Growth Challenges

Are London and Hong Kong trading places?

Hong Kong lies strategically on China’s southeast coast, on the Pearl River Delta and South China Sea. Serving as a trading port for centuries, it was overseen from Beijing until the mid-19th. In 1842 China’s loss in the Opium Wars saw the area ceded to Britain.

Under British administration and a favourable taxation regime, over the 20th century in particular Hong Kong was transformed into a thriving international business hub. The city grew to enjoy one of the highest per capita incomes in the world, amid a region that was still relatively poor. Until 1979 and for at least a decade thereafter main land China was impoverished, and largely cut off from the outside world. South East Asia was also economically poor through much of the 20th century. Hong Kong in contrast was a beacon of international wealth, with funds flowing into its financial and manufacturing sectors from around the world.

Over the last two decades of the 20th century not just China but South East Asia also grew rapidly. Except in the case of Singapore, incomes are nonetheless yet to reach OECD levels per capita. In the case of mainland China, its billion-plus population aggregates its incomes up to now being the world’s second largest economy. A shadow of its relative former self, Hong Kong now vies closer to shoulder-to-shoulder with Shanghai and Singapore for the trading port and finance hub that it once took for granted as its own self-made Asian monopoly.

On the other side of the world, another city that was once not only administrator of Hong Kong, but itself once the world’s largest trading port, is also now having to vie for investor attention in ways not recently experienced. London and the broader UK economy for some decades have been saved by North Sea oil, property and finance. All three are however now pushing their reserve limits, and are unable to re-boot the growth of earlier times. The country faces debt repayment obligations, a credit rating downgrade and more latent longer-term obligations related to its ageing population. Tight credit conditions in combination with sluggish real income growth and job contract uncertainty are having a striking effect on the property sector – possibly reminiscent even of patterns of growth between China and Hong Kong over the middle of the 20th century.

In a recent article in The Telegraph trends in the property sector highlight a pattern of divergence between London and the rest of the UK. Prices in London are continuing to rise, and have already exceeded their pre-crisis peak. Especially in areas favoured by wealthy foreigners, prices are already rising above the ordinary rate of inflation. The story notes that where London has always led, the rest of the country has traditionally followed – but not this time.

One reason is the ageing demography itself. In the footsteps of a recent East Asia Forum piece on the struggles of ‘Getting Old After Getting Rich’ in Japan, the article notes that property traditionally peaks have coincided with the ‘inverse dependency ratio’ – when ratio of workers to dependents is highest.  In the UK that peaked has passed and will take a generation for a current baby boom to instigate a similar ratio, and the related property boom.

To maintain prices and growth, London’s property market is ever more foreigner-driven. The Telegraph notes that 60% of new builds in London are now sold to foreign investors. Russian, Chinese and Middle Eastern buyers in particular are investing. The Telegraph notes that the city’s economy may now be “almost wholly decoupled from much of the rest of Britain”. Arguably the view from the rest of Britain toward London increasingly is starting to look a bit like Hong Kong once did from mainland China.While holding up local prices and providing construction jobs, this may also wedge the local economy in ways hitherto more familiar to developing economies. That is, an increasing gap between property prices and local wages. Continued declining real wages and share of national income accruing to labour will exaggerate the trend.

And so, is it yet to be a perverse outcome of history that as London and Hong Kong trade relatively fewer and fewer goods, they may nonetheless be trading places? That is, where Hong Kong is increasingly integrated into its region, and the region around it is increasingly catching up to Hong Kong in income level, London rather is diverging and becoming an island economy all of its own, crudely reflective indeed of earlier Hong Kong. In returning Hong Kong to China in 1997, it seems British leaders may have proceeded to unintentionally re-create ‘Hong Kong’, in London, with Chinese investors among those investing in the ‘south’ east.

Under British rule citizens of Hong Kong did not vote, rather British citizens were responsible for holding Hong Kong’s leaders to account. It is perhaps lucky for contemporary politicians in the United Kingdom that demography and voter apathy, not to mention the absence of real choice, may save a modern electoral backlash. How to not go backwards as an ageing already rich economy, least of all far from leading growth hubs? Will the combination of deregulated finance and getting old after getting rich ultimately serve as Britain’s home opium goal? What policies can bring a return of growth, opportunity and sustainable consumption levels in parallel with wealth-creation? 

Lauren has worked in economic policy and research at the World Bank, World Economic Forum, EIU and for the governments of Sierra Leone and Guyana. She has learned Chinese since 1995, and lived in Beijing for almost six years, on and off since 1997. Lauren has a PhD in Economics from Peking University, an MSc in Development Economics from the School of Oriental and African Studies (SOAS) and a B.A/B.Com from the University of Melbourne.

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