a while ago i did a video about hong
kong's loss of its electronics
manufacturing industry
decent video did decently well
but the single loudest thing that people
screamed at me in the comments section
was
well the manufacturer went over to
shenzhen and now hong kong can focus on
providing services which it's way better
at why are you complaining
but i am making it clear here that
demanufacturing the hong kong economy
was a mistake perhaps even its biggest
in this video we will look at what
happens when an entire economy loses its
ability to make things that people want
but first let me talk about the
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time alright now back to the show
after the chinese civil war shanghai's
industrialists along with a massive
bunch of refugees relocated to hong kong
to flee the communist party of china
the industrialists brought with them
capital and manufacturing expertise
settling down in their new home they
re-established their factories they
wanted to take advantage of the labor
opportunities provided by the 1 million
or so poor chinese migrants now
squatting in hong kong
because hong kong did not have much
available land even back then their
factories produce lightly manufactured
items out of high rise buildings simple
things like plastic flowers clothes and
radio assemblies
hong kong's manufacturing industry came
along at the right time starting in the
1950s the united states and other
members of the west began sourcing
certain manufactured goods from asia
this outsourcing trend would only
intensify in the coming years
by the early 1960s hong kong was the
single biggest manufacturer in the
developing world these low-skilled jobs
helped those people make a living and
build their wealth it was a miraculous
stroke of good fortune
very quickly however competition emerged
out of places like south korea or taiwan
cost rose as workers salaries got better
and each new generation of hong kongers
demanded a better richer lifestyle
but hong kong's manufacturing industries
as it turns out had little to offer
other than cheap labor
the city's economy lacked technological
expertise in producing native
technologies good enough to replace
unique critical components without that
those components had to be imported from
elsewhere
for instance in electronics the
city-state's oems were spending 60
percent of their cost budget on
integrated circuits that needed to be
imported from japan
the result was an uncompetitive industry
as early as 1981 the city's
manufacturers were asking for government
help in upgrading its technological
capabilities
over in taiwan singapore and south korea
governments were investing millions of
dollars in acquiring and quote-unquote
naturalizing their own technologies for
commercial use
hong kong's manufacturers were falling
behind but hong kong at this time was
still a british colony and that mattered
hong kong has a truly weird economic
history one can make a valid argument
that the british colonial administration
never intended for hong kong to be
anything more than a simple small
trading post straddling china and the
west
early on the hong kong government and
its resident trading houses settled on a
fiscal compromise no import or export
taxes the government would instead make
its money from land
in hong kong the government holds
superior title to all land and leases it
to private parties for money
this created incentives for an economy
centered on ever-rising land prices and
trading financial or otherwise
by 1949 hong kong's biggest companies
were banks
land development companies and trading
houses
many former industrialists like lee
kashing had already closed their
factories and became landlords seeing it
as more profitable
those companies did not see a reason why
the government should intervene on
behalf of the manufacturing industry
thus the hong kong government opted to
retain a non-interventionist stance
manufacturing went elsewhere mostly to
china the result was a massive loss in
lower and middle income jobs for hong
kong and a massive doubling down by the
city on finance and trading
hong kong's economy stopped making and
exporting goods abroad it instead
focused even further on serving as a
value-added intermediary for handling
investments in cargo
international companies from the west
want to buy cheaply made goods from
china hong kongers with their british
heritage english language laws and
pro-business attitudes helped with this
in 1980 the service industry contributed
68 of hong kong's gdp
20 years later this would increase to
86.5 percent in 2019 it was 93.4 percent
the second biggest sector is
construction hong kong is today a
service economy that produces little
other than the efforts of its people
hong kong chief executives like tong
chihuahua and donald tsang would not
attempt to reverse the d manufacturing
trend they instead pushed the view that
hong kong benefits most when factors of
production capital and trade flow freely
between china and the west
the problem with this view is that the
more china reforms and opens up the less
hong kong service economy model produces
for its people and china has been
opening up a whole lot
the pearl river region is now one of the
top logistics and transport centers in
the world
shanghai in particular has been taking
on a lot of hong kong's service economy
functions too
many cities in the china mainland have
reformed their financial restrictions
allowing foreign capital to flow into
their ports and logistic networks
in 1997 hong kong handled 60 of china's
trade with the rest of the world
that has declined to 28 in 2007 and just
10 percent in 2020.
with the transport trade and logistics
sectors declining the only thing left
growing in hong kong has been its
financial services sector
in 2000 finance insurance and real
estate contributed 18 percent of the
hong kong economy
in 2019 that has grown to be nearly 30
percent and it is now pretty much the
city's only growth engine
but even that is starting to see
competition too as of late china has
been lifting foreign ownership
restrictions on its investing and
banking markets
in 2020 they allowed foreign banks to
completely own their chinese
subsidiaries later that same year they
did the same for securities and fund
management firms
now foreign companies can offer
financial products and services directly
to chinese consumers
a swath of foreign asset managers have
taken advantage
the world's largest fund manager
blackrock said the chinese market
represents a significant opportunity to
help meet the long-term goals of
investors in china and internationally
it also provides us an opportunity to
help address the challenge of retirement
for millions of people in china
in 2021 blackrock started offering their
first wholly owned mutual funds in the
country
so far the take-up has been looking
pretty good
the chinese investment market has been
full of scams and chinese people need
better ways to generate returns for
their money so good for them
but with other cities in china
increasingly becoming financial and
investment centers of their own what
would that mean for hong kong's future
economy what pathway remains for young
hong kongers towards wealth and economic
security
in previous years hong kongers just
bought a house but hong kong property
prices are now obscene
house price increases have far outpaced
wage growth most young hong kongers will
never have the chance to own their own
place furthermore the hong kong
government has tacitly acknowledged that
they can't do anything about it
the hong kong dollar is pegged to the
united states dollar and has been since
1983. this gives the government no
control over its interest rates policy
the city is already incredibly dense
much of the remaining undeveloped land
is locked up in agricultural land banks
owned by one of the big four land
development monopolies like sonohongkai
properties and ck hutchison holdings
limited attempts at housing price reform
during the 1990s failed and were quickly
rolled back after the 1997 asian
financial crisis and one has to
acknowledge that housing price reform
inherently means over leveraged
individuals taking losses on their
purchases
and lastly public spending for housing
as a percentage of gdp has not gone up
since 2005.
so
if you can't buy a house what to do the
hong kong government's new policy vision
is not quite clear their moves are
somewhat unstable
but it appears that their vision is of a
society where people with labor
flexibility can work in various
high-tech industries
they would then grow the money earned
from those jobs to build up their wealth
by investing in wealth building assets
this is exactly the type of vice that
any financial advisor and myself will
give you and it is indeed very sensible
advice
but the weird thing about extrapolating
individually sound financial advice to a
public policy for an entire society is
that something sort of breaks somewhere
along the way
first where are these high-paying
high-value jobs going to come from
crypto gods and finance tick-tock
influencers aside the majority of young
people will earn their wealth from work
salary and wages
the financial sector will not provide
enough of those even if hong kong
continues hosting more chinese ipos
the finance insurance and real estate
sectors excluding construction jobs
provide less than 10 percent of the
city's jobs
nearly 85 percent of hong kong's adult
population over 3.1 million people work
for one of the large service oriented
companies
supermarkets utilities business services
and the like
this part of the domestic landscape is
stagnant dominated by the city's massive
land developer business conglomerates
furthermore the anti-competitive nature
of hong kong's established markets make
it extremely difficult for any new
entrants to compete and gain share
this all contributes to the city's
massive and growing wage inequality
problem bankers and big ex make a whole
lot everyone else gets considerably less
and i don't actually see that as a major
problem so long there also exists a
ladder for everyone else to rise up on
too
but many of these service workers are
over-educated for the jobs they are
doing with few prospects for career
upgrading and that is bad
i do want to note that the government is
trying up until 2016 both government and
private capital mostly invested in
things that would strengthen what they
consider to be hong kong's competitive
advantage
in other words the service industry and
what they call their four key industries
financial services tourism trading slash
logistics and professional services
however in recent years attitudes have
begun to change the hong kong government
has realized that it needs to open up
new career pathways for its youths they
identified a few emerging industries to
develop industries that can help move
hong kong towards a knowledge-based
economy
cultural and creative which includes
games and software
medical services like medical tourism
education services like profit and
non-profit educational institutions
perhaps hong kong can benefit from the
mainland's recent crackdown on
for-profit education services
testing and certification like iso
certification services for companies in
the pearl river area
and especially key innovation and
technology which i argue the government
should be looking at most of all
new technologies and innovations are
powerful growth engines for young people
i don't know if these will work out to
anything in the end but it is good that
they are trying
the second major problem has to do with
the assets the hong kong government is
encouraging people to invest in and what
that means for the city's people there
is a little paradox at work here
new policies encouraging stock ownership
amongst hong kongers have succeeded
increased participation in the city's
stock markets
and the hong kong stock exchange has
become the go-to market for chinese
companies like dd and alibaba fleeing
unfriendly american capital markets
but i am not quite sure how giving
everyone a stock exchange account is
going to help the lower classes find
wealth or even financial stability
in 2015 a survey found that the average
hong kong retail stock investor was 47
years old and already makes
substantially more than the average
household income
it is not just because they have more
money to invest but because stocks are a
way to stay rich not get rich
i want to point out that hong kong
stocks are not really growing fast
enough to help your average hong kong or
salary ban catch up
over the past 10 years the hong kong 25
50 index fund returned just 8.2 percent
annually
the benchmark hang seng index fund has
done 3.56
total return over the past five years
the s p 500 on the other hand has
returned 16.6 percent annually
the reasons for this lagging performance
are myriad the various regulation issues
hitting maituan alibaba and 10 cent for
instance but that's for another video
the bottom of it is that many of hong
kong's listed companies operate and make
their money in the city the paradox is
that unless the economic environment
changes the actions those companies need
to take in order to become more
shareholder friendly and raise their
stock prices will also shift increasing
economic burdens onto its residents for
instance mass layoffs and moving
low-skilled workers into non-standard
employment
both of which contribute to income
insecurity
furthermore because hong kong real
estate has gotten too expensive for the
average hong konger to invest in
outright the city's government and its
financial sector have dug deep to find
new assets to package up into vehicles
for investors to invest in
these actions have benefited certain
members of hong kong's people
but at the cost of long-term detriment
to certain other city residents
here's two examples
in 2000 the hong kong government
partially privatized the hong kong mtr
the railway company is famous for also
being a land developer which helps with
the cost of building its railway
networks
after privatization the company stopped
receiving free land grants from the
government to develop new railway
extensions
rather than actually paying for its land
the company took up the more profitable
work of being a landlord
land development profits declined from
8.3 billion hong kong dollars in 2007 to
530 million hong kong dollars in 2016.
they make far more profit in land
management they have expanded their
landlord services to include advertising
and telecom services
one can argue that it's great that the
mtr is not a financial burden on the
government
but a mass transit company that is more
busy monetizing its existing mass
transit networks rather than extending
them is a bit of a long-term fail
following this up the hong kong
government sold the car parking and
retail facilities for its public housing
complexes to a real estate investment
trust called the link
ostensibly for raising funds for the
housing authority the link was ipo to
the markets
tenants criticized this move either
because the government sold those
facilities for too little or because it
would negatively affect the livelihood
of shop owners
both turned out to be true the ipo
subscribed to by retail investors by the
way valued the link at up to five times
its ipo price
then the link raised rents on its
tenants driving many of them into
economic hardship
there is no doubt that hong kong's
choices to demanufacture its economy and
double down on services and finance have
generated much wealth for a great deal
of people after all the hong kong
economy gdp has never been higher
and i have not talked about all the
people over in shenzhen who now can
afford a better home and lifestyle
thanks to its new manufacturing prowess
and who needs these dirty difficult and
dangerous manufacturing jobs anyway
people would rather be lawyers and
accountants than factory workers right
so don't get me wrong hong kong is still
a great place to be for a privileged
bunch a bunch which would probably
include yourself
but there is a world where hong kong
could have had all that in addition to a
sophisticated manufacturing sector
the electronics industry could have
ascended the technology ladder building
and exporting increasingly sophisticated
products
for instance a hong kong tsmc would not
have been out of the question
considering close ties with the west at
the time
there was an opportunity to transfer
considerable technologies and expertise
but they ended up just letting it go and
now hong kong doesn't produce things
that other people want so as a result it
turned everything it once had its public
goods and even its people into
investable assets or cash flow streams
at considerable cost to its majority
poor who now see no way out
a lesson an economic diversification
alright everyone that's it for tonight
thanks for watching
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