Rising from the dark night
First published by the South China Morning Post on 15 April 2020.
We are in the middle of long, dark night for Hong Kong’s economy. The government’s HK$137.5 billion relief package will provide essential life support to businesses devastated by Covid-19 and protect jobs. But the next task is to accelerate the shift towards a different economic model: one that is higher up the value chain, more diverse and more resilient to shocks like the coronavirus. There is a chance that some of the consequences of Covid-19 could actually help to make this happen – but lasting change will depend on action by policymakers, investors and business leaders.
The traditional strengths of Hong Kong’s economy in finance, hospitality and retail remain critically important. This city’s position as a leading international finance, trade and tourism hub is a core advantage. But I believe most people would agree that our economic model needs to evolve if it is to deliver sustainable and growing prosperity for the community as a whole over the long term.
The government’s relief measures address the immediate and acute problems caused by the virus, but they won’t help to resolve long term, structural issues in the economy. Among other changes, that will involve developing a local technology industry and encouraging re-industrialisation through advanced manufacturing. The government has long recognised this and its policy focus on this area was reiterated in the February budget. “Innovation and technology…is an important growth engine for future economic development,” said Financial Secretary Paul Chan Mo-po.
Consistent policy support for innovation and technology has indeed made a positive impact, but the reality is that Hong Kong continues to underperform its potential in this area. Tax breaks, funding and infrastructure all help, but the potential game-changers for innovation and technology are more fundamental.
Like so much in Hong Kong, this is connected with the property market. In the U.S., for example, wealthy investors channel capital into domestic venture capital funds because they discover “unicorns” (privately-owned start-ups worth at least US$1 billion) and can generate outsized returns. That’s rational. In Hong Kong, it’s equally rational for wealth to be invested in local property because it, too, generates outsized returns.
At least, it normally does. But analysts are predicting that residential property prices will fall by 10-20% this year as the city’s economy feels the chilling effect of Covid-19 and unemployment reaches a nine-year high. Rental costs for commercial and residential property are also declining.
If returns on property are depressed by the pandemic, investors in Hong Kong may commit more capital to early-stage technology companies – especially when Covid-19 has demonstrated the value of online platforms and led many to expect permanent shifts in favour of digital business models. Given investors’ natural comfort with their home market, we can hope that local technology entrepreneurs benefit from the decline in Hong Kong property prices. If Hong Kong’s small herd of unicorns increases in the next couple of years, we may have to thank the coronavirus in part.
International perceptions that Hong Kong has performed well in managing the Covid-19 outbreak could also help attract more global technology companies to the city in future. This would help to expand the universe of clients, partners and investors for local firms, which is as important a part of the “ecosystem” as venture capital.
As locals, we may be more focused on the shortcomings of Hong Kong’s approach to containing the pandemic – and acutely conscious of the continuing risks. Overseas, though, Hong Kong is seen to have flattened the curve. For a whole generation of managers in multinational companies, resilience against pandemics will now be a key factor in decisions about where to locate operations. On that basis, our city is a safe haven. Of course, MNCs will also worry about social unrest after last year’s events, but the upheaval of Covid-19 will re-order perceptions and priorities.
So, some of the consequences of this terrible pandemic could in fact help Hong Kong make the shift towards an economy more driven by innovation and technology – and one that is less vulnerable to similar outbreaks in future (information continues to move freely during an infectious disease outbreak; people do not). Relying on this chance would be a poor strategy, though. Policymakers, business leaders and investors need to act decisively in order to speed up the transition.
As in Hong Kong, governments around the world are taking once-unimaginable actions that aim to provide economies with a bridge to the other side of the pandemic. We need to think one step further and ask some hard questions about what kind of economy we want on the other side. How can we ensure that innovation and technology start to attract a bigger share of local investment in relation to property? What will it take to make Hong Kong the best location for global technology companies in Asia? And what else do we need to do to make the shift towards tomorrow’s economy?
Hong Kong always finds a way forward. Today, even while the pandemic rages, we need the courage to face those questions and do whatever the honest answers require. While the good times rolled, perhaps we lacked the incentives to make fundamental changes to the economy. Now we know that change is essential. This long and dark night is the perfect time to take a new direction. If we do, the dawn will be brighter when it comes.
Adam Harper is the Founder and Managing Director of Ashbury Communications.
 https://www.budget.gov.hk/2020/eng/budget14.html  https://www.scmp.com/business/article/3078850/hong-kongs-property-prices-fall-20-cent-citys-jobless-ranks-swell-amid  https://www.scmp.com/property/hong-kong-china/article/3077163/worlds-costliest-offices-are-poised-enter-tenants-market