Photographer: Justin Chin/Bloomberg

Hong Kong's Economy May Soon Be Eclipsed by the Chinese City Next Door

  • Tech hub’s GDP predicted to surpass Hong Kong’s in 2018
  • Hong Kong still to benefit from status as financial center

Hong Kong is on the verge of seeing its economy surpassed in size by the former fishing village Shenzhen, a role reversal long foreshadowed by China’s massive supply of cheap labor and subsidized capital.

Shenzhen -- less than 20 miles north of central Hong Kong -- will see its gross domestic product jump to $350 billion in 2018, ahead of its rival’s projected $345 billion, according to an analysis by Michael Parker, head of Asia Pacific strategy at Sanford C. Bernstein & Co.

Yet while Shenzhen has amply demonstrated the ability to take the original Hong Kong trade-and-manufacturing prototype to new heights, in one main area it’s the ex-British colony that still reigns supreme. Hong Kong has kept its prominence as a financial center, with its influence highlighted most recently by the opening of a gateway to the mainland’s bond market.

“There’s almost a false premise here that it has to be one or the other, whereas they’re competing in different streams,” Parker said in a phone interview. “Hong Kong is continuing to benefit from its proximity” to the mainland, and Shenzhen is boosted by “the maturation of the services and technology sector” in China, he said.

In less than 40 years, Shenzhen’s population has ballooned to more than 11 million people from 30,000, government data show -- well ahead of Hong Kong’s 7.39 million. Meanwhile, Shenzhen’s annual GDP gains have averaged nearly 10 percent since 2010.

Hong Kong, however, has averaged about 3 percent annual growth in the past seven years as the city struggled with a downturn in tourism spending, pro-democracy protests in 2014 and the world’s most-expensive housing market. It’s projected to expand less than 3 percent in each of the next two years, according to analyst estimates compiled by Bloomberg.

Like London

But the distinction between the two Pearl River Delta ports showcases China’s challenge to replicate developed-world standard financial infrastructure, even as its economy keeps expanding in excess of 6 percent.

“It’s always going to be the financial hub and the gateway -- you’re never going to get rid of it,” Stephen Innes, the Singapore-based head of trading for Asia Pacific with Oanda Corp., said of Hong Kong. “It’s like London going through Brexit: obviously it’s not going to be the same place anymore but it will still remain the financial center.”

Shenzhen has shined amid China’s efforts to move up the value chain and go beyond cheap manufactured goods like plastic toys and simple textiles like T-shirts. The city is now an information-technology hub, with sector giants including Tencent Holdings Ltd., ZTE Corp. and Huawei Technologies Co. all based there -- a jump Hong Kong has struggled to make.

Read More: Hong Kong Cozies Up to Shenzhen in Border Swamp to Lure Startups

Hong Kong’s role as a bridge for foreign investors to China’s wealth will be key to its future, says Dong Chen, senior Asia economist with Pictet Wealth Management. As entrepreneurs expand their businesses in Shenzhen, they will inevitably need to tap Hong Kong’s deep talent pool for high-end financial services, he said.

With specializations including investment banking and legal services, Hong Kong has maintained a stark gap with Shenzhen in output per person, projected at about 60 percent in 2018, Chen said. Hong Kong’s per capita GDP came in at just under $44,000 in 2016, compared with about $25,000 in Shenzhen, Hong Kong Trade Development Council data show.

“The rise in Shenzhen in general should benefit Hong Kong,” Chen said. “Hong Kong was like a role model to some extent to many coastal cities in China -- Shenzhen included -- by offering free markets. Shenzhen definitely is a very good student.”

— With assistance by Colin Simpson

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE