Future Economic Growth and Financial Development in Hong Kong - Report Example

Future Economic Growth and Financial Development in Hong Kong Introduction Hong Kong’s unique political organization and its geographic location in the heart of Asia, provides it with several opportunities to realize significant expansion as a major international financial center. In addition, despite its small domestic economy, Hong Kong has the potential to expand economic output in selected sectors of its economy. This paper examines how Hong Kong can take advantage of its location, its expertise in a number of sectors including finance and its unique political and economic association with mainland China to become a strategic player in the global economy of the 21st Century. 2. Economic and Financial Development Opportunities Traditional economic theory depicts most developed nations as evolving from an agricultural economic base through a period of industrialization and rapid development of transportation, communication and financial infrastructure. Examples include the United States and Canada, Russia and many of the countries in the European Union. Hong Kong is an example of a developed state that did not follow this traditional paradigm. Because of its small size and mountainous terrain, Hong Kong did not build its economy from an agricultural base. From its very beginning, Hong Kong was forced to think strategically about defining its opportunities by building upon its two main strengths; an excellent deep water port and its financial expertise that had been developed under British rule. Hong Kong has experienced cyclical growth in its economy since Great Britain ceded the territory to China in 1997. Table 1 shows the changes GDP over the past twelve years. The primary factor that explains this fluctuation in GDP relates to the fact that Hong Kong’s economy is almost totally dependent upon the financial sector and the export of goods and services produced domestically. Moreover, Hong Kong’s largest trading partner is mainland China. Hong Kong’s policy makers have remained relatively complacent and risk averse over the past decade in assuming that the economy would grow at an average rate of between 3 and 4 percent per year and that the finance sector and exports would continue to drive that growth (Zhang 2009). The global economic downturn coupled with the meltdown of the international financial sector of 2008, had a devastating impact on Hong Kong’s economy. It has reminded policy makers and business leaders that they can no longer ignore economic diversity as the fundamental theoretical principle that guides successful economic and financial policy development. There are three major areas where Hong Kong has an opportunity to diversify its economy and further develop its financial sector. The first relates to developing new export markets. Table II shows that Hong Kong currently conducts 49% of its trade with mainland China, while only 8 percent of the territory’s annual trade is with the United States and 6.5% is with the European Union. Although it makes sense that mainland China presents a lucrative and potential growth market, any major economic or political problem in China could have a devastating effect on Hong Kong’s economy. In fact, total trade volume in Hong Kong has been steadily declining over the three few years primarily because the global financial crisis has reduced demand for imported goods (HK Statistics 2010). Hong Kong has an excellent reputation for the quality of its communications and multi-media technology products and the U.S. and the E.U. are both highly dependent upon technology components, the majority of which are imported. Moreover, Hong Kong’s harbor and its well developed loading facilities make increased export activity beyond traditional Asian markets a logical next step toward economic growth and diversity. The second area that has considerable potential to contribute to economic development relates to research and development. Hong Kong is blessed with two world class universities. The University of Hong Kong and the Hong Kong University of Science and Technology, ranked first and second in all of Asia, are positioned to become global leaders in the knowledge-based economy (Top Universities 2010). The problem is that they remain relatively unknown outside of Asia. However, with some additional capital investment from government and industry, these universities can partner to develop new technologies and engineering systems that can meet the growth in international demand in a variety of industries including the green technology sector. These institutions also have the potential to make significant contributions in the area of bio-medical research and in the development of new pharmaceutical products. The property rights revenues and the investment in new infrastructure and businesses that these R & D activities can bring are substantial. The third area that presents considerable opportunity for growth is in the financial services sector. Once again, policy makers and business leaders in Hong Kong have been slow to react to potential new growth markets. Although much smaller in scope than the New York, Tokyo and London financial centers, Hong Kong is recognized as one of the leading financial services sectors in the world and most of the major banking, equities and bond companies have located corporate offices there. In 2006, an economic summit was held in Hong Kong to discuss the implementation of the Government of China’s five year strategic plan covering the period 2006-2011. One of the major objectives of the plan is to assist the Hong Kong banking and financial services industry in re-organizing its operations to serve the financial needs of individuals and businesses located in mainland China. Participants at the summit noted that financial institutions located in Hong Kong were strategically positioned to establish satellite financial services centers in major cities on the mainland (Summit 2006). To date, some Hong Kong-based financial institutions have established basic operations in Shanghai and Beijing. However, the major development of a full service financial sector on the mainland has not yet been realized. The Government of China still relies heavily upon the financial markets in Tokyo, London and New York in accessing venture capital and equity markets and in conducting international business utilizing the Chinese currency (Renminbi) as the medium of exchange instead of the U.S. dollar. The Hong Kong financial sector’s complacency in developing a leading position in the financial services sector in mainland China may prove to be a strategic policy error. China is one of the largest and fastest growing economies in the world and dramatic changes in the country’s political institutions over the past several years have opened up tremendous business opportunities in a market of 1.3 billion people. This is particularly the case for Hong Kong given its unique status as a market economy operating as a Special Administrative Region of mainland China. The mainland government has indicated that if financial institutions located in Hong Kong are unable to provide the financial services that China needs to sustain its economic growth and to support its new middle class population, then the country will have to proceed to develop its own financial services sector. If this happens, a new world financial center will evolve, probably in Shanghai (Tong 2009). This will add a fourth global center to the existing centers in New York, London and Tokyo and the four will dominate the global banking, equity, bond and venture capital markets. Hong Kong will forever be relegated to an inferior position from which it will probably never recover. 3. Conclusion This paper examined several strategic opportunities that are available to business and government institutions in Hong Kong. The territory has the best of both worlds. It has a recognized financial services sector that was developed under British rule and has served as the backbone of Hong Kong’s economy for several decades. In addition, as a Special Administrative Region under the Peoples’ Republic of China, Hong Kong businesses have a strategic advantage in accessing the mainland China market of 1.3 billion people. Despite the current opportunities to maximize the advantages associated with its unique position, policy makers and business leaders in Hong Kong have maintained a policy of complacency and promoting the status quo. This paper identified three critical areas where Hong Kong has the expertise and the potential to make significant inroads into establishing a continued foundation for economic growth and financial stability. Hong Kong is uniquely positioned with its state-of-the-art port facilities, its outstanding research universities and its financial expertise to move forward in a positive and proactive manner. It is incumbent upon business and government officials to demonstrate the vision and the leadership to secure Hong Kong’s future. Failure to act now may have devastating consequences for the economy and the people of this island territory. Works Cited “Asian University Rankings for 2010.” Web. 30 June 2010. “Economic Summit on China’s 11th Five-Year Plan and the Development of Hong Kong: Financial Development.” Proceedings, 2006. Web. 30 June 2010. Hong Kong Census and Statistics Department. Web. 30 June 2010. Hong Kong Trade and Industry Department. Web. 30 June 2010. Tong, Scott, Shanghai: Global Financial Center? Aspirations and Reality, and Implications for Hong Kong. Oct. 2009. Web. 30 June 2010. Zhang, Ming. “China’s New International Financial Strategy amid the Global Financial Crisis.” China and World Economy 17.5 (2009): 22-35. Read More