One factor that influenced Hong Kong’s transition from a light industrial city into a global financial hub was the Open Door Policy of China in the late 1970s. China provided cheap labor, land, and low production costs that enticed Hong Kong industrialists to move their factories across the border. The deindustrialization and relocation of manufacturing industries from Hong Kong to the nearby provinces in the Mainland around the Pearl River Delta started in the late 1970s and was completed in the 1990s.341 Another factor that
influenced the shift of Hong Kong's economy was the entry of China into the World Trade Organization (WTO) in 2001. This ended the monopolistic role of Hong Kong as the major entrepot in the trade between China and other parts of the world.342 After deindustrialization,
Hong Kong's tertiary sector became the vital component in the economy. In 2016, the tertiary sector contributed 92.2% of the GDP of Hong Kong.343 Within the tertiary sector, “financing
and insurance” (17.7%), “real estate, professional and business services” (11%), and “ownership of premises” (10.7%) added up to almost 40% of the total GDP. Hence, Hong
340 Ibid. P. 263.
341 Chiu, S. W. K. and Lui, T. L. (2004). “Global city, Dual city? Globalization and Social Polarization in Hong Kong since the 1990s”. See also Sigler, T. J. and Zhao, S. X. B. (2016). “Hong Kong as an Offshore Trading Hub”.
342 Wong, J. (2013). “CEPA: A Gift from Beijing?” P. 32.
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Kong's economy now heavily relies on finance and real estate, and is vulnerable to crises from internal and external causes.344
Hong Kong's finance-led regime of accumulation is a real-estate centric model as discussed in Section 3.2. In such a regime, “the close links between real estate markets and governmental finances in Hong Kong… institutionalize the centrality of concern for real estate prices and help to disseminate expectations for ever-increasing rents”.345 The
shortcoming of a real-estate centric model of finance-led growth regime is that when housing prices rise quickly, the unaffordability of housing becomes a serious social problem.
Increased rent was one of the factors driving the manufacturers in Hong Kong to relocate their factories to the Mainland, and/or turn their attention to property investment for more profits with less effort. However, when housing prices plummet, it harms the wealth of the propertied class and the manufacturing industries, and other small-and-medium enterprises are also affected because most of their reserve capital is real-estate based.346
The Asian Financial Crisis in 1997 and the subsequent economic recession, lasting until 2003, showcased such downside of a real-estate centric model of finance-led growth regime. The downfall of housing prices caused negative equity for homebuyers who had purchased their home at the peak in 1997. This also affected the economy and the
employment market when manufacturers and small businesspersons had also invested in real-
344 Wang, G. and Wong, J. (2013). “After Smooth Handover, now the Hard Part”.
345 Smart, A. and Lee, J. (2003). P. 168. See also Halia, A. (2000) for her discussion of the property state in Hong Kong and Singapore.
Lee, To and Yu had also discussed such a cycle. “As asset prices rose, a reinforcing cycle occurred: people had further incentive to borrow from banks and invested or most likely speculated the money in the real estate and stock markets. The risk of overheating in the property and stock market remains a concern. Since stock and property markets have become the main income sources and profitable investment opportunities for the major economic players including the government, households, banks, shareholders and companies, any significant downturn of the markets would be immediately translated into a politically sensitive and socially disruptive issue.” Lee, K. M., To, B. H. P. & Yu, K. M., (2014). “The New Paradox of Thrift: Financialisation, retirement protection, and income polarisation in Hong Kong”. P. 18.
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estate. As a result, the closing of local companies and industries caused high unemployment rates347 following the collapse of the housing market. In 2002, “more than 150,000 families
fell into a category of those having negative assets” and “bankruptcies rose, from 780 recorded cases in 1996 to a high of 26,922”.348 From 2000 to 2003, the GDP continued to
drop from 1 to 3% annually and the unemployment rate reached the historical height of 8.5% in 2003 during the Severe Acute Respiratory Syndrome (SARS) epidemic. (See Figure 4.2 and 4.3)
Figure 4.2 Year-on-year % change in Gross Domestic Product (GDP) (1997 - 2016).
Source: Census and Statistics Department, HKSAR. (2018). Gross Domestic Product (GDP), implicit price deflator of GDP and per capita GDP.
347 Smart, A. and Lee, J. (2003a). “Housing and Regulation Theory – Domestic Demand and Global Financialization”. Pp. 103 - 104.
112 Figure 4.3 Unemployment Rate (%) (1997 – 2017).
Source: Census and Statistics Department, HKSAR. (2018). Labour Force, Unemployment and Underemployment.
The influence of the Mainland on Hong Kong's economy is also apparent. In 2003, the signing of Closer Economic Partnership Arrangement (CEPA)349 marked the deepening
economic integration between Hong Kong and China.350 For instance, the direct investment
from the Mainland tripled from HK$928 billion to HK$3,043 billion between 2001 and 2011. The inflow of Chinese capital has had multiple consequences on Hong Kong society. Market confidence was restored following the inflow of external capital from the Mainland in the local retailing sector, and opened the “China opportunities” to the trade, commerce and finance sectors. The GDP grew from 4.8 to 9.8 annually between 2004 and 2007. After a
349 CEPA was signed in 2003. It is a free trade agreement between Hong Kong and the Mainland China on four areas: “trade in goods, trade in services, investment, economic and technical cooperation”. The HKSAR government introduced the objective to be “accelerating the economic integration and enhancing the long term economic and trade development of both places.” Trade and Industry Department, HKSAR. (2018). “Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA)”.
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short recession in 2007 and 2008 following the Financial Tsunami, the GDP was restored in 2010 and 2011 with 7.1% and 8.9% growth, and continued to experience around 4-6% growth annually between 2012 and 2017. The unemployment rate was decreasing as well. From 2003 to 2008, the unemployment rate decreased from 7.9% to around 3%. This went back up in 2009 to 5.3% after the Financial Tsunami; yet later the rate decreased again back to around 3%. (See also Figure 4.2 and 4.3)
The economic growth resulting from external Chinese capital came with a heavy social price. The influx of external capital contributed to the rise of housing price from 2003 to 2008, and an even more drastic increase since 2009. This was caused by the Chinese economic stimulus program with US$586 billion package351 and the wall of money it created
in search of assets investment opportunity. Real estate in Hong Kong was one of its targets. The capital from China directly invested in real estate of Hong Kong increased from US$20 million in 2008 to US$1.6 billion in 2012.352 The external capital was one of the main factors
that pushed up the housing prices in Hong Kong in the Struggled Period. Between 2003 and 2017, housing prices have risen more than 460%, while the median monthly employment earnings have increased only around 50%.353 In addition, young adults' (aged 20 – 29) median monthly employment earnings is lower than the average with only around 30% increase.354 In
this skyrocketing market, House Buying has lost its connection to ordinary people's
351 The economic stimulus program invested in areas including housing, rural infrastructure, transportation, health and education, environment, industry, disaster rebuilding, income-building, tax cuts, and finance. This worked through granting loans from the banking sectors to large state-owned enterprises of China. The long-term aftermath is the rapid increase in debt. Dittmer, L. (2018). China's Asia: Triangular Dynamics since the Cold War. P. 42.
352 Lin, C. and Wang, L. (2014). “Main Factors that Influence the Cycles of Real Estate in Hong Kong”. P. 16. (in Chinese). http://www.cf40.org.cn/uploads/PDF/20140804.pdf
353 See Figure 2.1 and 2.2 in Chapter 2 for more details.
354 See Figure 2.2 in Chapter 2 for more details. The median monthly earnings have increased from $10,000 to $15,000 per month from 2001 to 2017.
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experience. To repeat, Hong Kong has been the least affordable private housing in the world since 2010, far surpassing other private housing markets in developed societies.355
As we are going to discuss in the next section, this influx of capital caused social polarization across the society. The gap between rich and poor continued to widen despite the recovery from economic recession. The Gini-coefficient had already been high among
developed societies in the late 1990s and it continued to grow even widener in Hong Kong from 0.533 to 0.539 between 2001 and 2016 (Figure 4.4). In 2016, Hong Kong was the second-most unequal city in the world in terms of income.356 The so-called “China
opportunities” that the CEPA generated were also distributed unevenly. They benefited specific sectors that could generate profit across the border, such as commerce, finance, and trading; yet local professionals, like teachers and doctors, were left behind. The privileges of external investment were also more concentrated in the established companies and hence furthered the growth of existing conglomerates.357
355 See Footnote 1 in Chapter 1 for more details. Demographia (2018). “14th Annual Demographia International Housing Affordability Survey”.
356 Behind New York, and followed by Washington. Census and Statistics Department, HKSAR. (2017). “Thematic Report on Household Income Distribution in Hong Kong”. P. 9.
357 Szeto, M. M. and Chen, Y. C. (2011). “Mainlandization and Neoliberalism with Postcolonial and Chinese Characteristics: Challenges for the Hong Kong Film Industry”. P. 242.
115 Figure 4.4 Gini Coefficient Indicator (1971 – 2016).
Source: Census and Statistics Department, HKSAR. (2012). Half-Yearly Economic Report 2012. & Census and Statistics Department, HKSAR. (2018). 2016 Population By-census