Free Markets: The Fall of Hong Kong's GDP
Midnight, July 1, 1997, marked the start of Hong Kong's gross domestic product downfall from a peak to a valley. But how did this happen? A city with a prospering economy showing steady growth and a large contribution to China's economy has eroded into a seemingly dark shadow of its past self. Absent of the assistance of Britain following their departure of colonial rule, China’s current government leadership shows a perfect representation of why a free market economy is superior to a commanded economic structure.
To get a clear understanding of the economic nightmare at hand, a look into Hong Kong's past is needed for a better understanding. Following the defeat of China in the first Opium war of 1842, the British Empire added to their massive global footprint with their reign over Hong Kong. To China's demise, they again forfeited more territory to Britain, forfeiting ownership of Kowloon. Flash forward to 1898, the British again enforced their power in China by leasing an additional 360 square miles of land, known as The New Territories for 99 years.
Those decades under British Rule greatly benefited the city, with Hong Kong acting as an exemplar for Asian economies, becoming one of the richest cities in the world. Hong Kong's capitalist economy prospered for decades with a similar structure resembling the US and other thriving capitalistic nations. Even so, Hong Kong and The New Territories had acted upon a bill similar to the American constitution known as the Basic Law, ensuring democratic practices and suffrage. The bill grants citizens in Hong Kong liberties such as a separate immigration system, separate police, currency, free media, and separate court systems, under a policy called “one country, two systems.” Hong Kong is governed differently than the rest of China, having various separate laws that could land one in a labor camp if performed in the wrong region. Known as a “Special Administrative Region,” Hong Kong has its own political parties, the right to assembly, and free speech. Constructed in 1984, The New Law is in motion until 2047, but new Chinese leadership over the past 20 years has prevented the city from prospering as before. In 1997, Hong Kong’s economy accounted for 18% of China’s economy; in 2019 the once thriving city now only contributes to 3% of the economy.
Hong Kong's current economy is still free but the government take over of land and housing has been disastrous. Overpriced housing is not just an issue for the poor, but for people of all ages and tax brackets. Making matters worse, the government isn't planning to assist heavily. A controversial plan known as the Lantau Tomorrow Vision, lead by Chief Executive Carrie Lam is a possible solution to deal with the city's overcrowding, but not in a traditional fashion. Her half a trillion dollar plan includes a reclamation and development of 4,200 acres on islands where millions will live. Her distrust in the free real estate market, in her mind, enables the right to destroy sea life and disassemble delicate ecosystems of the islands. This plan has not been met with open arms, some local residents even go as far to call her the enemy of the people. On the contrary, perhaps her focus could be shifted to improving the city and making the land easier to leave and welcome investors to build and expand commercial real estate. Land to build on isn't necessarily an issue for in Hong Kong, but the government’s control of land makes it extremely difficult, thus, the city was ranked the least affordable housing market 9 years in a row by Bloomberg. Many people are forced to live in “cage homes” that are smaller than most parking spaces. Business Insider estimates that over 20,000 people live in these cage homes in Hong Kong, with living spaces less than 25 square feet for an unaffordable rent price of $180 USD monthly. Hong Kong's government leases out land to developers but with such scarce areas being actioned, astronomical prices occur such as the Sun Hung Kai Properties $3.2 billion USD deal for a gross floor area of 1.42 million square feet. Low corporate taxes force the government to heavily tax land sales, just adding to mass overpricing of real estate sales in Hong Kong.
“Hong Kong is heavily reliant on traditional industries such as finance and real estate, which covers about 70 per cent of the economy. Shenzhen’s economy is mainly supported by manufacturing and technology, which contributes about 70 per cent...Hong Kong is used to letting the market drive where its economy is heading. But if you solely rely on the market, it will make some short-sighted decisions” says Hong Hao, a head research managing director from financial service Bocom International.
China's suffocation has disallowed large growth, allowing neighboring cities to thrive. Last year, Hong Kong’s economic growth came to a screeching halt in the last quarter of 2018, producing the lowest figures in three years. Hong Kong’s GDP increased only 1.3% from October to finish up the 2018 fiscal year - the city's slowest growth since the start of 2016. Indeed, the tables have turned. Just 20 years ago cities such as Shenzhen looked at Hong Kong as a large neighboring super power, but fast forward to 2018, the formally small city quickly developed and surpassed Hong Kong economy in 2018, with a growth in GDP by 7.6% reaching 2.42 trillion yuan. Shenzhen’s initiative on technology has given investors confidence, including the city powering over 6,000 public busses fully on electricity. Experts believe Hong Kong's resistance to change is the same reason neighboring cities have expanded and surpassed the once big fish in a small pond.
“Any attempt to endanger China’s sovereignty and security, challenge the power of the central government … or use Hong Kong to carry out infiltration and sabotage activities against the mainland is an act that crosses the red line, and is absolutely impermissible,” - says Chinese president Xi Jinping.
Most China experts believe there is little chance that China will release its suffocating grip on Hong Kong and even more remote is the chance that Hong Kong will rebound to even a shadow of its former growth of GDP. Until the Chinese government puts the needs of its people first, the future of Hong Kong remains a question to many. To others with a more historical perspective, the future of Hong Kong is in fact certain, certain to continue to deteriorate, but only time will tell.
Witten by Zachary Gladstone, Edited by Grace Kelman & Alexander Fleiss
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