response to changes in the economic landscape—much like a car with its steering wheel removed. Naturally, it is bumping along, and the going is getting harder and harder.

To understand this shortcoming of the Hong Kong SAR Government, we can examine08A Comparison of the U.S. Government’s Response During the 2008 Financial Crisis98The Hong Kong government's response during the 1997 Hong Kong financial crisis.08When the crisis hit Wall Street that year, the U.S. government did not hesitate to abandon its previously high-profile slogan of “no government intervention in the market.” To avoid the risk of deflation and a full-scale economic collapse, the U.S. government immediately stepped in to intervene in the market. In any case, whether to intervene in the market or not is simply a matter of policy choice. For the U.S. government, it’s nothing more than a matter of what’s written on a piece of paper. Changing a few words now is no big deal—there’s absolutely no psychological pressure involved.

However, the Hong Kong government, in98The decision to bail out the market that year was much more difficult. At the time, the person in charge of financial policy was none other than Donald Tsang, who later became Chief Executive of the Special Administrative Region. He later recalled that he felt government intervention in the market ran counter to the Hong Kong government’s long-standing policy of non-intervention in the market economy; he felt he was betraying his own ideals, to the point that on the night before the bailout decision was announced, he wept bitterly at home, burying his face in his hands. Donald Tsang’s mindset was that of a typical colonial official. He never held decision-making authority; he could only follow and adhere to the policies laid down by the higher-level government—that is, the former British government—as if they were imperial edicts. If the British government ordered a change to this policy, he would not have uttered a word of objection. But to ask him to violate this policy himself would have been like asking him to give up his life.

From this perspective, the tactics Soros used to attack Hong Kong back then were a major miscalculation. He was too impatient and exerted such intense, direct pressure on the Hong Kong SAR government that even this bewildered colonial administration realized it needed to take action to protect itself. Had he employed a “frog in slowly heating water” strategy against Hong Kong, the Hong Kong SAR government might not have developed that sense of self-preservation at all.

Another typical example in this regard is the issue of the Hong Kong dollar’s exchange rate. Beginning in the 1980s, in accordance with a decision made by the British, the Hong Kong dollar was pegged to the U.S. dollar. This policy has continued uninterrupted since Hong Kong’s return to China. In fact, more than one Hong Kong financial official has reflected after retirement that the exchange rate should have been adjusted appropriately to promote economic development. However, not a single financial official was able to make this decision while in office, so today the Hong Kong dollar remains pegged to the U.S. dollar, with only minor fluctuations permitted within a narrow range.

Of course, it would be inaccurate to say that the SAR government’s policies have remained completely unchanged. In fact, Hong Kong is like a car without a steering wheel; the direction the wheels turn depends entirely on what kind of potholes they roll over. These potholes are Hong Kong’s public opinion. However, public opinion is as fickle as a child’s face—it changes three times a day. Without a stable direction for decision-making, blindly following public opinion leads to fickleness and constant reversals of policy.

Take, for example, the Zhuang Fengyuan case from more than a decade ago: This marked the beginning of mainland Chinese women traveling to Hong Kong to give birth and then invoking provisions of the Basic Law to demand that their children be granted Hong Kong SAR resident status. At the time, the National People’s Congress advised the Hong Kong courts, warning them that this precedent must not be set, lest it lead to endless problems down the road. However, once this recommendation was made public, it sparked a strong backlash in Hong Kong public opinion, with many viewing it as an attempt by the Chinese government to manipulate Hong Kong’s legal system. The Hong Kong Court of Final Appeal, responding to public sentiment, ruled that the expectant mothers’ claims were legitimate. More than a decade later, hospitals across Hong Kong—large and small—were nearly overwhelmed by mainland expectant mothers, causing immense hardship for the local population. Consequently, the Hong Kong courts had no choice but to amend their judicial interpretation, no longer allowing newborns of mothers who traveled to Hong Kong to give birth to obtain Hong Kong SAR resident status.

If only I’d known then what I know now, why did I do that in the first place?

In the recent infant formula incident, the Hong Kong government once again engaged in similar behavior. In early March, amid strong public opposition to mainland tourists bulk-buying infant formula, the Hong Kong government ordered an indefinite ban on tourists carrying large quantities of infant formula out of the territory. Violators would face heavy fines, and the formula they were carrying would be confiscated. As soon as the ban was announced, infant formula immediately became unsellable in stores across Hong Kong, both large and small. A month later, the Hong Kong government backtracked, stating that the ban would be reviewed one year after its implementation. Then, in early May, it backtracked again, saying it would reconsider the ban in six months. According to visitors to Hong Kong, Hong Kong Customs’ enforcement of the ban on carrying infant formula is now virtually non-existent.

If only I’d known then what I know now, why did I do that in the first place?

Some commentators in Hong Kong like to criticize the current economic downturn, claiming it is due to the Hong Kong SAR Government’s failure to follow public opinion. From the numerous examples cited above, we have actually seen that, first, Hong Kong’s prosperity has nothing to do with public opinion—after all, when did the British colonial government ever care about public opinion in Hong Kong? It could be argued that Hong Kong’s prosperity is closely tied to the state of development on the Chinese mainland. Second, the Hong Kong SAR Government does not fail to heed public opinion; rather, it blindly follows it, like a blindfolded donkey circling endlessly around the millstone of “public opinion.” Third, it is precisely because the SAR government blindly follows public opinion that key policy directions have been monopolized by the pro-establishment camp, leading to a rigid adherence to old ways and an inability to reform; meanwhile, it is held hostage by the pan-democratic camp over trivial matters, resulting in constant flip-flopping and needless turmoil. Hong Kong residents, meanwhile, are left at a loss, torn between laughter and tears as they watch the political theater staged by these two factions of politicians.

So, can the Chinese government’s intervention in Hong Kong’s affairs reverse this trend and drive a successful economic transformation in Hong Kong? The committee members are not optimistic about this either. Hong Kong public opinion harbors strong resistance to the Chinese government’s intervention in Hong Kong affairs, and the tendency to nitpick at ordinary mainland tourists ultimately stems from a sense of superiority. A typical example is the issue of “whether it’s acceptable to eat on the MTR.” When mainland tourists eat on the Hong Kong MTR, it provokes dissatisfaction among fellow Hong Kong passengers, eventually escalating into verbal altercations between the tourists and locals, which then turns into a broad debate about “tourist conduct” and “public decency.” Yet almost at the same time, when Western tourists are seen eating and drinking on the Hong Kong MTR, the Hong Kong passengers on the same train remain completely silent. Therefore, issues of manners, public decency, and even legal regulations are all superficial. The real issue is the sense of superiority Hong Kongers feel toward mainlanders: “We are the wealthy, advanced, and civilized upper class; you are the poor, ignorant, and backward lower class. How can we possibly make concessions to you? Of course, it should be you who go out of your way to accommodate us.” As long as Hong Kongers maintain this mindset, any attempt by the Chinese government to intervene in Hong Kong’s internal affairs will only provoke an even stronger backlash. Healthy, sustainable reform must be built on the foundation of rational political dialogue. When one side of this game lacks any capacity for rational decision-making, how can reform even be discussed? To change this mindset, Hong Kong’s economic condition would have to decline to a level significantly below that of mainland coastal cities. Unless this happens, it will be impossible to shatter the sense of superiority held by Hong Kongers.

This is why the committee member said Hong Kong’s future looks bleak. There is potential for reform, but Hong Kongers lack the ability to pursue this path on their own, nor are they willing to accept guidance from the Chinese government. It’s a deadlock.

Alas, Hong Kong, your time has come to an end!

(Article from “Tianya Forum,” reprinted from “China Urban Center”)