Hong Kong: A globally fluent metropolitan city

Greg Clark and Tim Moonen June 2014

Hong Kong: A globally fluent metropolitan city2 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase

Introduction to the Brookings JPMorgan Chase GCI Global Fluency project

Between autumn 2012 and spring 2013, a Brookings Institution team based in Washington, D.C. and London began to formulate the idea of ‘global fluency’ and the traits cities require to achieve it. The project evolved from the observation that in an increasingly intercon­nected world economy, cities exhibit different degrees of global understanding, competence, behaviour, and reach, that affect how they optimise their role in glo­balisation and ultimately impact on future progress.

The target audience is metro area leaders and economic development practitioners who desire to be more intentional about the global futures of their regions. With the support of an International Advisory Board and experts across academia and the private sector, the team began an exhaustive review of literature on cities in the global economy, and assessment of city performance. This helped identify the ‘10 traits’ of globally fluent cities and city regions:

i. Leadership with a Worldview ii. Legacy of Global Orientation

iii. Specializations with Global Reach iv. Adaptability to Global Dynamics v. Culture of Knowledge and Innovation

vi. Opportunity and Appeal to the World vii. Universal Connectivity viii. Ability to Secure Investment for Strategic

Priorities ix. Government as Global Enabler x. Compelling Global Identity

In the first round of research, the team tested the validity of the 10 traits hypothesis by preparing case studies on 42 metropolitan areas, verifying their findings with local experts. The case study cities were:

Bangalore, Barcelona, Bilbao, Boston, Brisbane, Busan, Cape Town, Chicago, Colombo, Denver, Greenville, Hamburg, Helsinki, Istanbul, London, Los Angeles, Mexico City, Miami, Milan, Minneapolis-St. Paul, Moscow, Munich, Nairobi, Nanjing, New York, Omaha, Oslo, San Antonio, San Francisco, San Jose, São Paulo, Seattle, Shenzhen, Singapore, Sydney, Tel Aviv, Tokyo, Toronto, Vienna, Washington, DC, Wichita and Zurich.

This first phase of the project produced a number of important insights:

• Cities at are at different stages in the path towards seamless engagement with global markets. They first become globally aware (stage 1); later they build a global orientation (stage 2); and finally some become fluent in their communication with the global economy (stage 3).

• Cities accumulate characteristics over multiple business cycles that later translate into instinctive pro-activity and intentionality in overseas markets.

• Cities tend to embrace international opportunities in waves and cycles, due to deliberate decisions by leaderships to become more globally engaged.

• New pathways to enter and succeed in globalisation are opening up all the time, with more cities than ever participating in the most recent cycle.

JPMorgan Chase and Brookings are now expanding the research scope as part of a second round of concept-testing. Hong Kong is the first case study to feature in this second phase.

In May 2014 JPMorgan Chase hosted a dinner discussion about Hong Kong’s global future. The dialogue was hosted by Nicolas Aguzin, Chairman and CEO J.P. Morgan Asia Pacific, and Peter Scher, Vice President Public Affairs and Philanthropy, JPMorgan Chase, and moderated by Greg Clark, Global Fellow of the Global Cities Initiative of Brookings Institution and JPMorgan Chase. The Guest of Honour was CH Tung, formerly Chief Executive of Hong Kong. A draft version of this paper was debated and discussed by a senior audience with discussion panellists Prof Michael Enright Sun Hung Kai Professor, University of Hong Kong , Mr Nick Brooke, Chairman Professional Property Services Limited and Chairman of the Hong Kong Harbour, and The Hong Kong Science Park and David O’Rear, Chief Economist, Hong Kong General Chamber of Commerce.

The authors wish to thank Prof Michael Enright, Nick Brooke, and David O’Rear for their extensive help with the development of this paper.

3 Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase

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.

Hong Kong: A globally fluent metropolitan city4 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase

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 ‘buy­in’ 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.

5 Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase

1. Introduction and core data

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.

GDP1 Share

National GDP

GDP/Capita Population/m Share

National Pop.

GaWC Glob­al City

Ranking

# Global2000 HQs

GDP/c Growth 1993­2012

US$273bn 100% $38,000 7.2 100% 3 46 2.7%

Hong Kong urban area2

Hong Kong: A globally fluent metropolitan cityGlobal Cities Initiative A Joint Project of Brookings and JPMorgan Chase

Rank globally Rank in Asia-Pacific Total

Integration into global network of ad­vanced producer services firms

3 1 -

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

6

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.

Source: GaWC (2013);5 McKinsey Global Institute (2013)6; Z/Yen (2014)

7 Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase

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 projects, 2009-2013

1,142 3 2

Inward investment proj­ects in strategic functions, 2012

62 6 2

Foreign investment city of the future

- - 1

­

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 capi­tal 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)13

Hong Kong: A globally fluent metropolitan city8 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase

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 visitors

8.7m 11 4

Most popular cities to work, rest or play

- 8 2

# 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 study19

9 Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase

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 under­estimates 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.

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

Singapore

25

2

47

53

43

92

334

239

8

2

Hong Kong: A globally fluent metropolitan city10 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase

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

Theatre performances/ ’000

MuseumsInternational

students/ ‘000

Cinemas Music performances/ ‘000

­

­

Source: World Cities Cultural Report (2013)24

2 46 18 326 Hong Kong

Hong 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 manities

Clinical, Pre-clinical and

Health Engineering and

Technology Life Sciences Physical Sci ences Social Sciences

1 Univ. of Mel­bourne

Univ. of Mel­bourne

National Univ. of Singapore The Univ. of Tokyo The Univ. of Tokyo Univ. of Mel­

bourne

2 Australian Nation­al Univ. Univ. of Sydney

Hong Kong Univ. of Science and

Technology Univ. of Mel­

bourne Australian Nation­

al Univ. Australian Nation­

al Univ.

3 Univ. of Sydney The Univ. of Tokyo Tsinghua Univ. Univ. of

Queensland Aus­tralia

Peking Univ. National Univ. of Singapore

4 The Univ. of Hong Kong

Univ. of Queensland Aus­

tralia

Korea Advanced Institute of

Science and Tech­nology

Kyoto Univ. Kyoto Univ. Univ. of Sydney

5 Monash Univ. Monash Univ. The Univ. of Tokyo Australian Nation­al Univ.

National Univ. of Singapore

Univ. of Queensland Aus­

tralia

6 National Univ. of Singapore

National Univ. of Singapore

Seoul National Univ. Osaka Univ. Tsinghua Univ. Peking Univ.

7 Univ. of Auckland Kyoto Univ. Univ. of Mel­bourne Univ. of Sydney Tokyo Institute of

Technology The Univ. of Hong

Kong

8 Univ. of

Queensland Aus­tralia

Seoul National Univ.

Nanyang Techno­logical Univ. Monash Univ. The Univ. of Hong

Kong Univ. of New South Wales

9 Macquarie Univ. The Univ. of Hong Kong Kyoto Univ. Univ. of Western

Australia

Korea Advanced Institute of

Science and Tech­nology

Hong Kong Univ. of Science and

Technology

10 Chinese Univ. of Hong Kong

Univ. of New South Wales

Pohang Univ. of Science and Tech­

nology Seoul National

Univ. Univ. of

Queensland Aus­tralia

The Univ. of Tokyo

Source: Times Higher Education (2013)26

Hong Kong: A globally fluent metropolitan city12 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase

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%.

13 Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase

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.36

Hong Kong: A globally fluent metropolitan city14 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase

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

15 Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase

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

Hong Kong: A globally fluent metropolitan city16 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase

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

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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

Country HK$ billion

Change since 2007

China 24.8 -39%

USA 5.4 -78%

Singapore 2.5 -17%

Taiwan 2.4 -40%

Vietnam 1.9 +155%

Macao 1.8 +10%

Switzerland 1.5 +49%

2013 Re-exports

Country HK$ bil lion

Change since 2007

China 1920 +51%

USA 326 -5%

Japan 134 + 15%

India 83 +144%

Taiwan 75 +53%

Germany 74 +5%

Korea 73 +43%

2013 Imports

Country HK$ billion

Change since 2007

China 1942 +46%

Japan 286 -1%

Taiwan 262 +28%

Singapore 246 +26%

USA 220 +58%

Korea 159 +33%

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.53

Hong Kong: A globally fluent metropolitan city18 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase

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

Leadership with a Worldview

Compelling Brand Identity

Enabling Government

SecuringInvestment forPriorities

Securing Investment for Priorities

UniversalConnectivityUniversal Connectivity

Opportunityand AppealOpportunity and Appeal

Culture ofKnowledgeand Innovation

Culture of Knowledge and Innovation

Adaptabilityto GlobalDynamics

Adaptability to Global Dynamics

Legacy ofGlobalOrientation

Legacy of Global Orientation

DistinctSpecializationsDistinct Specializations

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.

19 Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase

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.

Hong Kong: A globally fluent metropolitan city20 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase

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 futureHong 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 ofthe Chinese and Asia-Pacific city systems is not yet visible. It will take at least another decade before it isclear if China will have five or 15 first-tier cities, and how many of these will be fully globalized. Nor is itclear how many leading cities there will be across the rest of the Asia-Pacific. Hong Kong will need strategicflexibility to serve this expanded network of large market centres. Opportunities need to be explored anddeveloped in trade facilitation, export management and co-ordination, corporate and inter-governmentaldecision-making, business capitalisation, executive education, cross-border R&D, regional enterprise, andinternational wealth management.

Global business connectivity of cities in China and Asia

China

High global connectivity

Medium glob­al connectiv

ity ­

Some in­ternational

linkages Hong Kong Guangzhou Qingdao

Shanghai Shenzhen Hangzhou

Beijing Tianjin Nanjing

Chengdu Chongqing

Dalian

Xiamen

Wuhan

Xi’an

Asia-Pacific

High global connectivity

Medium glob­al connectiv­

ity

Some in­ternational

linkages Singapore Bangalore Dhaka

Mumbai Manila Nagoya

Sydney Ho Chi Minh City Kaohsiung

Kuala Lumpur Auckland Penang

Seoul Brisbane Surabaya

Jakarta Chennai Phnom Penh

Melbourne Karachi Busan

New Delhi Hanoi Christchurch

Bangkok Perth Johor Bahru

Taipei Calcutta Fukuoka

Almaty Cebu

Hyderabad

Lahore

Islamabad

Adelaide

Osaka

Colombo

Ahmedabad

Pune Source: GaWC (2013)

Hong Kong: A globally fluent metropolitan city22 Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase

ii. How can Hong Kong optimise its political relationship with China to sustain business confidence, andto ensure that the most effective complementary roles with the Pearl River Delta and with Shanghaiare achieved? The ‘one country two systems’ approach has been a remarkably successful experimentsince 1997. Hong Kong now needs a longer-term perspective, up to 2047 and beyond. Even if the Chinesegovernment may not wish to be tied publicly to a long-term vision for the city, Hong Kong requires an opendialogue of ideas and propositions about its future. It is well-positioned to guide the PRD’s rapid transitiontowards innovation-led development, and stay open to talent and ideas, if it can steer a careful and maturenegotiation of its future with the Mainland.

iii. Can progress on liveability and sustainability remain competitive with other leading global cities? HongKong’s status as a place to live is threatened by problems associated with polluting emissions, strainedwaste, water and health systems, and gaps in education provision. These limitations affect Hong Kong’sattraction 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 citymust adjust to population growth of over 400,000 a decade, and rising expectations of citizens, but itdoes 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. Thecity 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 globalstandards, 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 ofsalaried taxpayers, and on mobile corporate profits. There is also a potential mismatch between capitaland land revenues, on the one hand, and capital and non-regular spending, on the other. Without someevolutionary reforms, Hong Kong may find it harder to address an aging society and high demand forhousing, 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 newland for development. The city has room to manoeuvre given its very large accumulated fiscal reservesand low debt.

vi. Is Hong Kong able to scale entrepreneurship and technology-led innovation? Hong Kong requiresproactive governance, investment and business leadership to ensure its ICT systems are prepared for itsfinancing and co-ordination of science and technology sectors across the Pearl River Delta region. It alsoneeds to promote enterprise within education and governance systems, to ensure that entrepreneurshipcan co-exist with a growing corporate, institutional, and private equity presence. As Hong Kong’sknowledge economy grows, more university degree places are also essential to meet higher educationaspirations.

23 Hong Kong: A globally fluent metropolitan city Global Cities Initiative A Joint Project of Brookings and JPMorgan Chase

.

http://reports.weforum.org/the-global­

competitiveness-report-2013-2014/#section=countryeconomy­profiles-hongkongsar; World Bank and IFC (2013). Doing Business 2013 http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB13­full-report.pdf

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The Global Cities Initiative is a joint project of Brookings and JPMorgan Chase & Co. The Global Cities Initiative is a five-year project that aims to help leaders in U.S. metropolitan areas reorient their economies toward greater engagement in world markets.

The Brookings Institution is a nonprofit public policy organization who’s mission is to conduct high-quality, independent research and, based on that research, to provide innovative, practical recommendations that aim to strengthen American democracy; to foster the welfare, security and opportunity of all Americans; and to secure a more open, safe, prosperous and cooperative international system.

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