Abstract: The COVID-19 pandemic, Russia-Ukraine conflict, and superpower rivalry has brought a new round of setbacks in global trade and financial links. As a result, Hong Kong’s growth momentum in trade and finance is likely to remain compromised. This paper argues that Hong Kong has a comparative advantage in developing the innovation and technology (I&T) industry. Presented with development opportunities from China’s national development strategy of “internal circulation” as the mainstay and the growing importance attached to I&T factors, Hong Kong should in the future achieve economic transformation through “reindustrialization”.
This paper suggests that the Hong Kong SAR Government should take advantage of the implementation of the Northern Metropolis Development Plan, with an emphasis on spearheading high-end manufacturing industries and proactively driving the city’s economic transformation towards a two-wheel mode: manufacturing and services.
Keywords: Hong Kong’s economic transformation; development of the innovation and technology industry; development of the Northern Metropolis
In the face of the once-in-a-century Great Global Change against the backdrop of China-US rivalry, the devastation of the pandemic, and the Russia-Ukraine conflict, the development dividends derived by Hong Kong from global trade and financial ties are likely to be compromised. Add to that is an unbalanced domestic economic structure and an ageing population, and Hong Kong must not only strive to maintain its status as an international financial centre and sustain its pre-existing trade advantages but also seek new economic breakthroughs and growth momentum.
Creating a “New Hong Kong” is as much a challenge as it is an opportunity. The Hong Kong SAR Government should adapt its role to changing circumstances and transform itself from purely a limited government to an organic combination of “limited + proactive government”, and from an economic growth forecaster to an advocate of growth targets. By fully leveraging the promising comparative advantages of local high-end manufacturing industries as well as the Northern Metropolis development as an opportunity to propel the innovation and technology (I&T) industry, the SAR Government should commit to advancing the SAR’s economic transformation towards a two-wheel mode of “I&T + finance & trade”.
I. Vision for Hong Kong: The Two-wheel Mode of “I&T + Finance & Trade”
The world economy is faced with a sea change. China and the US have become rivals rather than partners helping each other to win. With the coronavirus pandemic compounded by the Russia-Ukraine war, black swan events have greatly accelerated the mercurial dynamics of international politics. Recent years have seen the US trying to suppress China in the geopolitical, trade, and technology arenas. The clash between China and the US is intrinsically a rearrangement of relations between an emerging force and an established power. It is therefore necessary to realize that a trade war is just the starting point rather than the finishing line for the superpower conflict.
Since its outbreak in 2020, the ongoing coronavirus pandemic has wreaked havoc on the global economy, possibly stepping up the restructuring of industry chains and supply chains. The flare-up of the Russia-Ukraine conflict in early 2022 has exacerbated the split between different country blocs, further complicating and destabilizing the external environment of China. The external environment in which the Chinese economy operates (including Hong Kong) has undergone a profound change.
As a bridge between East and West, Hong Kong could bear the brunt of the once-in-a-century Great Global Change, with its status as a trading centre and a financial centre to be challenged. Since the onset of the China-US trade war in 2018, Hong Kong has increasingly come under the pressure of capital and talent outflows. The net change in financial non-reserve assets fell from HK$174.7 billion in 2017 to a deficit of HK$379.1 billion in 2021. Not only will Hong Kong inevitably be susceptible to any further decoupling of China-US relations, it will also find itself under the risk of decoupling. Since the outbreak of the Russia-Ukraine conflict, the US and Europe have imposed sanctions against Russia, including banning Russia from SWIFT. These sanctions can be regarded as a stress test; both the Hong Kong dollar and the renminbi can also be excluded from SWIFT.
Moreover, Hong Kong’s export trade predominantly consists of re-exports, of which nearly 60% are from mainland China. Under the dark clouds of the China-US standoff, the anti-extradition law amendment bill saga, and the COVID-19 crisis, Hong Kong’s re-exports have been increasingly subject to fluctuations. The ravages of the Omicron variant have even once again left Hong Kong with negative growth of re-exports. Needless to say, the SAR’s comparative advantages in finance, trade, and shipping have come under serious threat.
The fact that geopolitical considerations play a vital part in mapping the future of Hong Kong provides a golden opportunity for the development of I&T. On the one hand, by advancing the I&T industry, Hong Kong can reindustrialize and rekindle its past glory as one of the Four Dragons. The reindustrialization of Hong Kong, instead of returning to the former labour-intensive path, will rely on I&T as a springboard for steering traditional industries onto a new path of transformation and upgrading through Internet of Things, new materials, Industry 4.0, and smart manufacturing, etc. On the other hand, developing the I&T industry will be conducive to optimizing industrial structure in the long run. Under the raging fifth wave of COVID-19, despite the reduced contraction rate of the Hong Kong economy from 3.9% in the first quarter to 1.4% in the second quarter of 2022, local economic growth remains in negative territory.
In the short term, with the easing of the COVID-19 pandemic, the local economy is expected to gradually bottom out. In the long run, however, the structural problem of the services sector as a heavy share of the gross domestic product (GDP) has become prominent. The two-pronged development strategy of the I&T industry and the financial industry will benefit the overall economic structure and promote diverse development. In addition, should collaborative relations be resumed after global political and economic rapprochement, the two-wheel mode of I&T + finance will become a reality for Hong Kong, characterized by a more balanced development of different sectors.
Figure 3 Hong Kong’s Economic Growth Back in Negative Territory
II. Hong Kong’s Unique Edge in Developing I&T Under “One Country, Two Systems”
Under the Mainland’s development pattern of “dual circulation,” particularly the “internal circulation” geared towards remedying domestic shortcomings, Hong Kong should take the initiative to align with the National 14th Five-Year Plan by building an international I&T centre and forging a technopole in the Northern Metropolis. Such efforts would help the SAR achieve development in the twin-engine mode of “I&T + finance” and set up a platform for potential economic growth. From the perspective of comparative advantages, under “one country, two systems”, the comprehensive intellectual property protection systems, an international capital market, a low tax regime, and high-quality I&T talent pool of Hong Kong are favourable conditions for I&T development.
1) “One country, two systems” is Hong Kong’s most fundamental and core asset. Under the “one country” framework, Hong Kong can fully embrace the Mainland market – the second-largest economy in the world, take an in-depth part in the national “internal circulation”, and reap the opportunities that come with the Chinese economy geared towards compensating for shortcomings, transformation, and upgrading. The “two systems” design is such that Hong Kong maintains its pre-existing capitalist system, enjoys a high degree of self-autonomy, and possesses a common-law rule of law in line with that in Western developed economies. Coupled with its independent intellectual property protection systems, internet regulatory mechanism, relatively convenient connection with countries around the world, and a fairly Westernized lifestyle, these factors give Hong Kong a unique appeal to science and technology talent, especially ethnic Chinese.
In developing I&T, Hong Kong should focus on taking full advantage of the “one country, two systems” framework to not only encourage Hong Kong people to become entrepreneurs but also to enlarge its talent pool by attracting an international workforce and companies to come and grow their business in Hong Kong.
2) To capitalize on Hong Kong’s reputation as a meeting point for East and West in the capital market. Staunch support from the Mainland and its own worldwide connections are the prominent advantages of Hong Kong, which also has the Central Government’s backing to maintain its unique status and consolidate its role as an international financial, shipping, and trading centre in the long-term. Over the past 30-odd years, serving as the Mainland’s window on and bridge to the rest of the world, Hong Kong has not only made tremendous contributions to the nation’s economy but has also brought prosperity for itself. As Mr. Li Xiaojia, former chief executive of Hong Kong Exchanges and Clearing, has said, Hong Kong has made the following three vital contributions to China’s reform and opening up: re-export trade, foreign direct investment, and capital market. Re-exports have enabled China to strike it rich. Foreign direct investment has enabled China to become the world’s factory. The growth of Hong Kong’s capital market has provided an endless source of invaluable capital for the Mainland’s economic development. As a matter of course, Hong Kong has thus become a world-renowned trading centre and financial centre. Hong Kong’s development has not just benefited from the Mainland’s economic development but has also contributed to its success.
In the future, its competitive edge encompassing close ties with the Mainland and openness to the world will continue to play an indispensable role in Hong Kong’s development of I&T. On the one hand, against the backdrop of its further improved “internal circulation,” the vast Mainland market will have a greater focus on technological innovation and industrial upgrading. Targeting the pivotal areas (pharmaceutical products, big data, etc.) of the Mainland’s transformation and upgrading, Hong Kong can develop its research and development (R&D) activities, enabling the Mainland’s economic transformation as well as elevating local I&T. On the other hand, the development of I&T cannot do without the support of capital. Hong Kong can, with its status as an international financial centre, attract more funds in support of such development. At the same time, the SAR can also provide financial services for Mainland I&T companies to list overseas so that its I&T sector and financial sector can jointly grow and prosper.
3) A sound intellectual property protection system is conducive to motivating companies to innovate and develop new businesses. In the opinion of new institutional economists such as Harold Demsetz, given the existence of transaction costs, the definition of intellectual property rights (IP) has a significant impact on resource allocation. Clearly-defined IP rights can enhance economic efficiency substantially. Over its long process of development, Hong Kong has gradually built up a robust IP protection regime under common law, e.g. a high threshold of application for Mareva Injunction and the establishment of a sound IP protection system. A relatively strong legal sense was created during the development of market economy for more than a century. Being highly internationalized, Hong Kong is served by a wealth of legal talent, providing fertile ground for IP protection.
The concise definition of and protection for IP rights are conducive to forming reasonable expectations among enterprises so that entrepreneurs are encouraged to build start-ups and innovate for maximum profit while achieving optimized allocation of social resources. The Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area spells out the objective “to fully leverage the advantages of Hong Kong in IP protection and related professional services and support the development of Hong Kong as a regional IP trading centre.” The development of the Greater Bay Area is likely to propel Hong Kong’s expertise in IP protection to new heights.
4) A simple and low tax regime that is exceptionally attractive to I&T companies. One of Hong Kong’s core competitive strengths is its simple and low tax regime with only three direct taxes and not too many indirect taxes, which will help to alleviate the financial burden of enterprises. From the perspective of macro tax ratio (government tax revenue / GDP) in a narrow sense, Hong Kong’s macro tax ratio in the past three years was just 11% while those in the Mainland and the US in the same period were 15% and 21% respectively.
In the World Competitiveness Yearbook 2022 of the International Institute for Management Development in Lausanne, Switzerland, Hong Kong is ranked fifth globally, up from the seventh place in 2021 and is ranked among the top three under the sub-factors of “Public Finance”, “Tax Policy”, and “International Investment”.
5) Talent pool with enormous potential. Universities in Hong Kong are at the forefront of teaching and research in the Asia-Pacific region. According to the 2021 Policy Address, the SAR has five universities ranked on the list of top 100 universities in the world, 16 State Key Laboratories, six Hong Kong Branches of Chinese National Engineering Research Centres, and 22 Joint Laboratories with the Chinese Academy of Sciences, testifying to its strong research capabilities and talented workforce. What’s more, with historical links with the West that go way back and its role as a cultural bridge between China and the West, Hong Kong is well-positioned to attract global talent and to provide professionals for developing the I&T industry.
Notably as of the end of 2021, the number of tertiary students in Hong Kong standing at 307,000 accounted for 4.1% of total population. In comparison, the corresponding rates of higher-education students (including undergraduates and postgraduates) in Wuhan and Guangzhou, two educational powerhouses in the Mainland, were 9.4% and 8.2% respectively. As a matter of fact, Hong Kong’s participation rate in higher education is low among advanced economies. Improvements should be made in this regard to attract students from the Mainland and overseas to study in the SAR. The number of its higher-education places each year should be expanded to around 500,000 to sustain the nurturing of talent for I&T development.
III. Recommendations for Developing I&T in the Northern Metropolis
Creating a “New Hong Kong” is as much a challenge as it is an opportunity. The Government’s proposal to develop the Northern Metropolis is a godsend for forging the platform and the space for this purpose. The Northern Metropolis plan marks a clean break for the first time from the concept of demarcating space with administrative boundary, making direct integration of the development of “two systems” under “one country, two systems” possible. Conceptual change is the first step towards nurturing breakthroughs.
The Government should take a proactive stance and fully leverage its role as an “advocate of growth targets” and enhance the urban functions of the Northern Metropolis, with an emphasis on spearheading high-end manufacturing industries to drive economic transformation.
1) Strengthening top-level design to highlight the development positioning of high-end manufacturing industries. The Northern Metropolis plan should further underline the positioning of the high-end manufacturing cluster. Shenzhen has now become a stronghold of high-skill industries and modern manufacturing industries. Yet the New Territories North on the opposite side of the Shenzhen River is scattered with farms and traditional villages while land resources that should have been put to a high degree of use are underutilized. The Northern Metropolis plan covers the objective of developing I&T but in the 300 sq. km. economic belt, only the San Tin Technopole and adjacent areas covering 11 sq. km. are dedicated to developing I&T. It remains unclear how the development of manufacturing in other new towns will be coordinated or how the fan-out effect of the Technopole can be maximized. Only when there is already a significant size of development can employment capacity and new growth momentum be in place one after the other. New Development Areas such as Kwu Tung North as well as the early new towns including Tsuen Wan, Sha Tin, Tai Po, Tuen Mun, etc. mark the Government’s endeavour to enlarge the space for urban development in the New Territories North. However, owing to the lack of new industries to provide job offers, such “commuter towns” have failed to achieve the core objective of maintaining jobs-residence balance. Hence, the authorities should continue to optimize planning for the Northern Metropolis, with an emphasis on spearheading high-end manufacturing industries.
2) Guidance to industries with a central focus on differential development and coordinated development. The government is to a certain extent in a position to take the lead in industrial agglomeration. Studies have shown[2] that the degree of agglomeration is significantly higher among advanced manufacturing industries than among other industries while producing a greater positive spillover effect on neighbouring areas. Moreover, the agglomeration of diversified advanced industries is more conducive to producing innovation results. Given the ample breadth and depth of modern manufacturing industry chains, boosting industries does not call for the agglomeration of factories but instead relies on the creation of an interactive effect among industry chains spanning from fundamental research and applied research to advanced manufacturing. The Northern Metropolis should provide some support for Hong Kong’s reindustrialization in the areas of land, finance, and complementary policies, providing impetus before market factors take charge. Due to their knowledge-intensive and capital-intensive characteristics, new materials, new energy sources, and biomedicine do not require much land or logistics and transportation at an early stage. As such, they are compatible with Hong Kong’s existing comparative advantages.
The planning of manufacturing industries in the Northern Metropolis necessarily entails coordinated development and differential development vis-à-vis Shenzhen and neighbouring cities. Despite the positive spillover effect and complementary structures between the upstream and downstream segments of industry chains and among industry clusters, there is keen competition within the industries of general equipment, electronic equipment, and semiconductor chips. Given that Shenzhen has launched its “20+8” industry cluster plan, Hong Kong should come up with its own guidance to industries, listing objectives tailored for various industries so as to achieve coordinated development and differential development for the manufacturing sector under the Hong Kong-Shenzhen coordinated development framework. Should there be too much overlap between the two cities, the problem of industrial hollowing-out may arise and financial development lacking real industries will face long-term fluctuation risks.
3) The government serving its role to develop land and open up financing opportunities. A designated institution should be set up to expedite land reservation and lower the transaction costs of development. Under the common law system, despite ample discussion regarding large-scale development projects, transaction costs are high and consensus is hard to reach for public consultations, compensation for land resumption, environmental assessment, etc. Add to that a mix of land uses in the New Territories North with complicated land titles, and transaction costs for land resumption arrangements are high as a matter of course. I suggest that the SAR Government should set up a dedicated institution to coordinate the operations of various departments and strengthen communication with stakeholders such as local residents, land owners, environmental protection bodies, etc. The authorities concerned should also strive to streamline the approval process; speed up project implementation; recruit talent in accordance with social development needs; keep updating the general public on the status of achieving the milestones under environmental protection, housing, and infrastructures; and enhance transparency and monitoring by Legislative Councillors.
It is necessary to proactively seek financing options for the Northern Metropolis plan. Coordinated development for Hong Kong and Shenzhen is conducive to land revaluation for the Greater Bay Area. In the long run, land value in Hong Kong will not be significantly reduced because of short-term supply increase. In the process of financing for infrastructure development and industrial development, constant efforts should be made to facilitate input of private capital and to encourage participation of private institutions in the construction process by various means, such as Environmental, Social, and Governance (ESG), green finance, and community investment funds. The Government could consider issuing infrastructure bonds, municipal bonds, etc. for institutional and individual investors. In addition, financial institutions should be invited to take part in the infrastructure development of the Northern Metropole through financial innovation. Under the arrangements of related mechanisms, eligible enterprises would be able to issue corporate bonds, medium-term notes, etc. in the Mainland to raise capital.
4) Lowering the costs of “two systems” and driving economic and trade integration of Hong Kong and Shenzhen. Initiatives include speeding up cross-border transport construction and perfecting the customs clearance system. In the run-up to the large-scale infrastructure development in the Northern Metropolis, cross-border transportation of construction materials and machinery is necessary and construction progress will inevitably be subject to clearance efficiency. In my opinion, it is essential to accelerate the railway construction and streamline immigration, health quarantine requirements, etc. between the two cities. In the long run, Hong Kong’s development integration with Shenzhen will hinge on mutual, easy access. Hence, under the existing customs policy, it is necessary to further optimize the crossing arrangements for residents, aiming at round-the-clock opening hours and unlimited number of trips. As for further integration of Shenzhen and Hong Kong, the authorities should consider setting up the areas (including the Lok Ma Chau Loop) along the southern and northern coasts of the Shenzhen River as an open zone, with shared electricity and water supplies so that development of the Northern Metropolis can be expedited as well.
Moreover, it is important to boost the efficiency of mutual investments between Hong Kong and Mainland companies. Approval for granting Mainland capital access to Hong Kong is mainly made under the investment facilitation policy for Mainland enterprises to invest and to establish their businesses in the Hong Kong and Macao SARs. The Shenzhen and Hong Kong authorities can jointly apply to the Ministry of Commerce and the Hong Kong and Macao Affairs Office of the State Council for further shortening the approval time under the policy above. With the review process streamlined, Hong Kong can make good use of its appeal to high-quality international capital and pave the way for foreign capital investments in the Loop area between Hong Kong and Shenzhen. Consideration can also be given to directly bringing in advanced manufacturing enterprises to set up in the San Tin Technopole.
5) Clearing market roadblocks to strengthen connection and collaboration among industry, academia, and R&D. To stimulate the integration between Hong Kong’s R&D and the Mainland manufacturing market. Despite their strong fundamental research capabilities, Hong Kong’s higher-education institutions are, for all sorts of reasons, out of touch with the Mainland market. It is not easy to productize their research results. Hence, it is less than ideal for the relevant departments of the SAR Government and universities to only strengthen their cooperation with government departments and academic institutions of Guangdong province and Shenzhen. Instead, they should also focus on closer collaboration with the midstream and downstream manufacturing companies in the Greater Bay Area in order to nurture upstream R&D manufacturing companies in Hong Kong to close the gap between fundamental research and end products.
To further facilitate the flow of cross-border elements and the establishment of an intermediary service platform. Adapting research needs to industrial demand is determined by research resources, industry talent, funding subsidies, and free mutual flows of data and information resources in the age of the big data. Simultaneously, for Hong Kong to achieve breakthroughs in its development of I&T, it is critical to attract and nurture innovative talent. On the one hand, proactive efforts should be made to draw in high-quality talent from overseas and the Mainland. On the other hand, I&T companies can, by granting employee stock options, stimulate creative vitality so that more middle-class talent can share in the development results, thus leading to upward social mobility.
The governments of Hong Kong SAR and Shenzhen should join hands to strive for higher-level policy incentives in order to lower the threshold of cross-border mobility of talent and capital in addition to streamlining regulatory procedures. I suggest encouraging the establishment of intermediary service platforms familiar with the legal and business environments of both cities. These platforms will proactively help Hong Kong’s manufacturing companies to familiarize themselves with the Mainland market and make Hong Kong into the crown jewel of the advanced manufacturing and I&T hub in the Greater Bay Area.
References
辜勝阻，2018：構建粵港澳大灣區創新生態系統的戰略思考，《中國軟科學》
毛振華，2022：有為政府應為「目標提出者」，鳳凰衛視專訪
香港特區政府，2021：北部都會區發展發展策略，報告書
張彩雲，2021：中國高技術產業集聚效應研究，吉林大學博士論文
香港特區政府，行政長官2021年施政報告
香港特區政府統計處網站https://www.censtatd.gov.hk/sc/
[2] 張彩雲，中國高技術產業集聚效應研究，吉林大學博士論文，2021年
Scholars such as 辜勝阻（2018）and Jian Wang (2022) have also come up with similar conclusions.
