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Can the Swiss Model Save Hong Kong's Economy?

  • Tourist arrivals and retail demand slump as China slows
  • Private wealth boom tipped as a potential new growth driver

As Hong Kong’s traditional growth pillars teeter, the former British colony is becoming increasingly reliant on an old staple: banking. 

The economy is being squeezed by China’s weakest growth in a quarter century and a strengthening currency that’s pegged to the U.S. dollar, eating away at competitiveness. Tourist arrivals are dropping, luxury goods stores closing, and a looming U.S. interest-rate increase threatens to pull the rug out from housing prices that have surged more than 350 percent from their low in 2003.

With manufacturing long gone, that leaves the $300 billion economy headed more toward a growth model resembling Switzerland’s than its Asian Tiger roots. As China opens its markets to the outside world and the region’s rich list surges, much of the process will happen through Hong Kong, said Kelvin Lau, senior economist at Standard Chartered Plc.

"Hong Kong is the ideal platform," said Lau. "Banking and finance will remain a very important pillar for Hong Kong’s economy over the next five to ten years."

In the Asia Pacific region, there was an 8.5 percent increase in the number of individuals with high net worth in 2014 to 4.7 million people, one million more than two years ago, while their wealth increased 11.4 percent to $15.8 trillion, according to a survey by Capgemini and RBC Wealth Management. The region has already surpassed North America in terms of the number of high net worth individuals, and the report compilers expect it be No.1 in terms of wealth by the end of the year.

China and India are driving the wealth expansion, much of which is expected to make its way to Hong Kong, attracted by its legal and tax structures.

"We are seeing a lot of mainland Chinese individuals coming to Hong Kong, opening bank accounts, buying wealth management products and buying insurance products," Brian Li, deputy chief executive at Bank of East Asia Ltd., said in an interview in Hong Kong last week. "There’s still a huge potential for Hong Kong in these areas."

Safe Harbor

That means Hong Kong -- home to the Asian headquarters of HSBC Holdings Plc and host to investment banks and private wealth managers including UBS Group AG and Citigroup Inc. -- could become like Monaco, Liechtenstein or Switzerland, deepening its role as a safe harbor for the region’s rich, according Keith Pogson, a Hong Kong-based senior partner for financial services at Ernst & Young.

It’s not just private banking that could drive the economy. In the hedge fund industry, total assets under management in Hong Kong expanded from $87.1 billion in 2012 to $120.9 billion as of Sept. 30 2014, an increase of 39 percent, according to official data.

That potential is a rare bright spot. Hong Kong’s private-sector economy suffered its sharpest contraction since 2009 in August, according to a private survey of purchasing managers. With spending by Chinese tourists dropping off, retail sales by value slid 2.8 percent in July from a year earlier.

UBS has lowered its target for Hong Kong’s benchmark stock gauge by 25 percent, saying its worst-case scenario for the city is coming true. The Hang Seng Index will slide to 19,775 as slowing growth in the city and China weigh on corporate earnings, Spencer Leungwrote in a Sept. 2 report.

The Hong Kong Trade Development Council Export Index slumped to 37.1 in the third quarter from 46.8 in the second, indicating a “significant deterioration” in exporters’ confidence, according to report dated Sept. 16. Exports are projected to remain flat through to the year end, the HKTDC said.

Trade remains the largest portion of Hong Kong’s economy, at 17 percent.

Resilient Growth

Yet for all the negatives, Hong Kong’s economy expanded faster than analysts forecast in the second quarter, helped by rising wages and low joblessness. Growth of 3 percent is tipped for 2016 and 2017, up from an expected 2.5 percent this year, according to the median estimate of economists surveyed by Bloomberg.

Strength in banking could stand to remain the key to offsetting weakness in other traditional pillars. After the retail sector, financial services are the biggest employer in Hong Kong, with total jobs rising to 218,747 from 152,142 a decade earlier, according to government data.

"The Chinese still don’t trust their own, so they look to international private banks to be the holders of capital," said Pogson of Ernst & Young. "An offshore private bank still has great appeal and that is not going to go away any time soon."

— With assistance by Bei Hu, Frederik Balfour, and Ailing Tan

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