Hong Kong Economic Strengths and Vulnerabilities During the Recession

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The trauma of the global financial crisis has clearly not alleviated from the Asian region, particularly if we talk about the East Asian economical condition, this region is prepared to collaborate with the West to reap the benefits of integrated financial systems. The Hong Kong Monetary Authority, being at the crossroads of East Asian financial flows, has been pushing for regional financial integration to increase market size and reduce vulnerability to financial stability (Gill et al, 2007, p. 14). “Hong Kong is a limited economy dependent on trade and globalization, which has been stuck between two major economic engines, US and China, and has been directly linked with their growth rates” (HK, 2009, p. 14).

The recession period was not felt in the newly formed HKSAR, as the government was able to acquire public confidence in the Chinese government and HKSAR (Lee, 2001). Thus, HK’s economy continued to perform well stable, until the political change brought uncertainty which affected the government’s performance at the executive and bureaucratic level (ibid). Contemporary government economic leaders in the Asian financial crisis are bound to adopt the simulative policies set by the Chinese government in 2003. There is a reason behind sticking to the same old set of political ideologies. The economic distress that Hong Kong has been through up till this day questions the Hong Kong Special Administrative Region (HKSAR) about the consequences of its economic recovery, under present-day recession. However, the identified vulnerabilities include:

Absence of long-term structural policies

The adoption of ‘Laissez-Faire’ has escorted the Hong Kong economy to a platform where there are no long-term development plans and policies. The lack of developmental strategies in this era of global recession has paralyzed the HKSAR government to cope up with the advancement, technology is going through. Thus, Hong Kong is depriving what we call the new ‘outsourcing’, ‘supply chain’ economy, since it does not work toward a long-term developmental strategy.

In the case of foreign direct investment, Asian capital flows mostly to China, for the wide-ranging opening policies adopted by China, is creating a situation in which costs of production suppress those that are significantly just across the border from Hong Kong. This creates a vulnerable situation where the investment of the trade-oriented type dominates Hong Kong’s economy. Contemporary theoretical approaches that emphasize the ‘internalization’ of markets within multinational firms (Chiu, 1995, p. 11) reflect more convenience with Chinese multinational firms that are smaller than those of the Hong Kong, and possess more interest from large ethnic Chinese communities. Such a ‘competitive advantage’ in preferring investing in China, is not only a vulnerability to the Hong Kong economy but a threat that must be addressed at the political level.

Lack of Innovative Economic activities

There is no doubt that the transformation of Hong Kong from export manufacturing to a post-industrial economy has opened up many doors for being a middleman between China and the West, but at the same time it has increased the dependency on Chinese policies and norms. In the process of emerging as a world city, Hong Kong’s economy has become progressively tied to that of China through its Guangdong connection. Such dependency seeking effective strategies to upgrade the economy has only resulted in losing the confidence of the HKSAR. Today, with the reliance on low-margin projects like Disneyland and Individual Visitor Scheme (IVS), Hong Kong’s economy is more dependant on the economic partnership with China.

The strength that the government has witnessed in a pool of economic vulnerabilities is that Hong Kong possesses a myriad of comparatively advantaged expansions in the field of labor-intensive manufacturing industries (Li, 2002, p. 127). A vast range and variety in the manufacturing sector have given a tremendous boost to Hong Kong’s export base. This has not only raised the trade and has escorted the income to expand by marking a shift in the commercial and financial sectors, but has also raised the professional services. One can say that China has helped Hong Kong to move in new economic horizons, and has helped the economy to further expand the commercial sector in Hong Kong. However, despite providing the foreign investors full autonomy and prominence over the service sector, FDI (foreign direct investment) has taken the form of entirely foreign ownership. Such autonomy based on joint ventures, on one hand, lacked domestic interest and participation, on the other hand, it increased FDI with a tremendous decline in foreign investment from other big investors including Japan, the US, mainland China, and the UK (Li, 2002, p. 127).

There is a need to refine initiatives in favor of technology and computer skills. There are presently no incentives to Hong Kong IT industries and rare development in the field of knowledge-related industries. HK government does not finance or subsidize IT firms or any reform of the financial sector to promote and consolidate the economy’s status. There has been very limited technical and scientific research that restricts modernization of the infrastructure and halts competition through deregulation of telecommunications and other service industries (Jao, 2001, p. 213).

Lack of Technology

With absolutely no technological policies and innovative measures, HK stands alone in this technological innovative era. Though it is a plus point for the HK economy to consider the Government’s initiatives pertaining to Cyberport and IT, even the response from the private sector and other IT firms is encouraging. But what about the technological isolation that presently HK is witnessing. Although by helping China in providing the ‘custom software solutions’, HK works in collaboration necessary for modernization and development, but since it does not have its own niche in knowledge management, HK suffers.

Inadequate Prevention from financial crisis: The existing mechanisms and institutions being followed in HK are simply inadequate to prevent and cope up with the contemporary financial crunch. The continuing trend toward financial liberalization must be set to increase the likelihood and frequency of currency and financial crisis (Gill, 2007, p. 117). Unfortunately, this has been set to decrease short term capital flows, where greater emphasis has been done to build up huge foreign currency reserves, at a greater cost of self assurance. Financial liberalization has bound the government to make minimum usage of macroeconomic instruments, because these instruments are available in a limited manner to deal with the crisis aversion. This has left the HK government to deal in a less effective manner, which enhances economic downturns rather than reducing its impact. National macroeconomic policy should be autonomously granted to HK, so that government possess the right to intervene in crisis situations, so as to lessen down the economic consequences.

Ineffective Crisis Management Mechanisms

Financial crisis management has always been dealt ineffectively for the inadequate sources use to equip the financial institutions. HK, as a middle income country, suffers devastating results for the real economy because of limited, slow and unclear disaster management imperatives. There is lack of emergency financing during crisis, so the government envisions and needs speedy availability of emergency financing and new procedures for timely debts. In this case, international financial institutions must understand their responsibility to offer new financing procedures in a crisis. Instead of providing benefits to the foreign creditors, arrangements must be made while introducing new mechanisms for foreign creditors to share responsibility for their lending practices. Contemporary greatest hindrance experienced by HK in managing through economic crisis is the decision made by World Bank and other multilateral development banks that have abandoned industrial financing to East Asian countries.

Open Capital Markets Regional Crisis

As one of the most liberal economies in the industrial world, HK is adversely affected in the regional public and private sectors in context with other Southeast Asian members. Other trade partners and competitors, despite having similar trade structures suffer the consequences of regional crisis because of trade intermediation and competitive service exports (Pempel, 1999, p. 102). However, with the retreating from open capital markets, where on one hand HK experienced ease of capital flows, on the other hand it favoured domestic deflation with higher interest rates. Hong Kong is among those few vulnerable states, which remain under constant pressure of political influences to deflationary policies. Government heavily rely on the inflow of foreign reserves that does not likely preserve own currency values. Economy is weakened via vulnerable conditions of macroeconomic policy responses by external political expectations and domestic political requirements. Such economic condition of Hong Kong has contributed towards making the economic pressure intense on the global capital market.

The relationship with China affects HK’s economy in a negative manner by escorting the domestic and foreign capital market towards unnecessary pressure. Such a pressure in the monetary authority politicizes capital and property markets by making them vulnerable to the market expectations. Since a crisis in one neighbouring country has a profound impact on the other linked country, particularly when the two are autonomous in their currency and capital market linkages, the relationship between the two countries serve to be an important source of contagion in the Asian economic crisis. Even when HK experienced currency devaluation, the competitiveness of other East Asian countries was affected, thereby devaluating Chinese and Singaporean currencies as well (United Nations, 1999, p. 49).

Poor corporate governance with a deregulated market, having no authority and legal restrictions on foreign investors and multilateral companies and with absolutely no government interference, HK markets enjoy a high level of standard in financial sector. Although, Hong Kong along with China stands alone in the global competitive market where shareholders acquire a strong position, but the fact is that the current economic recession demands at least some kind of external discipline on the contested takeovers. Hong Kong lacks such kind of external stress on the creditors and investors.

It is obvious that present day Hong Kong is experiencing new challenges that are more focussed on the economics of the supply side. Real estate and property tends to ne another challenge that relates to the geographical feasibility of housing. This indicates the limited territory of Hong Kong is likely to experience further social and environmental complications; therefore this arena also needs implications. For instance with the increase in supply of low-income workers, competition would grow, which would keep the average wage on a bottom line. With the increase in workers competition, unemployment would remain a common issue, particularly if Hong Kong fails to adapt to the growing trends of knowledge-based economy.

The challenge to the present day recession is to minimize the rapid share of Hong Kong’s economy in order to sustain level of employment along with absolute income means. Another challenge is to find a mediocre way that works through macroeconomic similarities among the Asian world. Recession attacks have been a common threat to all neighbouring Asian countries, particularly those having similar economical background and social scenarios. The dilemma with foreign investment is that when they see economic vulnerability in one country, they feel reluctant to invest even in other neighbouring countries. Such a loss of confidence contributes toward economic crisis that also affect other countries. In the way to economic crunch, national banks play a vital role in having a misperception that their operations are secure against severe contingencies. What the banks use to do is that they lend from abroad such uncertain projects that usually fail to fulfil the basic security requirements. This not only cause inconvenience but also escort the Asian economy towards unnecessary investment which further leads to insufficient measures to combat economic risk. A vulnerable economy is followed by adverse ethical dilemmas that are aggravated by vague financial policies in public and private sector financial institutions and does not take into account bankruptcy procedures. Thus, the Hong Kong economy needs to understand its market liberalization, so that proper attention must be given to risk assessment and finances.


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BusinessEssay. "Hong Kong Economic Strengths and Vulnerabilities During the Recession." December 12, 2022. https://business-essay.com/hong-kong-economic-strengths-and-vulnerabilities-during-the-recession/.