By David Ogilvie
In June 2016 the UK, for better or for worse, decided to end its 43-year membership of the EU – an institution that, for all its myriad failures, weaknesses, and disjointedness, has helped deliver some remarkable feats of peace, prosperity, and openness across the continent since its formation.
Hong Kong authorities were naturally worried about the effects this tearing up of the status quo may have on the territory. As Hong Kong is one of the most open economies in the world, it seemed inevitable that the headwinds coming from the continent would affect us adversely. Any negative spillovers into Europe’s other major economies would also hit the territory’s trading, tourism, and other sectors hard.
And yet the Hong Kong authorities also understood that the fundamentals were on their side. Hong Kong has a sound financial system and resilient foundation, capable of handling abrupt changes in economic conditions and capital flows that can occur following such “black swan” events. Besides, the UK ranked as only Hong Kong’s 12th largest trading partner in 2016, accounting for 1.2 per cent of total trade – a drop in the ocean compared to Hong Kong’s largest trading partner, China, which saw total trade volumes valued at HK$3.86 trillion last year.
Of course, London’s position as the world’s largest international financial-services market means that Hong Kong must remain vigilant and monitor the UK’s on-going and heated negotiations with the EU closely, given the importance this sector has for Hong Kong’s overall economic health. Shortly after the EU referendum, for example, several commercial property funds in the UK suspended redemptions as investors rushed to withdraw in the face of heightened risk aversion towards the UK property market. This has yet to generate notable ripple effects in Hong Kong, however, with the property market remaining, for the time being, robust and rosy-cheeked.
It is even possible that Brexit may offer some solid opportunities for Hong Kong. Richard Graham, the head of a UK parliamentary committee on China relations, stated shortly after the EU referendum that China and Hong Kong should be prioritised during Britain’s post-Brexit trade talks and that negotiations should begin as soon as feasible. It would also likely accelerate the pattern of legal work being pulled out of London and towards Hong Kong.
As Hong Kong seems to have weathered the recent battering waves of political and economic disruption coming out of the UK rather well, it is worth understanding what Hong Kong can teach the UK in this time of self-imposed turbulence.
At the moment, there seems to be a fundamental lack of vision on the part of the UK’s leaders on what a post-Brexit Britain should look like. Perhaps they can take some inspiration from Hong Kong, which has just celebrated its 20th anniversary of the handover to China. The UK can do well reflecting on how the territory has transformed itself into such a free-wheeling and thriving economy despite the political vicissitudes.
The 1960s and 1970s saw Hong Kong’s economy open considerably under the purview of the territory’s then Financial Secretary, the redoubtable John Cowperthwaite. In the face of a banking crisis and growing protectionist tendencies in the EU, US, and UK, Cowperthwaite’s vision was to ensure the government in Hong Kong would do everything it could to facilitate the free flow of goods and capital. Government interference would be minimal. Instead, private companies, risking their own capital, would act as the engine of growth, something Cowperthwaite referred to as “positive non-interventionism”. Taxes would be kept low and profits reinvested back into the business sector. At the same time, government spending was minimised and limited resources dedicated to those most in need, including the creation of vast public housing projects in which to this day approximately 29 per cent of Hong Kong’s population resides.
The results have had remarkable long-term benefits for Hong Kong. The ratio of government spending to GDP remains less than half that of the UK’s and hovers at around 20 per cent, and the government has a budget surplus of 4.8 per cent. The tax rate, of course, remains remarkably low (including no VAT, sales tax, or tax on capital gains or interest income), attracting talent and boosting reinvestment. In the meantime, the UK’s budget deficit remains around 3 per cent, whilst Hong Kong’s GDP per capita last year grew to be approximately 27 per cent higher than the UK, according to the International Monetary Fund. Considering that the average Hong Kong resident earned about a quarter of someone living in the UK when Cowperthwaite took over as Financial Secretary in 1961, this is pretty remarkable.
So perhaps the UK authorities should take a leaf out of the late Financial Secretary’s book. If the country is to make the most out of Brexit, it seems that the formula that he espoused, including low government spending and market interference, free trade, and faith in the private sector to identify opportunities and push growth forward, could prove to be just the blueprint to turn the country around.
David Ogilvie is a consultant with over 12 years of experience working in financial risk management throughout the Asia-Pacific region.
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