20 years after handover: Four major economic issues we examined

June 28, 2017 16:03
The Four Pillar Industries – financial services, trading and logistics, producer and professional services, and tourism – experienced major changes in the past two decades. Photo: Reuters

Time flies when you’re having a full plate, and in the blink of an eye, our group Economics 3.0 has been churning out articles in Hong Kong print media for five years now.

On the eve of the 20th anniversary of the city’s handover, I would like to recap the four economic issues we examined over the past five years to gain new insights for the future.

1. Hoarding government reserves

The Hong Kong government is getting richer. In June 1997, the total asset value of the Hong Kong Exchange Fund was below HK$600 billion. Excluding the resources required to back Hong Kong banknotes by US dollars, the "free reserves" amounted to just HK$360 billion.

Two decades later, the Exchange Fund's total assets have multiplied more than six times to reach HK$3.8 trillion, while "free reserves" have multiplied more than five times to about HK$1.9 trillion.

If we divide the "free reserves" by the city’s population, each resident has about HK$260,000 kept in the treasury.

Comically, there are academics and experts warning about the possibility of a budget deficit, such that the Hong Kong government needs to pile up reserves as a precaution. And some government officials insisted the bigger the fiscal reserves the government amassed, the better.

At the same time, the cash-flush government cannot restrain itself from spending money through various funding programs and billions' worth of infrastructure projects.

Yet, the cash handout scheme we proposed, in order to return wealth to Hong Kong people, was not widely supported by the public; the same with the idea of using government reserves for life insurance of citizens.

2. Transformation in the Four Pillar Industries

The Four Pillar Industries – financial services, trading and logistics, producer and professional services, and tourism – have been a major driving force of the city’s economic growth. They accounted for 49.4 percent of GDP in 2000, and reached 57.2 percent in 2015.

The Individual Visit Scheme, launched in 2003, triggered a boom in the tourism industry, which contributed 2.4 percent of GDP in 2000 and 5 percent of GDP in 2015.

But what are the costs of the influx of mainland visitors? Passengers crowding in public transport, visitors lugging large trolley suitcases in Mong Kok and northern New Territories, triggering social conflicts and confrontations.

We proposed an arrival tax to enhance the quality of visitors, but unsurprisingly, the discussion ended without a cause.

3. The root of the taxi problem

The root of the problem lies in the rigid licensing scheme of the Hong Kong taxi industry. Since 1998, the number of citizens and tourists in Hong Kong has risen steadily, but the number of taxis on the road has remained stagnant. Meanwhile, the number of customer complaints has been escalating fast.

Taxi fares, as well as the supply of taxis, did not keep pace with the economy's performance, resulting in "non-price" behaviors such as drivers refusing to do long rides (or short rides) and taking unnecessary detours.

No amount of tinkering will improve the situation. However, when a new transport option, such as the ride-sharing platform, emerges, the government, tied to outdated licensing requirements, responded to the new sharing economy with arrests and crackdowns.

4. Sluggish graduates’ salaries?

We can’t compare the growth in home prices to wages, just like you can’t compare apples to oranges. Instead, a reasonable comparison should be between wages and rents, a better indicator of housing cost in the city.

According to a study by the University Grants Committee, starting salaries of university graduates rose by an average of 30 percent in 18 years since the 1996-97 academic year. The growth rate far outperformed that of the Consumer Price Index, and just slightly fell behind the rent for small and medium-sized flats.

If we look at the majors of the graduates, those who took up business administration, engineering and technology led in salary growth, while those who studied arts and humanities got nearly no gains in starting salary.

If the average quality of the graduates declines, their average salary figures will be misleading. If we assume the quality of graduates remains unchanged, an increase of over 30 percent in the average starting salary has been recorded over 20 years.

Looking back, could we have foreseen today’s Hong Kong 20 years ago? What will happen to Hong Kong in the next 20 years?

This article appeared in the Hong Kong Economic Journal on June 27

Translation by Ben Ng

[Chinese version 中文版]

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Visiting Associate Professor, Department of Economics and Finance, City University of Hong Kong