How Hong Kong can survive – even thrive – amid a decline in demand from mainland China

According to the just-published outline of the 13th five-year plan, China’s average annual rate of growth will slow from 7.8 per cent in the previous five years to over 6.5 per cent, and per capita disposable income will also fall, from 7.7 per cent to over 6.5 per cent. There is, however, no target for international trade, except that it will be optimised by increasing domestic value-added content in exports and both quality and quantity in imports. This may imply low or no growth in the gross value of total exports and a decline in the trade surplus.

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There is a commitment to orderly progress towards full convertibility of the renminbi. There is also an extensive discussion of the continuing liberalisation of both outbound and inbound investment.

In the Hong Kong and Macau chapter, Beijing reaffirms its general commitment to support the special administrative regions in developing their economies, improving livelihoods, advancing democracy and promoting social harmony. More specifically, the plan indicates support for Hong Kong in: first, consolidating and elevating its position as an international finance centre, transport and trade; second, developing and nurturing innovation and science and technology; and third, becoming an international legal, arbitration and mediation services centre.

The plan also indicates continuing support for Hong Kong as the leading offshore renminbi centre and an international asset management centre, and in increasing the value-added in sectors such as finance, trade, logistics and professional services. However, tourism from the mainland is no longer mentioned.

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The slowdown in growth rates means a potential reduction of demand from the mainland for Hong Kong goods, services and assets (including stocks and real estate). The potential reduction in mainland tariff and non-tariff barriers to imports and the progress towards full convertibility of the renminbi chip away at Hong Kong’s comparative advantages. Mainland tourist expenditure here has probably already peaked. All of this means Hong Kong cannot expect to continue to prosper by doing “business as usual”. It needs to reinvent itself.

The city can establish itself as the regional securities (both bonds and stocks) market, so that all East Asian – not just Chinese – enterprises and governments come to Hong Kong to raise capital and issue equity and debt, and investors worldwide only need to come to Hong Kong to invest in all East Asian economies, in bonds, stocks and private equity (including venture capital).

The securities can be denominated and traded in either US dollars or renminbi. The non-Hong-Kong stocks will be listed and traded in Hong Kong in the form of Hong Kong depositary receipts as a secondary listing. The basic idea is to have all the major East Asian blue-chip stocks list and trade in Hong Kong. The city must also work hard to develop an active, deep and liquid bond market for both short and long maturities.

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The successful creation of a deep and wide East Asian securities market will attract global and regional financial institutions to establish their headquarters here. It will also encourage major multinational financial and non-financial corporations to set up their treasury operations here. An East-Asia-wide securities market also fits in with Beijing’s “One Belt, One Road” initiative.

This strategy requires a proactive Hong Kong government to plan for the long term and to rally everyone in the city, including its major corporations, to work together to succeed. It will also require the support of the central government, not only because mainland investors will supply much of the funds but because Beijing can also help persuade other East Asian economies to come along.