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Serving Hong Kong’s Economic Life

Prof. Stephen Cheung

Dean, School of BusinessHong Kong Baptist University

Content

• Background• Current economic situation• Socio economics challenges• Implications on public finance• Regional economic cooperation

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Background

Hong Kong has survived two major international financial crises in just one decade:

Asian Financial Crisis (1997-1999) Global Financial Tsunami (2007-

2009)

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Background

1. Proof of resilience of the Hong Kong economy?

or

2. Call for more immediate repositioning to adapt to the new challenges for HK?

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The economy has somehow recovered…

• In 2009, GDP increased by 8.0% in 1st Quarter & 6.5% in 2nd Quarter. Annual growth rate: 7.2%.

• Unemployment has dropped to 4.2% (lowest since Jan 2009.)

• Chief Executive expects 2010 growth by 5-6% (Policy Address)

Current Economic Situation

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Socio-economic Challenges

• High income inequality sustained (Gini coefficient - 0.43 in 2009). UN reports: No. 1 unequal city in Asia (2008) & among developed economies worldwide (2009) (2nd: Singapore; 3rd: USA)

• Asset-bubble built up again (property prices restored to pre-97 level in some popular estates)

• Inflation: imported (RMB revaluation) + ‘peg’ to depreciating US Dollar

• Competition from first and the rapidly growing 2nd-tier cities in the Mainland

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UNDP Human Development Report 2009

HDI Rank Country 1992-2007

1 Norway 25.8

2 Australia 35.2

3 Iceland ..

4 Canada 32.6

5 Ireland 34.3

6 Netherlands 30.9

7 Sweden 25

8 France 32.7

9 Switzerland 33.7

10 Japan 24.9

11 Luxembourg 30.8

12 Finland 26.9

13 United States 40.8

14 Austria 29.1

HDI Rank Country 1992-2007

15 Spain 34.7

16 Denmark 24.7

17 Belgium 33

18 Italy 36

19 Liechtenstein ..

20 New Zealand 36.2

21 United Kingdom 36

22 Germany 28.3

23 Singapore 42.5

24 Hong Kong, China (SAR)

43.4

25 Greece 34.3

26 Korea (Republic of) 31.6

27 Israel 39.2

Income Gap

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Income Gap

Income Gap

No. 1: Hong Kong, Top 11 Countries With the Biggest Gaps Between Rich and Poor (UNDP) Gini score: 43.4

Share of income or expenditure (%)Poorest 10%: 2.0Richest 10%: 34.9

Ratio of income or expenditure, share of top 10% to lowest 10% : about 18 times

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Income Gap “Renowned for its high concentration of Rolls-

Royces, expensive real estate, and posh shops, the Chinese special administrative region has plenty of rich who enjoy showing off their wealth. However, Hong Kong also has one of the largest public housing sectors in the world, with about half the population living in government-supported or -subsidized housing estates. The city has no minimum wage - except for domestic helpers from the Philippines, Indonesia, and other countries. ”

Business Week, October 16, 2009

Number of Chinese newspaper articles with these key words

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 10/2010Disparity between the rich and the poor 貧富懸殊 1546 1360 1127 2002 3042 3186 4567 3087 2908 5587

Housing prices 樓價 18091 20329 19764 23320 23979 21914 30409 36965 36620 42288

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Income Gap• Deep and increasing social tensions

dividing HK society• Cross-sector and inter-class conflict

hampers the overall economic vitality • Governance hindered: difficult to

introduce much needed policies

=>Are we still as efficient, adaptive and resilient as we have used to be??

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Income Gap Developed economies: high percentage

of service-sector, finance & capital market and technology/high value-adding industries.

Wealth accumulation easier IF one has knowledge and/or capital

Recent asset-bubbles amplify the situation (property prices surging; restored to pre-1997 level in some areas)

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Income Gap

This also implies: without capital, assets or sophisticated knowledge, wealth creation is very unlikely

Unlike industrial/fast-growing period: easier promotion, pay-rise, job-change

Income gap and social inequality widened

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• Non-professional / low-skilled migrant communities: most obvious

• Inter-generation poverty: knowledge and capital gaps between children of the rich and the poor households are increasingly broadened

Income Gap

Number of Chinese newspaper articles with these key wordsYear 2001 2002 2003 2004 2005 2006 2007 2008 2009 10/2010

Profiteers 奸商 828 834 1253 1305 943 698 1123 1535 1497 1463Hatred toward the business sector 仇商 1 1 0 10 34 6 7 18 11 619

Hatred toward the rich 仇富 9 91 517 512 578 759 738 666 965 1999

Inflated buildings 發水樓 1 0 0 1 2 5 32 56 312 921

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‘Hatred toward the Rich / Business’?

Yes, rising public skepticism, grievances and even confrontation against a few tycoons, business groups and sectors, particularly developers

‘Hate Rich’ is NOT in HK’s culture and mindset; decades of pro-business and ‘get-rich’ ethics developed

Global Giants (e.g. Bill Gates and Warren Buffet) are respected not only for wealth and power, but more for their corporate social responsibilities and personal philanthropy

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‘Hatred toward the Rich / Business’?Real problems: • ‘oligopoly’ by some developers &

‘giant’ groups• Taking huge profits, appears to be an

obstacle to improve social justice, e.g. minimum wage, anti-trust, effective privacy protection, anti-discrimination etc.

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‘Hatred toward the Rich / Business’?• Asymmetrical power over consumers

and even government: manipulation of market price

• Changing HK values: highly developed, HK people (esp. new generations) pursue goals of social justice, fair-play, consumer-rights, market transparency etc. as in other advanced societies

Number of Chinese newspaper articles with these key wordsYear 2001 2002 2003 2004 2005 2006 2007 2008 2009 10/2010

Social enterprises 社會企業 163 173 164 255 348 611 2367 2090 1935 1750

Wealth comes before virtue發財立品 59 66 56 88 97 113 169 110 98 187Corporate social responsibility企業社會責任 35 98 205 622 1118 2512 4426 6751 4963 4347

Corporate Social Responsibilities

• Business has a role to play in building a harmonious society

• These are joint or shared responsibilities of the government & business in any developed societies

• Only responsible to the shareholders could be an excuse

• Tri-partite relation among NGOs, Govt, and business sector

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Consequences: Social Tensions • Income inequality + occasional economic

setbacks social tensions and discontents• Problems severed with recent inflation and

asset-bubble. Simple livelihood needs for grass-roots, youngsters and even lower-middle class become tougher

• Recent asset bubbles and the forthcoming inflation

Policy Address

The Government is making efforts to address the most pressing socio-economic issues within the current budgetary resources:

• Right direction, new thinking - practical livelihood needs of majority of the population & long-term needs of the economy better define the Government’s economic principle

• Home Owners’ Scheme remain controversial, with HK public split in vested interests, but measures and innovation are still needed, e.g. ‘My Home Scheme’ and ‘Community Care Fund’, etc

• More human-oriented, less social tension

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Policy Implications

Immediate actions needed to resolve social tensions

• Re-assert the Government’s primary economic roles as ‘provider’, ‘facilitator’ and ‘regulator' to ensure a fair and open level-playing field exists

• Deal with ‘working poor’/wide income inequality

• Care for the underprivileged groups

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Implications on Public Finance

Roles of the Government

• ‘Laissez-faire’ / ‘non-intervention’• Market leads and government

facilitates• Big market and Small Government

Number of Chinese newspaper articles with these key wordsYear 2001 2002 2003 2004 2005 2006 2007 2008 2009 10/2010

International Finance Centre國際金融中心 3240 4393 6508 8132 9682 10600 12865 13401 21068 12580Offshore Financial Centre for RMB離岸人民幣中心 0 115 1183 296 158 84 186 335 468 1235

Marginalization 邊緣化 1052 2458 3329 4440 7371 10943 8654 7644 8863 9382

From Competition to Collaboration• Hong Kong can work in collaboration with other

financial centres of China and leverage our respective strengths

• Specifically, with our highly open and internationalized market, a well developed and highly governed regulatory regime as well as the rule of law, HK is set to enjoy a comparative advantage to attract international talent, capital, financial products and services

• Hong Kong can also be a testing ground for the internationalization of the RMB, and to become a market offering a broad range of RMB products and services

From Isolation to Engagement

• Hong Kong can engage other financial centres in the Mainland by encouraging more exchange of financial products, capital and talent

• As the bridge head for Mainland enterprises, Hong Kong can serve as the preferred capital raising centre outside the Mainland, providing equity listing, bond issuance and international asset management services

• Hong Kong can engage the other financial centres of the Mainland in the areas of financial market infrastructure, information sharing, and regulatory co-operation to enhance the financial security of cross-border capital flows

Zero-sum game or Win win situation• The development of Shanghai as a

financial centre in the Mainland is a reality• Hong Kong stands to gain with the

competitive advantages that we have built so far

• Hong Kong Government needs to re-steer its role differently to pave the way for HK to sustain its role as a international financial centre as China continues to mature and other of its mainland financial centres continue to develop

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End

Thank You!