Hong Kong’s Fundamental Economic Problem

Posted October 30, 2024

If Xi Jinping hoped his financial stimulus plans would be met with a standing ovation in Hong Kong, he may want to avoid social media for the next few weeks. The Hang Seng Index might be rallying – for now – but the market is fickle. While a cash injection provides a short-term boost, it’s not a panacea for the structural issues bubbling below the surface.

Since the pandemic, Hong Kong has faced trade sanctions, a talent drain paired with an aging population, and a currency working relatively against its own economy. With the Hong Kong dollar pegged to the USD, its strength relative to the Chinese yuan has incentivized locals to shop in mainland China for lower prices and discouraged foreign investment. This has resulted in a looming structural deficit, so it’s great to see the Politburo finally recognizing its initial shortcomings.

But make no mistake: Hong Kong’s problems are not confined to economics. Its success largely depended on its position as a gateway between East and West, acting as a financial hub for those wanting to access the lucrative market in mainland China. Not to mention its status as a tax haven. But with East and West increasingly at odds, liberals and foreign businesses alike are becoming spooked by China’s grip. It’s unlikely that a short-term financial recovery will be enough to ease these concerns or usher in a return to the glory days.

It is “one country, two systems,” but any system Hong Kong adopts is proving to be under control by Beijing. If this can happen to a region with one of the highest GDP per capita in the world, what does it say about the future of less-than-superpowers in a similar position?