De-industrialization was Hong Kong’s Biggest Mistake

a while ago i did a video about hong kong's loss of its electronics manufacturing industry decent video did decently well but the single loudest thing that people screamed at me in the comments section was well the manufacturer went over to shenzhen and now hong kong can focus on providing services which it's way better at why are you complaining but i am making it clear here that demanufacturing the hong kong economy was a mistake perhaps even its biggest in this video we will look at what happens when an entire economy loses its ability to make things that people want but first let me talk about the agenometry newsletter if you subscribe to the channel you should also sign up to the newsletter check out videos you might not have seen before and read writings that i never bothered to turn into a video you can find the link to the newsletter in the video description below or you can just go to asianometry.com as of right now you can expect a new newsletter every thursday at 1 am taiwan time alright now back to the show after the chinese civil war shanghai's industrialists along with a massive bunch of refugees relocated to hong kong to flee the communist party of china the industrialists brought with them capital and manufacturing expertise settling down in their new home they re-established their factories they wanted to take advantage of the labor opportunities provided by the 1 million or so poor chinese migrants now squatting in hong kong because hong kong did not have much available land even back then their factories produce lightly manufactured items out of high rise buildings simple things like plastic flowers clothes and radio assemblies hong kong's manufacturing industry came along at the right time starting in the 1950s the united states and other members of the west began sourcing certain manufactured goods from asia this outsourcing trend would only intensify in the coming years by the early 1960s hong kong was the single biggest manufacturer in the developing world these low-skilled jobs helped those people make a living and build their wealth it was a miraculous stroke of good fortune very quickly however competition emerged out of places like south korea or taiwan cost rose as workers salaries got better and each new generation of hong kongers demanded a better richer lifestyle but hong kong's manufacturing industries as it turns out had little to offer other than cheap labor the city's economy lacked technological expertise in producing native technologies good enough to replace unique critical components without that those components had to be imported from elsewhere for instance in electronics the city-state's oems were spending 60 percent of their cost budget on integrated circuits that needed to be imported from japan the result was an uncompetitive industry as early as 1981 the city's manufacturers were asking for government help in upgrading its technological capabilities over in taiwan singapore and south korea governments were investing millions of dollars in acquiring and quote-unquote naturalizing their own technologies for commercial use hong kong's manufacturers were falling behind but hong kong at this time was still a british colony and that mattered hong kong has a truly weird economic history one can make a valid argument that the british colonial administration never intended for hong kong to be anything more than a simple small trading post straddling china and the west early on the hong kong government and its resident trading houses settled on a fiscal compromise no import or export taxes the government would instead make its money from land in hong kong the government holds superior title to all land and leases it to private parties for money this created incentives for an economy centered on ever-rising land prices and trading financial or otherwise by 1949 hong kong's biggest companies were banks land development companies and trading houses many former industrialists like lee kashing had already closed their factories and became landlords seeing it as more profitable those companies did not see a reason why the government should intervene on behalf of the manufacturing industry thus the hong kong government opted to retain a non-interventionist stance manufacturing went elsewhere mostly to china the result was a massive loss in lower and middle income jobs for hong kong and a massive doubling down by the city on finance and trading hong kong's economy stopped making and exporting goods abroad it instead focused even further on serving as a value-added intermediary for handling investments in cargo international companies from the west want to buy cheaply made goods from china hong kongers with their british heritage english language laws and pro-business attitudes helped with this in 1980 the service industry contributed 68 of hong kong's gdp 20 years later this would increase to 86.5 percent in 2019 it was 93.4 percent the second biggest sector is construction hong kong is today a service economy that produces little other than the efforts of its people hong kong chief executives like tong chihuahua and donald tsang would not attempt to reverse the d manufacturing trend they instead pushed the view that hong kong benefits most when factors of production capital and trade flow freely between china and the west the problem with this view is that the more china reforms and opens up the less hong kong service economy model produces for its people and china has been opening up a whole lot the pearl river region is now one of the top logistics and transport centers in the world shanghai in particular has been taking on a lot of hong kong's service economy functions too many cities in the china mainland have reformed their financial restrictions allowing foreign capital to flow into their ports and logistic networks in 1997 hong kong handled 60 of china's trade with the rest of the world that has declined to 28 in 2007 and just 10 percent in 2020. with the transport trade and logistics sectors declining the only thing left growing in hong kong has been its financial services sector in 2000 finance insurance and real estate contributed 18 percent of the hong kong economy in 2019 that has grown to be nearly 30 percent and it is now pretty much the city's only growth engine but even that is starting to see competition too as of late china has been lifting foreign ownership restrictions on its investing and banking markets in 2020 they allowed foreign banks to completely own their chinese subsidiaries later that same year they did the same for securities and fund management firms now foreign companies can offer financial products and services directly to chinese consumers a swath of foreign asset managers have taken advantage the world's largest fund manager blackrock said the chinese market represents a significant opportunity to help meet the long-term goals of investors in china and internationally it also provides us an opportunity to help address the challenge of retirement for millions of people in china in 2021 blackrock started offering their first wholly owned mutual funds in the country so far the take-up has been looking pretty good the chinese investment market has been full of scams and chinese people need better ways to generate returns for their money so good for them but with other cities in china increasingly becoming financial and investment centers of their own what would that mean for hong kong's future economy what pathway remains for young hong kongers towards wealth and economic security in previous years hong kongers just bought a house but hong kong property prices are now obscene house price increases have far outpaced wage growth most young hong kongers will never have the chance to own their own place furthermore the hong kong government has tacitly acknowledged that they can't do anything about it the hong kong dollar is pegged to the united states dollar and has been since 1983. this gives the government no control over its interest rates policy the city is already incredibly dense much of the remaining undeveloped land is locked up in agricultural land banks owned by one of the big four land development monopolies like sonohongkai properties and ck hutchison holdings limited attempts at housing price reform during the 1990s failed and were quickly rolled back after the 1997 asian financial crisis and one has to acknowledge that housing price reform inherently means over leveraged individuals taking losses on their purchases and lastly public spending for housing as a percentage of gdp has not gone up since 2005. so if you can't buy a house what to do the hong kong government's new policy vision is not quite clear their moves are somewhat unstable but it appears that their vision is of a society where people with labor flexibility can work in various high-tech industries they would then grow the money earned from those jobs to build up their wealth by investing in wealth building assets this is exactly the type of vice that any financial advisor and myself will give you and it is indeed very sensible advice but the weird thing about extrapolating individually sound financial advice to a public policy for an entire society is that something sort of breaks somewhere along the way first where are these high-paying high-value jobs going to come from crypto gods and finance tick-tock influencers aside the majority of young people will earn their wealth from work salary and wages the financial sector will not provide enough of those even if hong kong continues hosting more chinese ipos the finance insurance and real estate sectors excluding construction jobs provide less than 10 percent of the city's jobs nearly 85 percent of hong kong's adult population over 3.1 million people work for one of the large service oriented companies supermarkets utilities business services and the like this part of the domestic landscape is stagnant dominated by the city's massive land developer business conglomerates furthermore the anti-competitive nature of hong kong's established markets make it extremely difficult for any new entrants to compete and gain share this all contributes to the city's massive and growing wage inequality problem bankers and big ex make a whole lot everyone else gets considerably less and i don't actually see that as a major problem so long there also exists a ladder for everyone else to rise up on too but many of these service workers are over-educated for the jobs they are doing with few prospects for career upgrading and that is bad i do want to note that the government is trying up until 2016 both government and private capital mostly invested in things that would strengthen what they consider to be hong kong's competitive advantage in other words the service industry and what they call their four key industries financial services tourism trading slash logistics and professional services however in recent years attitudes have begun to change the hong kong government has realized that it needs to open up new career pathways for its youths they identified a few emerging industries to develop industries that can help move hong kong towards a knowledge-based economy cultural and creative which includes games and software medical services like medical tourism education services like profit and non-profit educational institutions perhaps hong kong can benefit from the mainland's recent crackdown on for-profit education services testing and certification like iso certification services for companies in the pearl river area and especially key innovation and technology which i argue the government should be looking at most of all new technologies and innovations are powerful growth engines for young people i don't know if these will work out to anything in the end but it is good that they are trying the second major problem has to do with the assets the hong kong government is encouraging people to invest in and what that means for the city's people there is a little paradox at work here new policies encouraging stock ownership amongst hong kongers have succeeded increased participation in the city's stock markets and the hong kong stock exchange has become the go-to market for chinese companies like dd and alibaba fleeing unfriendly american capital markets but i am not quite sure how giving everyone a stock exchange account is going to help the lower classes find wealth or even financial stability in 2015 a survey found that the average hong kong retail stock investor was 47 years old and already makes substantially more than the average household income it is not just because they have more money to invest but because stocks are a way to stay rich not get rich i want to point out that hong kong stocks are not really growing fast enough to help your average hong kong or salary ban catch up over the past 10 years the hong kong 25 50 index fund returned just 8.2 percent annually the benchmark hang seng index fund has done 3.56 total return over the past five years the s p 500 on the other hand has returned 16.6 percent annually the reasons for this lagging performance are myriad the various regulation issues hitting maituan alibaba and 10 cent for instance but that's for another video the bottom of it is that many of hong kong's listed companies operate and make their money in the city the paradox is that unless the economic environment changes the actions those companies need to take in order to become more shareholder friendly and raise their stock prices will also shift increasing economic burdens onto its residents for instance mass layoffs and moving low-skilled workers into non-standard employment both of which contribute to income insecurity furthermore because hong kong real estate has gotten too expensive for the average hong konger to invest in outright the city's government and its financial sector have dug deep to find new assets to package up into vehicles for investors to invest in these actions have benefited certain members of hong kong's people but at the cost of long-term detriment to certain other city residents here's two examples in 2000 the hong kong government partially privatized the hong kong mtr the railway company is famous for also being a land developer which helps with the cost of building its railway networks after privatization the company stopped receiving free land grants from the government to develop new railway extensions rather than actually paying for its land the company took up the more profitable work of being a landlord land development profits declined from 8.3 billion hong kong dollars in 2007 to 530 million hong kong dollars in 2016. they make far more profit in land management they have expanded their landlord services to include advertising and telecom services one can argue that it's great that the mtr is not a financial burden on the government but a mass transit company that is more busy monetizing its existing mass transit networks rather than extending them is a bit of a long-term fail following this up the hong kong government sold the car parking and retail facilities for its public housing complexes to a real estate investment trust called the link ostensibly for raising funds for the housing authority the link was ipo to the markets tenants criticized this move either because the government sold those facilities for too little or because it would negatively affect the livelihood of shop owners both turned out to be true the ipo subscribed to by retail investors by the way valued the link at up to five times its ipo price then the link raised rents on its tenants driving many of them into economic hardship there is no doubt that hong kong's choices to demanufacture its economy and double down on services and finance have generated much wealth for a great deal of people after all the hong kong economy gdp has never been higher and i have not talked about all the people over in shenzhen who now can afford a better home and lifestyle thanks to its new manufacturing prowess and who needs these dirty difficult and dangerous manufacturing jobs anyway people would rather be lawyers and accountants than factory workers right so don't get me wrong hong kong is still a great place to be for a privileged bunch a bunch which would probably include yourself but there is a world where hong kong could have had all that in addition to a sophisticated manufacturing sector the electronics industry could have ascended the technology ladder building and exporting increasingly sophisticated products for instance a hong kong tsmc would not have been out of the question considering close ties with the west at the time there was an opportunity to transfer considerable technologies and expertise but they ended up just letting it go and now hong kong doesn't produce things that other people want so as a result it turned everything it once had its public goods and even its people into investable assets or cash flow streams at considerable cost to its majority poor who now see no way out a lesson an economic diversification alright everyone that's it for tonight thanks for watching if you enjoyed the video consider subscribing check out the newsletter or follow the twitter want to send me an email drop me a line at john asianometry.com i love reading your emails introduce yourself suggest a topic or more until next time i'll see you guys later

Channel: Asianometry

Views: 332,856

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Id: rKvKUdhm-Ms

Length: 18min 27sec (1107 seconds)

Published: Sun Mar 13 2022