Hong Kong: A globally fluent metropolitan city - Greg Clark and Tim Moonen
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Hong Kong: A globally fluent metropolitan city Greg Clark and Tim Moonen June 2014
2 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase Hong Kong: A globally fluent metropolitan city
Introduction to the Brookings JPMorgan Chase GCI This first phase of the project produced a number of
Global Fluency project important insights:
Between autumn 2012 and spring 2013, a Brookings • Cities at are at different stages in the path towards
Institution team based in Washington, D.C. and London seamless engagement with global markets. They
began to formulate the idea of ‘global fluency’ and the first become globally aware (stage 1); later they
traits cities require to achieve it. The project evolved build a global orientation (stage 2); and finally
from the observation that in an increasingly intercon some become fluent in their communication with
nected world economy, cities exhibit different degrees the global economy (stage 3).
of global understanding, competence, behaviour, and • Cities accumulate characteristics over multiple
reach, that affect how they optimise their role in glo business cycles that later translate into instinctive
balisation and ultimately impact on future progress. pro-activity and intentionality in overseas markets.
The target audience is metro area leaders and • Cities tend to embrace international opportunities
economic development practitioners who desire in waves and cycles, due to deliberate decisions by
to be more intentional about the global futures of leaderships to become more globally engaged.
their regions. With the support of an International • New pathways to enter and succeed in globalisation
Advisory Board and experts across academia and the are opening up all the time, with more cities than
private sector, the team began an exhaustive review ever participating in the most recent cycle.
of literature on cities in the global economy, and
assessment of city performance. This helped identify
JPMorgan Chase and Brookings are now expanding the
the ‘10 traits’ of globally fluent cities and city regions:
research scope as part of a second round of concept-
testing. Hong Kong is the first case study to feature in
i. Leadership with a Worldview
this second phase.
ii. Legacy of Global Orientation
iii. Specializations with Global Reach
In May 2014 JPMorgan Chase hosted a dinner
iv. Adaptability to Global Dynamics
discussion about Hong Kong’s global future. The
v. Culture of Knowledge and Innovation
dialogue was hosted by Nicolas Aguzin, Chairman and
vi. Opportunity and Appeal to the World
CEO J.P. Morgan Asia Pacific, and Peter Scher, Vice
vii. Universal Connectivity
President Public Affairs and Philanthropy, JPMorgan
viii. Ability to Secure Investment for Strategic
Chase, and moderated by Greg Clark, Global Fellow
Priorities
of the Global Cities Initiative of Brookings Institution
ix. Government as Global Enabler
and JPMorgan Chase. The Guest of Honour was CH
x. Compelling Global Identity
Tung, formerly Chief Executive of Hong Kong. A draft
version of this paper was debated and discussed by a
In the first round of research, the team tested the
senior audience with discussion panellists Prof Michael
validity of the 10 traits hypothesis by preparing case
Enright Sun Hung Kai Professor, University of Hong
studies on 42 metropolitan areas, verifying their
Kong , Mr Nick Brooke, Chairman Professional Property
findings with local experts. The case study cities were:
Services Limited and Chairman of the Hong Kong
Harbour, and The Hong Kong Science Park and David
Bangalore, Barcelona, Bilbao, Boston, Brisbane, Busan,
O’Rear, Chief Economist, Hong Kong General Chamber
Cape Town, Chicago, Colombo, Denver, Greenville,
of Commerce.
Hamburg, Helsinki, Istanbul, London, Los Angeles,
Mexico City, Miami, Milan, Minneapolis-St. Paul, Moscow,
The authors wish to thank Prof Michael Enright, Nick
Munich, Nairobi, Nanjing, New York, Omaha, Oslo, San
Brooke, and David O’Rear for their extensive help with
Antonio, San Francisco, San Jose, São Paulo, Seattle,
the development of this paper.
Shenzhen, Singapore, Sydney, Tel Aviv, Tokyo, Toronto,
Vienna, Washington, DC, Wichita and Zurich.
Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase 3
Executive Summary
Hong Kong today plays five inter-locking global, regional, metropolitan, and local economic roles that
underpin its global fluency:
i. The leading Asia-Pacific finance and business hub and decision-making centre for global firms.
ii. The primary business, investment and capital-raising gateway into and out of China.
iii. The key port and managerial locus for the Pearl River Delta, and one of the world’s most productive regions
for export-oriented manufacturing.
iv. An entrepreneurial city of agile and opportunist firms serving Chinese and global markets.
v. An international centre for tourism and higher education.
Hong Kong took a unique pathway into the global economy that shaped its DNA as a city of trade and
opportunity. Its early success as an entrepot evolved as a product of its compact gateway location, its deepwater
port, its British legal and financial frameworks, its bilingual culture, enabling government framework, and its
open-ness to absorbing talent and entrepreneurship. Each has endured through Hong Kong’s journey from
trading port to labour-intensive industry, high value-added production, and most recently to internationally
traded services and supply chain management.
Hong Kong is almost peerless as a node for finance, investment, port traffic, air cargo and tourism. However
the city faces a number of strategic issues over the next decade that will require policy and leadership
innovation:
i. In which ways will Hong Kong best serve the emerging Asia-Pacific urban system? The future shape of
the Chinese and Asia-Pacific city systems is not yet visible. It will take at least another decade before it is
clear if China will have five or 15 first-tier cities, and how many of these will be fully globalized. Nor is it
clear how many leading cities there will be across the rest of the Asia-Pacific. Hong Kong will need strategic
flexibility to serve this expanded network of large market centres. Opportunities need to be explored and
developed in trade facilitation, export management and co-ordination, corporate and inter-governmental
decision-making, business capitalisation, executive education, cross-border R&D, regional enterprise, and
international wealth management.
ii. How can Hong Kong optimise its political relationship with China to sustain business confidence, and
to ensure that the most effective complementary roles with the Pearl River Delta and with Shanghai
are achieved? The ‘one country two systems’ approach has been a remarkably successful experiment
since 1997. Hong Kong now needs a longer-term perspective, up to 2047 and beyond. Even if the Chinese
government may not wish to be tied publicly to a long-term vision for the city, Hong Kong requires an open
dialogue of ideas and propositions about its future. It is well-positioned to guide the PRD’s rapid transition
towards innovation-led development, and stay open to talent and ideas, if it can steer a careful and mature
negotiation of its future with the Mainland.4 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase Hong Kong: A globally fluent metropolitan city
iii. Can progress on liveability and sustainability remain competitive with other leading global cities? Hong
Kong’s status as a place to live is threatened by problems associated with polluting emissions, strained waste,
water and health systems, and gaps in education provision. These limitations affect Hong Kong’s attraction to
talent in a more intensified regional and global system.
iv. How can Hong Kong manage the housing and affordability pressures of its growth model? The city must
adjust to population growth of over 400,000 a decade, and rising expectations of citizens, but it does not
yet produce enough homes of the right quality to keep housing affordable. A low share of owner-occupation
limits the amount of equity created and affects the capacity to plan for an aging society. The city needs to
agree upon and pursue some mix of urban restructuring, increased densities, and Hong Kong-managed
‘satellite communities’ in the wider region.
v. Can Hong Kong guarantee future fiscal stability in the face of spending pressures? By relevant global
standards, the city’s fiscal model is strong, creates large surpluses, and has been successful at achieving ‘buy
in’ from all income groups. However it does have imbalances and depends heavily on a low share of salaried
taxpayers, and on mobile corporate profits. There is also a potential mismatch between capital and land
revenues, on the one hand, and capital and non-regular spending, on the other. Without some evolutionary
reforms, Hong Kong may find it harder to address an aging society and high demand for housing, welfare
and infrastructure. New strategies, including towards debt financing and cost recovery, may be needed to
safeguard the city’s reputation as a place of opportunity, and to bring forward new land for development. The
city has room to manoeuvre given its very large accumulated fiscal reserves and low debt.
vi. Is Hong Kong able to scale entrepreneurship and technology-led innovation? Hong Kong requires proactive
governance, investment and business leadership to ensure its ICT systems are prepared for its financing and
co-ordination of science and technology sectors across the Pearl River Delta region. It also needs to promote
enterprise within education and governance systems, to ensure that entrepreneurship can co-exist with a
growing corporate, institutional, and private equity presence. As Hong Kong’s knowledge economy grows,
more university degree places are also essential to meet higher education aspirations.Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase 5
1. Introduction and core data
GaWC GDP/c
Share Share # Global
Glob Growth
GDP1 National GDP/Capita Population/m National 2000
al City 1993
GDP Pop. HQs
Ranking 2012
US$273bn 100% $38,000 7.2 100% 3 46 2.7%
Hong Kong is the world’s 19th biggest metropolitan economy, and just inside the top 50 by population, but it
is one of the world’s most important and influential urban centres. The city is globally competitive in terms of
specialized functions and quality, and also draws upon the assets and markets of its 57 million person Pearl River
Delta hinterland on the Chinese Mainland.
Hong Kong urban area26 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase Hong Kong: A globally fluent metropolitan city
2. Recent benchmark performance
2.1 Strengths of Hong Kong
Hong Kong is rated among the leading quartet of business and financial services centres globally, and has been
for the last decade. Along with Singapore, it has become part of an expanded ‘Big Six’ world cities (with London,
New York, Paris and Tokyo) that stand out not just because of their globalised services economy, but also their
investment, knowledge production, talent and tourist attraction, and R&D strengths.3
The city’s success as an attractive and vibrant commercial gateway allows it to play a series of inter-locking
global, regional, metropolitan, and local economic roles:
i. It is the main Asia-Pacific finance and business centre with a large concentration of global firms serving
the whole region. Although Singapore’s independence is an advantage for private asset management, Hong
Kong is far ahead in terms of its equity market and stock market liquidity. The city also enjoys ‘first-mover’
advantage in RMB-finance, and accounts for over two-thirds of the world’s offshore RMB current payments,
well ahead of Singapore, London and Frankfurt.4 Hong Kong is beginning to play the same roles in the Asia-
Pacific that London and New York play in their respective time zones.
Rank globally Rank in Asia-Pacific Total
Integration into global network of ad
3 1 -
vanced producer services firms
Global Financial Centres Index 3 1 -
Investment management 3 1 -
Professional services 3 1 -
Government & regulatory 3 1 -
Banking 2 1 -
Insurance 4 2 -
Number of $1bn+ companies 11 5 96
Number of large foreign subsidiaries 21 6 27
Source: GaWC (2013);5 McKinsey Global Institute (2013)6; Z/Yen (2014)Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase 7
ii. It is the primary business and investment gateway into and out of China, combining unique access
to Chinese products and markets with a trusted, stable, and conducive business climate, operating to
globally recognised standards. Hong Kong now hosts the largest amount of direct real estate holdings
by value ($800 billion) of any global city, because of the weight of mainland Chinese investors.7 Chinese
firms also use Hong Kong as a capitalisation platform — nearly half of the 1600 firms on the HKSE are
from the Mainland.
Total Rank globally Rank in Asia-Pacific
Greenfield Investment
1,142 3 2
projects, 2009-2013
Inward investment proj
ects in strategic func 62 6 2
tions, 2012
Foreign investment city
- - 1
of the future
Source: KPMG (2014);8 fDi Intelligence (2013).9
It is the professional services hub city and key port of the Pearl River Delta, the world’s
most productive region for export-oriented manufacturing. As a city of trade, wholesale and
retail employment occupies a higher share than in any other major international centre (24%).10
The city is one of the world’s most service-oriented economies, as services sectors account for
over nine-tenths of GDP.11 Many of these service functions support trade and cross border capi
tal investment.
iii. It is an entrepreneurial city of dynamic smaller and medium sized firms serving Chinese and
global markets. Over 310,000 SMEs employ 1.3 million workers, mostly across trade, wholesale,
retail, professional and personal services sectors.12 Hong Kong’s commercial ethos also hinges on its
attractiveness as a highly efficient place to do business.
Ranking of Hong Kong in the World Economic Forum’s 2013-2014 national-level competitiveness indicators
Rank globally
Trade barriers 1
Hiring and firing practices 1
Ease of access to loans 2
Burden of customs procedures 3
Wage flexibility 4
Days to start a business 5
Effect of taxation on incentives to invest 6
Intensity of local competition 7
Co-operation in labour-employer relations 8
Source: WEF (2013); World Bank/IFC (2013)138 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase Hong Kong: A globally fluent metropolitan city
iv. It is a global hub for tourism and higher education. When Chinese visitors are counted, Hong Kong
attracts a higher number of overseas visitors than any other city.14 It is also one of only eight cities (along
with London, Boston, New York, Stockholm, Paris, Los Angeles and San Francisco), and unique in Asia, to be
home to three universities in the global top 150 — the University of Hong Kong, Chinese University of Hong
Kong, and the Hong Kong University of Science and Technology.15
Total Rank globally Rank in Asia-Pacific
International overnight
8.7m 11 4
visitors
Most popular cities to
- 8 2
work, rest or play
# of top 150 universities 3 7* 1
# of top 100 MBAs 2 10* 3
Source: Ipsos-Mori (2013)16; Mastercard (2013)17; Times Higher Education (2013).18
* based on number of universities and then aggregate score based on ranking position.
Hong Kong’s areas of strength in PwC’s 2014 Cities of Opportunity study19Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase 9
Hong Kong’s ability to play these five roles simultaneously gives it a unique position in the Asia-Pacific. As
such, the widespread perception of zero-sum competition with Singapore, Shanghai and even Shenzhen under
estimates Hong Kong’s distinct character, assets and capabilities. For example, the perceived ‘threat’ of Qianhai
special economic zone in Shenzhen now appears as an opportunity for Hong Kong service sectors to extend
their knowledge and practices to the Mainland. Hong Kong already occupies a discrete role in the emerging
Asia-Pacific system, where large competitive cities benefit from regular interaction. It can continue to develop
complementary relationships with, and services for, other major cities in the local and wider region.
“When Hong Kong succeeds, China will benefit. And when China succeeds, Hong Kong will benefit
even more.”
CH Tung, former Chief Executive, Hong Kong SAR government
2.2 Challenges for Hong Kong
Hong Kong’s main areas of challenge are linked to managing growth and cost pressures. The city faces challenges
around affordability, air pollution, waste and water systems, housing, international schools, and rising public
education and health system strains, all of which put it outside the top 20 in several liveability and sustainability
indices.20 These issues combine to deter some talented and wealthy people and families from staying or moving
to the city.10 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase Hong Kong: A globally fluent metropolitan city
Hong Kong’s areas for improvement, based on PwC’s 2014 Cities of Opportunity study
Hong Kong’s negotiated political future and strategic vision with its regional hinterland is another challenge for
competitiveness. High-innovation businesses are dispersed across the PRD region and not clustered only in Hong
Kong, given limited land, and competition for space from Hong Kong’s other chief specializations.21 In 2014 the
government is proposing an innovation and technology bureau to boost value-added from science sectors. This
new centralised body would take on responsibilities from the Innovation and Technology Commission and the
Office of the Government Chief Information Officer.22
Hong Kong is also not yet a global centre for decision-making on a par to London’s role in Europe or New York’s
role in North America. The city does not quite host the same critical mass in terms of corporate, institutional,
media or inter-governmental decisions. It requires a long-term focus on becoming the obvious centre for
decision-making in the Asia-Pacific.
“Hong Kong needs to become less like the moon and more like the sun, generating more light rather
than reflecting light generated elsewhere.”
Michael Enright, Sun Hung Kai Professor, University of Hong Kong
In a similar vein, Hong Kong’s cultural offer is not as deep as that found in New York or London. Theatre, film,
musical and artistic performances are less frequent than many other international business centres. Two of its
challenges are to leverage the potential of the delayed West Kowloon Cultural District, which will add a number
of performance landmarks, and to increase demand for employment in the cultural industries. Only 4% of the
city’s workforce is employed in cultural professions, compared to 5.6% in London, 5.8% in New York and 7.1%
in Paris.23
Hong Kong’s cultural output compared to other leading cities
International
Theatre perfor Music perfor
Museums students/ Cinemas
mances/ ’000 mances/ ‘000
‘000
Paris 27 137 97 302 33
New York 43 131 61 501 22
London 33 173 99 108 17
Seoul 67 147 37 71 9
Tokyo 25 47 43 334 8
Singapore 2 53 92 239 2
Hong Kong 6 32 18 46 2
Source: World Cities Cultural Report (2013)24Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase 11
Nevertheless, given Hong Kong’s record of attracting talent and ideas, its famous action cinema industry, and
being home to two of the top three Asian universities for arts and humanities provision, it can become an even
more established cultural centre in the whole region.25
The Top 10 universities in the Asia-Pacific across each faculty
Arts and Hu- Clinical,
manities Pre-clinical and Engineering
Technology
and Life Sciences Physical Sci-
ences Social Sciences
Health
1 Univ. of Mel Univ. of Mel National Univ. of The Univ. of Tokyo The Univ. of Tokyo Univ. of Mel
bourne bourne Singapore bourne
Australian Nation Hong Kong Univ. Univ. of Mel Australian Nation Australian Nation
2 al Univ. Univ. of Sydney of Science and bourne al Univ. al Univ.
Technology
Univ. of National Univ. of
3 Univ. of Sydney The Univ. of Tokyo Tsinghua Univ. Queensland Aus Peking Univ. Singapore
tralia
Univ. of Korea Advanced
4 The Univ. of Hong Queensland Aus Institute of Kyoto Univ. Kyoto Univ. Univ. of Sydney
Kong tralia Science and Tech
nology
Univ. of
5 Monash Univ. Monash Univ. The Univ. of Tokyo Australian Nation National Univ. of Queensland
al Univ. Singapore Aus
tralia
6 National Univ. of National Univ. of Seoul National Osaka Univ. Tsinghua Univ. Peking Univ.
Singapore Singapore Univ.
7 Univ. of Auckland Kyoto Univ. Univ. of Mel Univ. of Sydney Tokyo Institute of The Univ. of Hong
bourne Technology Kong
Univ. of Seoul National Nanyang Techno The Univ. of Hong Univ. of New
8 Queensland Aus Univ. logical Univ. Monash Univ. Kong South Wales
tralia
Korea Advanced Hong Kong Univ.
9 Macquarie Univ. The Univ.
Kong
of Hong Kyoto Univ. Univ. of Western
Australia
Institute of
Science and Tech ofTechnology
Science and
nology
Pohang Univ. of Univ. of
10 Chinese Univ. of
Hong Kong
Univ. of New
South Wales Science and Tech Seoul National Queensland
Univ. Aus The Univ. of Tokyo
nology tralia
Source: Times Higher Education (2013)2612 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase Hong Kong: A globally fluent metropolitan city 3. Hong Kong’s journey into and through globalisation. What kind of economic and development trajectory has it taken? What has changed over time? Hong Kong’s record of international exchange began after the arrival of the British colonial forces in 1841. It was initially dismissed by British Foreign Secretary Lord Palmerston as “a barren island with hardly a house upon it”.27 Over the next two decades, however, its business climate advantages saw it gradually become an enclave entrepot economy supplying distant markets across Asia and the British Empire, which became its defining economic role for over a century. The city quickly gained credibility as a reliable, low-tariff and commercially diverse trading and trans-shipment centre, as well as a staging post for Chinese emigration. A new Chinese business elite took advantage of opportunities to embed the colony into pre-existing Asia-Pacific finance and commerce networks. By the 1860s, Hong Kong already had very strong connections with San Francisco, Malacca, Manila and Sydney, among many others.28 The Hong Kong Shanghai Bank (now HSBC) was established in the new city in 1865 to service East Asian trade, and the Stock Exchange opened in 1891. The city became the preferred regional head office location for expanding multi-national corporations. It also became a base for Asian revolutionaries such as Sun Yat-Sen and José Rizal in the 1890s, and later Ho Chi Minh in the 1930s. 3.1 Stability amid conflict: an Asian safe haven and trade platform Hong Kong’s transformation from entrepot to industrialised global hub accelerated after the Second World War Japanese occupation and the turmoil of the Chinese Civil War and Korean War. The arrival of wealthy Shanghai- based entrepreneurs, along with many other lower-skilled Chinese refugees, saw the population quadruple in the ten years up to 1955. This influx presented very large housing, health and employment demands. Deprived of its key local trade market with China, and having absorbed Chinese industrial entrepreneurship and technical knowledge, Hong Kong’s businesses began to develop their own industries that could compete in a re-globalizing economy.29 The refugee population quickly filled new roles in the labour-intensive electronics, plastics and textiles sectors, where Hong Kong became a ‘first-mover’ in Asia. The international activity of firms in these sectors was largely financed by local British banks that had the financial resources and expertise to optimise the export process. A tacit diplomatic agreement between the UK and China allowed Britain to retain its presence and influence as long as Chinese interests were not challenged. 3.2 Enterprising colony As a British colonial ‘protectorate’, with relatively limited administrative roles and scope for strategic vision, the Hong Kong government initially adopted a laissez-faire economic policy with few long-term capital- intensive investments or planned sector and technology advances. The city competed on its strategic location, enabling business climate, and the entrepreneurial flair and flexibility of so-called ‘guerrilla’ business strategies that quickly identified and exploited short and medium term profit opportunities.30 This model of economic development achieved consistent annual growth rates in excess of 6%.
Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase 13
As wage and production costs grew, Hong Kong’s entrepreneurs gradually added to the production base by
moving into more diversified and higher value-added production — focusing mostly on banking, insurance and
shipping. The expanding and maturing business sector was influential in convincing the government to construct
the city’s first subway system, which became operational in the 1970s. This maturity has also seen city firms take
a leading role in setting up, directing, and managing activities for the local and global economies.31
3.3 Pearl River Delta region
The lifting of the moratorium on foreign banks in 1978 and the opening of the Shenzhen Special Economic
Zone in 1980 began a new phase in Hong Kong’s evolution. Competitive pressures meant the city’s industrial
base mostly relocated to the neighbouring Pearl River Delta region. Access to a large workforce in cities such
as Shenzhen and Guangzhou meant manufacturing joint ventures, managed and financed in Hong Kong, soared
in number. Local capital was well placed to enter the regional subcontracting market that became key to global
supply chains of consumer goods.
The 1984 Joint Declaration provided vital assurances to the international business community about Hong
Kong’s post-1997 future, accelerating the city’s transition. Total manufacturing employment nearly halved in the
decade from 1985 as it rapidly grew service-based activities — including a new wave of tightly clustered business
and professional services. The city’s container port at Kwai Chung grew sharply as export-processing industries
mushroomed in the PRD, largely owned and managed by Hong Kong firms. Soon it had become the financial
centre and international managerial node of a much larger functionally integrated economic region, based on a
“front office, back factory” model.32
3.4 Adjusting to change and challenge
By the mid-1990s, many commentators predicted a gradual decline in Hong Kong’s international hub status,
as political uncertainty coincided with an entrepreneurial brain drain.33 But the city’s post-1997 status within
the ‘one country, two systems’ framework in fact fostered an expansion of international influence to maintain
its role within China.34 Despite the impact of the Asian financial crisis and SARS, the city responded by pro-
actively sponsoring a new cycle of redevelopment to strengthen and diversify its services offering. Many strategic
initiatives were brought forward to upgrade key infrastructures, urban development and culture, at the same
time as maintaining an appealing business climate. Its status as an autonomous region has been highly attractive
to foreign investors seeking access to the Chinese market without the uncertainties of Chinese corporate law.35
“What financed China’s development was Hong Kong’s US$500 billion direct investment, followed by
an additional US$500 billion raised on its stock market.”
David O’Rear, Chief Economist, Hong Kong General Chamber of Commerce
Despite the significant impact of the North Atlantic financial crisis on trade demand, Hong Kong has continued to
benefit from its gateway access to the emerging mega-economy of China. It has become the dominant centre for
the offshore renminbi trading and deposit market, as its low costs of currency trade and exchange remain highly
attractive. The city is still the world’s second largest IPO market behind the NYSE, and the rigour of its Securities
and Futures Commission in relation to tech IPO listings signals a disciplined commitment to an independent rule
of law.3614 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase Hong Kong: A globally fluent metropolitan city Hong Kong is Asia’s primary innovator in financial services, selling products that are developed in London or New York. A huge number of global decision-makers have a presence in the city, and the only major difference with its Anglo-American counterparts is that a lower proportion of local headquartered entities are globally important. It hosts the 11th biggest concentration of large ($1 billion+) companies in the world, and the 4th highest in Asia.37 3.5 Tackling the consequences of growth and success Hong Kong authorities now face important decisions regarding air quality, waste and water systems, the future energy mix, property affordability, fiscal planning and economic inclusion. The former are being addressed in the 2014 Hong Kong Budget by a set of ‘Liveable City’ initiatives for vehicle emissions, fresh water sources, and sewage treatment.38 The latter is highlighted by the fact that just over one million of the population claim social security.39 The post-tax Gini co-efficient, at 0.475, is also higher than either Singapore, London or Paris.40 Dense new town developments in Tuen Mun, Yuen Long and Kam Tin are projected to absorb some of the planned growth, but form just part of the overall picture, which may also include the resumption of land reclamation outside Victoria Harbour and around Lantau Island, as earmarked in The Hong Kong CEO’s 2014 Policy Address.41 Hong Kong’s system of public service and subsidy in housing, welfare and education, which has been sponsored by upper income workers as well as land receipts and other revenues, has been an effective model for achieving ‘buy-in’ from all income groups. Access to public housing and low cost healthcare and education remains extensive. The fiscal model, though strong, may need attention because of a potential structural deficit by the 2020s brought on by an aging society and decelerating growth. Recurrent spending on key services is beginning to grow by more than 5% annually, running ahead of GDP and revenue growth. A new low-income working family allowance, for example, will cost HK$3billion (US$400m) a year.42 Infrastructure financing needs are also growing. Capital revenues have risen at 1.7% per year since 1997 but capital spending has increased at a rate of 6.8%, while other non-recurrent spending has grown above 10% a year. Currently, government revenues are reliant on salaried taxpayers, who comprise a fifth of the workforce, corporate profits tax, and relatively volatile land sales and stamp duty from the property and equities markets. These four sources account for about two-thirds of revenue at present. A new Working Group on Long-Term Fiscal Planning aims to achieve a more diversified tax base with more stable sources of income to maintain the city’s prodigious record of investment.43
Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase 15 Breakdown of Hong Kong government revenue and expenditure 3.6 Dialogue for the future with China Hong Kong has also had to modify its engagement with the wider Pearl River Delta region, with which it had previously refrained from developing close relations and inter-government cooperation.46 The Greater PRD region (PRD plus Hong Kong and Macau) is evolving from production-driven development toward innovation- led development. Manufacturing hinterland cities are seeking more producer services business, R&D clusters, and global services roles — in sectors such as cars, pharmaceuticals and petrochemicals. Some no longer see themselves as so fully dependent on Hong Kong’s banking, insurance, logistics and services expertise. The planned Qianhai financial, logistics and IT zone in Guangdong is one example of a Chinese-led policy that needs careful input from Hong Kong in a highly politicised context. Another is the future of regional airport provision; capacity constraints in Hong Kong are predicted from 2016 onwards, and there is scope to share regional airports, if the political risk is well-managed. Given intense cross-border rail and road integration, Hong Kong is de facto moving towards a more unified economic region of collaboration and partnership with the PRD that maximises efficiency and complementarity. Chief Executive CY Leung’s 2014 Policy Address acknowledges the strategic ambition to “strengthen co-operation with the Mainland…in every aspect.”47
16 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase Hong Kong: A globally fluent metropolitan city Hong Kong’s leadership has begun to explore opportunities to extend its influence on the Mainland, in the form of neighbourhood and community management services close to the city. This stewardship of satellite communities may prove part of the solution to the city’s housing demand, alongside housing development in the New Territories and regeneration on Hong Kong Island, where increased land sales aim to yield 20,000 private homes for development annually.48 At the same time, Hong Kong’s developers and urbanists are also creating solutions for cities in the PRD and across China. The city is therefore becoming something of a laboratory for Chinese (and Asian) urbanism. This is a significant role, especially as the precise future political arrangements with China are not entirely clear, and will need to be managed as long-term investment horizons begin to reach the 2047 expiry of the city’s SAR status. Hong Kong is therefore well placed to retain a key role in China’s economy as a platform for global leadership that welcomes external participants and influences. Although its post-2047 vision is not yet set out clearly, the city’s Chambers of Commerce, and many other business and civil society groups, are active in the debate to ensure a prosperous future for Hong Kong.
Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase 17
4. Elements of international and global orientation — In what
ways is Hong Kong globally connected and relevant?
What sort of trade patterns does it exhibit?
Hong Kong’s major international role is in connecting a dynamic fast-growth Asian region to the global economy.
In most respects it is not directly competitive with other top six world cities, but succeeds in positioning itself as
the most experienced, capable and liveable node (along with Singapore) connecting Asia to the rest of the world.
“Hong Kong is a living laboratory for urban China and urban Asia.”
Nick Brooke, Chairman Professional Property Services Limited
Hong Kong ranks third among countries in terms of global foreign direct investment inflows, attracting $75 billion
in 2012 alone.49 It also hosts the fourth busiest container port in the world, with a consistent 23 million TEU,
recently overtaken by its neighbour Shenzhen, whose port facilities and trade activities are largely owned by
Hong Kong businesses.
The city’s Chek Lap Kok airport is still the biggest international air cargo port in the world, ahead of Memphis and
Shanghai. It is also expected to enter the top 10 busiest for passengers in 2014 by overtaking Dallas/Fort Worth,
surpassing 60 million passengers annually.50
Despite accounting for just 0.1% of the global population, Hong Kong accounts for 2.8% of global trade, and is
a net exporter of services, to the tune of HK$170 billion annually, equivalent to more than a quarter of GDP.51
Mainland China is by far the largest source of Hong Kong’s imported goods, and has been growing at a rate of
5-7% per year. Japan is the second largest source of imports, but the total volume is steadily decreasing, while
Taiwan, Korea and the United States are growing their exports to the city.
Hong Kong’s record of trade goods exports, re-exports and imports since the GFC52
2013 Exports 2013 Re-exports 2013 Imports
Country HK$ Change Country HK$ Change Country HK$ Change
billion since bil- since billion since
2007 lion 2007 2007
China 24.8 -39% China 1920 +51% China 1942 +46%
USA 5.4 -78% USA 326 -5% Japan 286 -1%
Singapore 2.5 -17% Japan 134 + 15% Taiwan 262 +28%
Taiwan 2.4 -40% India 83 +144% Singapore 246 +26%
Vietnam 1.9 +155% Taiwan 75 +53% USA 220 +58%
Macao 1.8 +10% Germany 74 +5% Korea 159 +33%
Switzerland 1.5 +49% Korea 73 +43% Malaysia 88 +39%
Hong Kong’s trade flows are dominated by the re-export trade with China. Over 98% of exports are re-exports
rather than domestic exports. While exports have slowed to most nations since 2010, the re-export trade with
China, Japan, India, Korea and Germany continues to grow.5318 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase Hong Kong: A globally fluent metropolitan city
5. Key traits of global fluency: to what extent is the city’s
international dimension inherited or intentional?
Given its status as a top tier global city, it is not surprising that Hong Kong strongly exhibits nearly all of the
10 traits of global fluency (see chart below). Like other enduring trading cities, international commerce has
been fundamental to the city’s purpose and success. It has acquired an unusual capacity to adapt to new trends,
maintain its appeal regionally, and secure the investment and political support for necessary upgrades to its
infrastructure platforms.
Hong Kong’s wheel of global fluency
Compelling Leadership
Brand with a
Identity Worldview
Legacy of
Enabling Global
Government Orientation
Securing Distinct
Investment for Specializations
Priorities
Universal Adaptability
Connectivity to Global
Culture Dynamics
of
Opportunity Knowledge
and Appeal and
Innovation
The traits where Hong Kong appears to require most vigilance are traits 1, 6 and 9. First, Hong Kong has a
profound reputation for opportunity and appeal (Trait 6) that continues to be nourished by the city’s immigrant
and expat networks, and its language proficiency in Cantonese, Mandarin and English. But retaining this
reputation in the future will depend upon how well it can address the housing, education and quality of life
challenges that are a product of Hong Kong’s recent growth and success.
Second, Hong Kong’s unique political and cultural experiment continues to succeed but does not provide
articulated certainty as to the ongoing worldview of its leadership (Trait 1). The city’s future vision as negotiated
between the Hong Kong and Beijing governments over the next decade (Trait 9) will need to balance its global
relationships with an emphasis on its role with the Mainland. Getting the balance of open-ness, democratisation
and press freedom right will be critical for Hong Kong’s business confidence.Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase 19 As with other long-standing global cities, Hong Kong’s trading history is critical to it acquiring an international orientation and later global fluency (Trait 2). Its early assets that enabled trading functions were its location on the South China Sea and high-quality deep-water port (Trait 7). These remain key advantages to the city’s position as a connective centre of pan-Asian trade. Its crossroads status within Asia also enables it to be a primary gateway to, and also from, the continent. Previous generations of migration during economic boom years as a trading and manufacturing centre meant that Hong Kong has possessed the language skills, family connections, and familiarity with business and cultural practices to successfully innovate and enter new markets (Trait 5). Hong Kong’s constrained physical location has not only offered the advantages of leveraging density and fostering strong links between transport and land-use. It has also allowed the city to become the world’s access point to China and its development. In the second half of the 20th century its location made it the natural place for commercial and political representatives to gain information and intelligence about China. More than 100 countries now have consul-generals or vice-consuls stationed in the city, most of them along the northern fringe of Hong Kong Island. Hong Kong’s vibrant media sector also has a much freer flow of information with less governmental interference than in other Asian cities. A history of British and Chinese influence also saw Hong Kong evolve as both a quintessentially Chinese city and one governed according to global business norms. The British jurisdiction, legal and policymaking apparatus offered stability and predictability that was a prerequisite for international trade. Its bi-lingual culture, links to the entire Commonwealth network, and adherence to British (and therefore global) accounting standards and other professional qualifications, ensured Hong Kong was long preferred to Shanghai by British and European trading firms as a headquarters or meeting place.54 Links to London have created a network of commercial intelligence and political influence that traders found highly beneficial. These foundations, laid long ago, remain important. The city’s legal system is a central pillar of resilience against the rise of alternative global financial centres. Hong Kong’s relationships with London and New York continue to be important ingredients of its global embeddedness. Hong Kong’s global capability is down to much more than historical legacy, however. It is also due to in large part to a consistently conducive government framework (Trait 9). This extends beyond a reliable low tax and low trade tariff policy. The government has been careful to ensure that the public sector does not encroach onto private sector activity, seeking only to set and referee fair rules to the market game.55 Private firms have been given scope to run important city services and functions, and it is the government framework ensuring that these services are maintained to a high relative standard. The government has also successfully used land to intervene strategically to manage growth, especially since 1945. In the 1950s and 1960s, ambitious public housing and SME re-location programmes prompted systematic land-use and transport planning across the whole territory, resulting in the 1989 Port and Airport Development Strategy and the 1991 Metroplan. These strategic initiatives and investments have helped the city prepare 21st century infrastructure (Trait 7). They are being matched by government capital spending of over HK$70 billion ($9.0 billion) a year up to 2018 on major projects on Lantau Island and around the international airport.56 This connectivity investment is complemented by the transformative impact of high-speed rail in China, which has changed spatial business dynamics and is creating opportunities to engage with all the country’s larger cities. Financing infrastructure has been supported by the highly effective use of land for commercial purposes by government-owned institutions such as the MTR Corporation, using instruments such value capture finance (Trait 8).57 The next phase of enabling government will require vision and support for lasting solutions to decelerating productivity, to the low and medium-skill labour shortage, and to cost of living, all while retaining Hong Kong’s business environment advantages.
20 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase Hong Kong: A globally fluent metropolitan city The perception of Hong Kong as Asia’s major city of market opportunity (Trait 6) has been a critical factor in its ’first-mover’ economic adaptability, especially in the early 1950s and early 1980s (Trait 4). For most of the past 150 years economic decisions have been taken by entrepreneurs and creative commercial enterprises, facilitated rather than directed by non-interventionist government. The city’s original appeal for a fleeing Chinese entrepreneurial elite meant it became well placed to evolve from an entrepot to a manufacturing hub ahead of Taiwan and Singapore, a sign of agility in the face of outside geopolitical forces. This business community was later decisive in establishing new stock exchanges in the early 1970s and lobbying for open-ness to foreign firms and investment. Further influxes of Chinese have since helped to relieve upward wage pressure, as South-East Asian migrants have been instrumental in filling domestic and care roles. More recently, a significant number of entrepreneurial expats have returned to the city, having benefited from exposure to English-speaking education and business experience. Although immigrant labour has not been quite as big a factor in Hong Kong as it has in other global cities, their financial and human capital has helped stimulate important periods of innovation and labour market adjustment, not least the shift from manufacturing in the quarter century from 1985.58 Hong Kong’s spirit of enterprise is embedded in its DNA. It is highly distinctive in the evolving system of Asia- Pacific cities. As demand from corporate, institutional, and private equity sectors continues to grow, a strategy to support and prepare the next generation of entrepreneurs is needed to maintain the city’s enterprise hub status.
Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase 21
6. Conclusion: Hong Kong’s global future
Hong Kong is among the world’s five leading centres for finance, investment, port traffic, air cargo and tourism.
To continue to evolve and succeed, cities must not just promote their assets and advantages but they must also
address pressures and uncertainties. This review has highlighted a number of strategic questions for Hong Kong
over the next decade that will require policy and leadership innovation:
i. In which ways will Hong Kong best serve the emerging Asia-Pacific urban system? The future shape of
the Chinese and Asia-Pacific city systems is not yet visible. It will take at least another decade before it is
clear if China will have five or 15 first-tier cities, and how many of these will be fully globalized. Nor is it
clear how many leading cities there will be across the rest of the Asia-Pacific. Hong Kong will need strategic
flexibility to serve this expanded network of large market centres. Opportunities need to be explored and
developed in trade facilitation, export management and co-ordination, corporate and inter-governmental
decision-making, business capitalisation, executive education, cross-border R&D, regional enterprise, and
international wealth management.
Global business connectivity of cities in China and Asia
China Asia-Pacific
Medium glob Some in Medium glob Some in
High global High global
al connectiv ternational al connectiv ternational
connectivity connectivity
ity linkages ity linkages
Hong Kong Guangzhou Qingdao Singapore Bangalore Dhaka
Shanghai Shenzhen Hangzhou Mumbai Manila Nagoya
Beijing Tianjin Nanjing Sydney Ho Chi Minh City Kaohsiung
Chengdu Chongqing Kuala Lumpur Auckland Penang
Dalian Seoul Brisbane Surabaya
Xiamen Jakarta Chennai Phnom Penh
Wuhan Melbourne Karachi Busan
Xi’an New Delhi Hanoi Christchurch
Bangkok Perth Johor Bahru
Taipei Calcutta Fukuoka
Almaty Cebu
Hyderabad
Lahore
Islamabad
Adelaide
Osaka
Colombo
Ahmedabad
Pune
Source: GaWC (2013)22 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase Hong Kong: A globally fluent metropolitan city
ii. How can Hong Kong optimise its political relationship with China to sustain business confidence, and
to ensure that the most effective complementary roles with the Pearl River Delta and with Shanghai
are achieved? The ‘one country two systems’ approach has been a remarkably successful experiment
since 1997. Hong Kong now needs a longer-term perspective, up to 2047 and beyond. Even if the Chinese
government may not wish to be tied publicly to a long-term vision for the city, Hong Kong requires an open
dialogue of ideas and propositions about its future. It is well-positioned to guide the PRD’s rapid transition
towards innovation-led development, and stay open to talent and ideas, if it can steer a careful and mature
negotiation of its future with the Mainland.
iii. Can progress on liveability and sustainability remain competitive with other leading global cities? Hong
Kong’s status as a place to live is threatened by problems associated with polluting emissions, strained
waste, water and health systems, and gaps in education provision. These limitations affect Hong Kong’s
attraction to talent in a more intensified regional and global system.
iv. How can Hong Kong manage the housing and affordability pressures of its growth model? The city
must adjust to population growth of over 400,000 a decade, and rising expectations of citizens, but it
does not yet produce enough homes of the right quality to keep housing affordable. A low share of owner-
occupation limits the amount of equity created and affects the capacity to plan for an aging society. The
city needs to agree upon and pursue some mix of urban restructuring, increased densities, and Hong Kong-
managed ‘satellite communities’ in the wider region.
v. Can Hong Kong guarantee future fiscal stability in the face of spending pressures? By relevant global
standards, the city’s fiscal model is strong, creates large surpluses, and has been successful at achieving
‘buy-in’ from all income groups. However it does have imbalances and depends heavily on a low share of
salaried taxpayers, and on mobile corporate profits. There is also a potential mismatch between capital
and land revenues, on the one hand, and capital and non-regular spending, on the other. Without some
evolutionary reforms, Hong Kong may find it harder to address an aging society and high demand for
housing, welfare and infrastructure. New strategies, including towards debt financing and cost recovery,
may be needed to safeguard the city’s reputation as a place of opportunity, and to bring forward new
land for development. The city has room to manoeuvre given its very large accumulated fiscal reserves
and low debt.
vi. Is Hong Kong able to scale entrepreneurship and technology-led innovation? Hong Kong requires
proactive governance, investment and business leadership to ensure its ICT systems are prepared for its
financing and co-ordination of science and technology sectors across the Pearl River Delta region. It also
needs to promote enterprise within education and governance systems, to ensure that entrepreneurship
can co-exist with a growing corporate, institutional, and private equity presence. As Hong Kong’s
knowledge economy grows, more university degree places are also essential to meet higher education
aspirations.Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase 23
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