This is Hong Kong; a “semi-democratic” peninsula, off the coast of communist-China,
home to one of the most important regions in the world – one whose ownership has shifted
many times throughout its turbulent history.
In the late 1800s, Hong Kong rose to international prominence when it acted as a base of operations
for British colonial trade, effectively bridging the prosperous East and emerging Western world.
And while modern-day Hong Kong has certainly evolved over the past two centuries, its role
in the global economy has remained largely unchanged.
How can the GDP of this tiny 1,000 square-kilometer city rival that of Denmark,
South Africa, and Norway? How is it possible for a territorial region
– whose arguable independence has been in dispute for decades – to become the “financial
Mecca” of Asia? And finally, what will the world events of
2019 and 2020 mean for this economy?
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Hong Kong has done very well for itself as a global-middle-man. And the meteoric rise
of it’s neighboring economy, China, has only strengthened the city’s already-prosperous
position. But, of course, if you follow the news, you
probably already know that Hong Kong has seen better days. Global trade tensions, prolonged
protests, and good-old-fashioned competition have dramatically impacted its economy in
recent years. Not to mention, today’s pandemic. But before we try to understand the impacts
of these events and speculate about their outcomes, we must first understand what this
region does.
Raising Capital Trading is Open
New York, London, and Hong Kong are the three largest financial centers on the planet.
New York is, of course, home to the New York Stock Exchange as well as the Nasdaq; the
two largest securities exchanges.
London is the go-to financial centre for Europe.
But, Hong Kong, is slightly different. As it’s responsible for raising capital – primarily
for Chinese, companies.
And as you already know from watching videos on this channel about the communist country,
China has quickly become the second-largest economy on earth. Along with that growth,
has come the rise of Chinese companies, like BaiduHuawei, Ablibaba, and Tencent.
Like any public company, these businesses need to raise money to finance their operations
for R&D, marketing, and everything else companies spend money on. .
But because China’s less-than-transparent financial sector is largely closed-off to
the rest of the world, Hong Kong plays the essential role of China’s portal for accessing
the global capital markets.
So, why do these state-owned companies, many of which are directly subsidized by the Chinese
government, list on an international exchange, rather than a domestic one?
The answer is actually quite simple: by listing on a reputable exchange – one that’s actually
regulated, but more on that later – companies can not only raise cash, but also their credibility,
which opens the door for raising even more money from international investors.
Due to incredibly strict controls over capital on the mainland, a lot of these corporations
find it hard to conduct business internationally. Having a presence in a market like Hong Kong,
which is kind of china but kind of isn’t. On top of all of that, Chinese companies also
enjoy another unique advantage which is access to non-Chinese currency. By listing in Hong
Kong, rather than a mainland exchange, the proceeds from the IPO are denominated in Hong
Kong dollars, which are significantly easier to work with globally, as opposed to the Chinese
Yuan.
Regulations
If you want to list your company on a public exchange, one that’s liquid and globally-recognized,
then you are in for a lot of paperwork.
Public stock exchanges like the New York Stock Exchange, the Nasdaq, and yes the Hong Kong
Stock Exchange, want to ensure that the equities trade that they list are not complete frauds.
If you’re a student of history, you already know that regulators have made mistakes in
the past, [fake cough noise] WorldCom and Enron.
A great demonstration of just how much faith people put into public exchanges is shown
on Business Casual’s mini-documentary about the Kuwait’s stock exchange meltdown in
the 1970s, the Souk Al Manakh, it’s a fascinating topic which we’ll link in the video description
below. But, we’ve remissed. To do this, regulators
like the SEC mandate that listed companies have to be of a certain size, follow lengthy
accounting rules, plus a plethora of other hoops and hurdles, all in the name of compliance.
What this means is that if you’re looking to do business with a publicly-listed company,
you can be pretty certain that they are reputable. At least in theory…
Beyond these state-owned mega-corporations, it must also be realized that Hong Kong is
a popular hub for regular Chinese corporations like Tencent, Alibaba, Huawei, and Xiao Mi
who are looking to move into international markets.
Raising capital doesn’t happen exclusively in the stock exchanges. Hong Kong is a metropolis
of investment bank buildings, all stacked to the brim with people looking to underwrite
traditional loans for promising companies.
As you can imagine, being the home of initial public offerings, capital raises, and loan
origination during the longest economic expansion in history has been enormously profitable
for the Hong Kong government.. And ever since it opted for T-Bills over tea
bags, Hong Kongers have long-enjoyed the dividends of its prosperous financial sector.
But this prosperity is now under threat.
The cracks are forming. Riots, plagues, and competition
Hong Kong’s position as a one-stop-shop for all of your financial needs in Southeast
Asia has made the region incredibly rich.
The managing government of the region almost runs the city like some kind of corporation
in its own right.
Since its handover to China in 1997, the area has been led by a president, governor, or
even a mayor. Rather, Hong Kong is led by a
Chief Executive, resembling a leadership structure closer to a corporation than a government.
Corporations have competition and Hong Kong is no exception here.
Shanghai is the first problem that Hong Kong is starting to come up against.
And China has noticed. Perhaps you can even say that China is jealous and wants a slice
of Hong Kong’s highly-profitable banking sector. In-fact, Shanghai, the de-facto financial
capital of mainland China, regularly competes for the same IPO listings as the ones sought
by Hong Kong – arguably in an attempt to limit the influence that Hong Kong has over
China’s markets.
It’s not exactly an easy pitch for Shanghai, as Chinese capital controls prohibits companies
from issuing shares at a lower price than what their assets are worth – essentially
meaning that mainland-listed companies can’t raise new funds if their stocks fall too low.
Anybody paying attention would have realized that stocks fell really low earlier this year,
so trading on much of the exchange was halted entirely.
But it’s not just China limiting Hong Kong’s financial sector.
Protests amongst Hong Kong residents and police have raged across the city for over a year
now.
Which has put tremendous pressure on other industries could have helped pick up the slack
of the waning financial market.
The first being tourism. The city is a popular destination with world-class restaurants,
landmarks, and nightlife. Even more important is that Hong Kong airport is the major travel
hub for the region. A huge amount of travelers pass through Hong
Kong international airport on their way into or out of Asia. The city is serviced by Cathay
Pacific which is one of the largest airliners in the world.
Slowing down these direct and indirect tourist dollars has seriously hurt an already struggling
economy.
But tourism is actually a minor consideration next to retail.
Hong Kong is one of the largest luxury goods markets in the world.
The city's affluent residents frequently spend big in a very profitable retail sector. This
retail sector in turn employs hundreds of thousands of the city's workforce.
The protests have frequently occupied shopping malls as bases of operation, completely shutting
down some of the city’s largest retail centers.
This put shop owners and retail workers out of business causing direct structural unemployment.
It has also caused some bigger, less obvious underlying issues.
Real Estate All Demand, No Supply
Hong Kong has the most expensive real estate in the world. This city is home to over 7
million people but it covers an area smaller than London.
What little land it does have is covered in mountains, with a majority of the landmass
protected as public parks.
The actual space left to accommodate all of these people is incredibly limited. When you
combine this with the fact that Hong Kong is home to a lot of very wealthy people you
get yourself some extremely expensive real estate.
The real estate market of Hong Kong is both a major concern and a saving grace to its
economy.
Unbelievably high prices have of course priced a lot of people out of ever being able to
afford a home of their own. They are pushed into increasingly desperate living situations,
such as the infamous cage homes.
This is not a great look for what is supposed to be the wealthiest city in the world, but
the march towards higher real estate prices can’t really stop.
Investments into family homes and commercial real estate is a major market on the island,
rivaling even the financial markets that have made the economy so wealthy in the first place.
To maintain this steady price growth the government has been very slow with rolling out land reclamation
projects or even opening up existing land for development.
By artificially controlling supply it has sent a message to investors that this is a
stable asset the government will look after!
But it raises the question, why on earth would the government want to do this? When you have
people living in cages, while simultaneously having a lot more land left to give you have
to assess the motivation.
One argument is that Hong Kong does not want to encourage urban sprawl. The idea is that
if it did get rid of its parklands, it would very quickly become completely covered in
concrete skyscrapers.
This sounds reasonable, but it probably isn’t the real reason.
You cannot buy land in Hong Kong, instead, you rent it from the government. At the moment
the government is really only renting out land for a period of 50 years at a time. This
means that developers will rent a plot of land, build a huge skyscraper-filled to the
brim with apartments, and then profit off the difference in net rentals.
So long as the developers can be certain rent will stay high, they will be sure of profits,
and they will keep paying these rents.
Income tax in Hong Kong is extremely low, which means the government needs to rent out
land in order to raise enough revenue.
Very quickly you can see how this becomes a vicious cycle of dependency on ever-increasing
real estate prices.
Now as mentioned earlier the riots specifically have put a lot of downward pressure on this
real estate, specifically commercial real estate.
If this continues for much longer Hong Kong’s government may be unable to fill new 50-year
land rentals adding even more uncertainty to a nation on the brink of chaos.
Now, this all looks pretty bad, but if there is one thing really worth exploring, it is
the city’s amazing economic resilience.
Hong Kong The Financial Fortress
Hong Kong rose to prominence as a safe haven for trade between the east and the west. It
was a British fortress that asserted power in the region.
Today as we have seen it is much the same. It’s still a safe haven for trade, it still
asserts huge influence over the region, and in many ways, it is still a fortress.
The events of the last decade would have crippled any regular economy, especially when you consider
an economy entirely located within one city.
We are seeing first-hand today in the United States the impacts that civil unrest can have.
When you add this fuel to the fire of a global health crisis, trade tensions, and burgeoning
global competition you would expect that this special economic region would be suffering.
The reality is pretty different though. The region is still growing, and growing fast!
A lot of this is of course piggybacking off the success of China, but that is not the
whole story.
Hong Kong is actually a really financially responsible country. Despite very high costs
of living and real estate prices, the region has surprisingly low consumer debt.
The same goes for businesses and even the government.
What this means is that while these external shocks have been bad, they have not been nearly
as bad as they would have been in a regular developed economy with enormous personal,
business and government debt.
You can watch our video on “will this be the next great depression?” to understand
why this is in further detail, but the takeaway is that debt normally makes the good times
great and the bad times terrible in an economy.
Hong Kong has managed to have a great growth period without the need to take on lots of
debt. This means that during more trying times it is not going to suffer the same way other
economies would.
Ranking
So now it is time to rank this economy using the tried and true economics explained leaderboard,
formed using these criteria.
Size is an interesting one, Hong Kong is not a country so the mere fact that it is being
compared to a country is a really strong indication of just how massive and influential this region
is. Even still with a GDP of around 370 billion dollars it is nothing too remarkable on a
global scale, at least not in absolute terms. It gets a 7 out of 10.
GDP per capita is also interesting. Hong Kong is home to some truly wealthy people but it
has extreme wealth inequality meaning that this figure is dragged down a bit. What is
probably more important to consider is that this is a very clear indication of the problems
of just looking at GDP figures. Hong Kong has a GDP per capita of $49,000 USD which
is still really good. But if you were to look at that alone you would not get the whole
story.
GDP is basically a measure of transactions. As we have seen the residents of Hong Kong
are typically a little bit more responsible with their spending. This means that on paper
their economy looks smaller than it actually is, particularly on an individual level.
This GDP per capita figure puts them in line with countries like Austria, Sweden and Germany.
So it’s a clear 9/10.
But the people of Hong Kong are significantly wealthier than these regular developed countries.
The average net worth of a resident of hong kong is $489,000 usd’s which puts it in
line with the wealthiest residents in the world.
Now it still has to get a 9/10 even though I desperately want to give it a 10 out of
10, because by golly I made this list and I am not going to alter it 4 video’s in.
So for now just take it as another practical demonstration of the limitation of GDP figures.
Anyway!
Stability and confidence, the city gets a 9/10. It is the go to destination for finance
in Asia specifically because of its stability. It loses a point because of the current social
unrest as well as the uncertainty about what the future holds under Chinese leadership,
but nevertheless this economy has soldiered on. If anything, the economy's resilience
to this adversity is a clear demonstration of just how stable it really is.
Growth, well it has to be a 10/10. Over the past 2 decades the economy has tripled in
size due in part to the rise of China. There really isn’t much else to argue about here
so it clearly deserves this score.
Finally industry. Finance and tourism are about the best domestic industries you can
cultivate in an economy, they are endlessly renewable and unbelievably profitable. Hong
Kong has, or well at least had both of these. It is going to get a 9 out of 10 only losing
a point because its reign of superiority might be under threat from mainland Chinese financial
centers.
Overall this gives the economy a score of 8.8 out of 10. Putting it securely into first
place with a giant asterisk, because this is not a country, it is a special economic
zone. So perhaps it is unfair to rank it amongst national economies that don’t have the luxury
of basically being one big financial sector. Make of that what you will.
Final thoughts
Hong Kong is home to an extraordinary economy.
It is remarkably wealthy, remarkably stable and remarkably good at being in the right
place at the right time.
The city is in a rough spot at the moment, caught between a range of external pressures.
Global middle man is not an easy role to play at the best of times, but when the powers
that be go into trade wars, and then the world shuts down, all while your people are marching
in the streets, it makes this kind of work almost impossible.
Where a regular economy would have crumbled, Hong Kong has held strong.
Globalisation is a painful but mostly rewarding process. As our world becomes ever more reliant
on global trade and finance, we are going to need to bridge the gap between the east
and west.
Given what are significant cultural differences, represented by vibrant personalities we are
going to need one damn strong bridge.
Fortunately, we have one.
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