2022-06-08

What Does Hong Kong’s Future Hold as a Chinese and International City?

Going into 2022, Hong Kong has become increasingly torn between its dual roles as one of China’s most developed cities and an international financial centre. Ever since the start of the pandemic, Hong Kong has been adhering to a “zero-COVID” strategy in line with Mainland China, aiming to suppress all COVID outbreaks as soon as possible. That strategy has meant strict social-distancing rules, extended quarantine periods for those entering the city, and flight bans on numerous countries. This has caused some grievances in the international business community, with multinational corporations contemplating the relocation of their Hong Kong offices to Singapore, Hong Kong’s major competitor in the Asia Pacific region. Hong Kong’s policy of isolation is at odds with a world that has a growing acceptance of the “living with COVID” approach. 

 

The Greater Bay Area and Hong Kong’s integration with the motherland

 

Hong Kong’s strategies of integrating with Mainland China and aligning with its policy objectives extend far beyond COVID. Over the last few years, Hong Kong has been part of a broader regional development plan in China called the Guangdong-Hong Kong-Macao Greater Bay Area (hereafter, the GBA). It was announced in 2017, with aims to enhance the economic cooperation and integration of nine cities in the Guangdong province (including Shenzhen and Guangzhou) and the two Special Administrative Regions, Hong Kong and Macao. By coordinating the region’s economic development, the local governments would leverage the strengths and advantages of each city, thereby achieving synergy and promoting efficiency.

 

This strategy incorporates the idea of spatial division of labour, where each region specialises in economic activities in which it has a comparative advantage. In the case of the GBA, Shenzhen specialises in technology, innovation and research and development (R&D); Hong Kong specialises in professional services such as finance, banking, and legal services, and boasts its international outlook and its ability to draw foreign investment. In addition to the comparative advantages of each city, the GBA as a whole is itself a massive market. The GDP of Guangdong province grew by 8% to USD1.92 trillion in 2021, potentially larger than South Korea’s GDP of USD1.82 trillion. Hong Kong’s per capita GDP is still among the world’s highest. 

 

As Hong Kong’s traditional business partners including European countries and the US are still in the midst of economic recovery, it is perhaps logical for Hong Kong to integrate with its immediate neighbours more closely and rejuvenate its growth potential. We have also observed multinational corporations and other countries realigning their strategies to seize the opportunities brought about by the rapid growth of the GBA. HSBC has set up a GBA office in 2021, while Singapore seeks collaboration in various industries in the region. Indeed, according to a 2022 survey by the American Chamber of Commerce in Hong Kong, about 60% of surveyed firms have business operations in the GBA.  

 

Tapping into the GBA market

 

MWYO, a Hong Kong think tank, conducted a survey in 2021 with 1,002 local young people in Hong Kong to gauge their thoughts on the potential of the GBA and whether they are interested in relocating to GBA’s Mainland cities to capture the opportunities there. This set of data may serve as a good reference point for internationals hoping to take a slice of the GBA’s rapid growth.  

 

Around 13% of respondents expressed interest in developing a career in the GBA. Among them, 68% cited the GBA’s better industry prospects and overall competitiveness (in comparison to Hong Kong) as the primary reasons for their interest.

 

Young graduates in Hong Kong appear to gravitate towards cities where they can better utilise their professional skills. For instance, young people eyeing a career in research and development (R&D) are more likely to have better prospects in GBA Mainland cities. 32% of those graduating with IT-related degrees and 25% of those graduating with natural science and maths-related degrees believe their career prospects in the GBA are better than in Hong Kong, higher than all other subjects. These two subject areas are intertwined with R&D and technological innovation. They are also the main drivers of development and growth in GBA Mainland cities, especially Shenzhen. If a young professional (from Hong Kong or overseas) aims to develop their career in R&D and would like to have a taste of the Chinese market, then the GBA is where most of China’s R&D resources and talent demand are concentrated.

 

Young people in service industries for which Hong Kong is famous, tend to believe that they would find similar prospects in GBA Mainland cities and Hong Kong. 71% of those graduating with education degrees and 61% of those graduating with management and finance-related degrees believe their prospects in GBA and HK are similar. Hong Kong has a more developed and sophisticated education industry and finance industry than GBA Mainland cities, while accumulating much successful experience and international reputation. Demand for such services through the GBA continues to grow. Despite the Mainland government’s recent curbs on the private education sector, the demand from middle-class families for foreign education with international curricula remains strong. The proliferation of large businesses and a rising number of high-net-worth individuals mean a thirst for sophisticated financial and asset management services. These are markets that continue to have untapped potential.

 

International talent may face hurdles when jumping on the GBA bandwagon

 

While the GBA development strategy makes sense, its potential would ultimately be limited if it only attracts domestic capital and talent. This is especially true for Hong Kong, as its status as an international business hub is one of its most valuable assets. Drawing overseas capital and talent to the whole of GBA beyond Hong Kong could be challenging. There may be multiple hurdles along the way, as experienced by Hong Kong local talent making their way in GBA Mainland cities, and their employers. 

 

The local corporate culture and employer expectations in Mainland cities may differ from multinational or Hong Kong companies. English skills and an international outlook are essential skills when working at a multinational firm. However, these skills may not be that helpful if the company primarily serves the domestic Chinese market and has no plans to expand overseas in the near future. Thus, Mandarin skills and strong local connections may instead be much more helpful assets, though uncommon amongst Hongkongers and expats. Additionally, there may be differences in corporate values and practices. We interviewed Hongkongers who worked at GBA Mainland companies in the past. One of them, who worked at a tech company, mentioned that his previous employer did not see intellectual property as a top priority in its R&D. A person who worked at a PR firm that partnered with Mainland companies, was concerned about two issues when considering employment at a GBA Mainland company: first, they might have compliance issues when conducting business; second, their employees work very long hours and lack work-life balance. On the other hand, this could be an opportunity for non-local talent. One GBA employer we interviewed said that Hong Kong workers had better professional ethics and more respect for intellectual property rights, to the extent that they were more suited for working on product development and handling confidential information.

 

On a more practical level, the relatively low wages in GBA Mainland cities may deter some Hongkongers and expats from entering that job market. A 2019 report from Hong Kong Baptist University details the average wage levels of positions in Hong Kong and three major GBA Mainland cities, Guangzhou, Shenzhen and Dongguan. Most jobs in these three cities had average annual wages that were below 60% of the wages of similar positions in Hong Kong. 

 

 

Source: “Guangdong-Hong Kong-Macao Greater Bay Area Pay and Benefits Level Survey 2019”, 

Hong Kong Baptist University Centre for Human Resources Strategy and Development

 

There are exceptions to the norm: tech jobs and managerial positions. The GBA-Hong Kong wage gap for managerial staff is small, compared to lower-level positions. Four such positions in Guangzhou offered an average salary that is 12.4% to 34.1% lower than Hong Kong’s level: administrative/general services manager, engineering manager, quality control manager, and logistics manager. However, unless these positions involve interacting with actors in the foreign market, they would likely require familiarity with the region’s workplace culture and knowledge of the local industry ecosystem. 

 

As Mainland China’s tech hub, Shenzhen offers high-paying jobs in the IT industry that rival and even surpass similar positions in Hong Kong. In 2019, software engineers on average, earned an annual base salary equivalent to around HKD 407,000, compared to around HKD 341,000 in Hong Kong. These IT giants offer competitive salary packages for programmers and software engineers. The same may also be true for luxury brands and private education companies. 

 

The tax system further complicates the issue of wages. In Mainland China, the income tax rate can go up to 45% for the top tax bracket, and expats enjoy the same rate as Chinese nationals. Currently, expats enjoy special deduction items for housing rental and children’s education, but Beijing had announced the phasing out of these tax breaks by 2022. Together with restrictions on the flow of capital, individual investors and job seekers have always been cautious to inject their financial resources into the Chinese market. 

 

Further complications: international scepticism, geopolitics and COVID

 

Without the recognition and interest of the international community, GBA is just another TV series catering exclusively to the Chinese audience. Internationally, there is a general scepticism towards China’s grand experiments of development. From the “Go West Plan” to develop Northwestern China at the start of this century, to all the free trade zones across the country and the well-known Belt and Road Initiative, the international community is not unfamiliar with this kind of Chinese economic plans, often with ambitious goals but moderate success. Will the international community make their bet in the GBA game? It is perhaps still too early to say.

 

The geopolitical backdrop of the China-US rivalry may have further complicated the potential success of the GBA strategy. Bearing the collateral damage of the rivalry, Hong Kong has suffered as its reputation has been tarnished. In 2020, the city’s top officials were given economic sanctions by the US Government over human rights allegations. The US-based Heritage Foundation removed Hong Kong from its Index of Economic Freedom in 2021. Thus, it is not surprising if international investors may have more hesitation than ever to increase their investment in Hong Kong or via Hong Kong. Without Hong Kong performing its role as the gateway to international capital, the GBA plan faces a bumpy road ahead. 

 

Needless to say, new norms will arise in the aftermath of the disastrous COVID pandemic. One of the phenomena in discussion is the remapping of the global supply chain, with more international firms diverting their production plants away from China, currently concentrated in Guangdong province. This trend has yet to become widespread, but it could be intensified by unexpected US tariffs or other China containment policies. If that happens, the GBA plan may only be left with the domestic market. 

 

Hong Kong will benefit from the GBA’s success, albeit uncertain

 

Two years into the pandemic, China’s economic recovery has been stronger than countries in Asia and the West. For Hong Kong, it makes easy sense to take advantage of the market and development potential of its immediate neighbours in the GBA, especially when there are few viable options elsewhere at the moment. Talent in sectors where GBA Mainland cities have concentrated their resources (e.g. R&D) and sectors whose goods and services these cities have an appetite for (e.g. professional services), may be drawn to relocating there to gain work experience. However, the success of the GBA, as a project of economic integration, relies on both internal and external factors.  

 

Internally, better coordination among GBA cities and enhancement of efficiency in various economic activities would provide impetus to further economic development.  The discrepancy in the corporate cultures of Hong Kong and GBA Mainland cities should be resolved, to foster more cooperation. As China has a track record of efficient governance, with the Winter Olympics being a recent example, overcoming these hurdles should be manageable. At the same time, the wage gap between Hong Kong and GBA Mainland cities and the subsequent concerns such as tax and capital flow restriction may still be a turnoff in the near term. 

 

Interest and recognition from the international players are also crucial for the GBA to reach its full potential. Under the current geopolitical climate, the response to China and its economic initiatives has ranged from neutral to negative. This factor is full of uncertainty, and neither China nor Hong Kong as a city can easily mitigate it. The only way to encourage interest in the Chinese market is to ensure sustained domestic growth in China and further market liberalisation, so that international players may be interested in seizing business opportunities in the country and especially in the integrated GBA.

 

 

Originally published in Asia Global Online on June 8, 2022