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2019 February
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CGCC Forum: Seizing New Opportunities from Reform and Opening-up

Ever since the reform and opening-up of the country began four decades ago, the Mainland has been experiencing soaring economic and social development, as well as improved livelihood of people. The country is now the world’s second largest economy. To mark the start of the new year, relevant government officials and expert scholars were invited to speak at the CGCC Forum to offer their insights and explore this year’s macro-economic prospects under the current global landscape and the new round of reform and opening-up, the directions of the country’s reform and opening-up in the new era, as well as the role of Hong Kong.

 

Paul Chan: Supporting businesses, safeguarding employment, stabilizing the economy

Looking back on 2018, Paul Chan, Financial Secretary of HKSAR, admitted that both the market and its fluctuations were difficult to predict as there was anxiety over the future of the global economy. The volatility of the stock markets around the world in the past few months indicated that we will face economic challenges this year. According to Chan, the main risk factors of the current world economy will continue to be the trade conflicts between China and the US, the gradual financial tightening in various advanced economies, the Brexit, as well as other geo-political risks.

 

Chan pointed out that the overall economy of the Mainland has stayed robust and a steady annual growth of around 6.5% is expected. While trade conflicts may affect the external trade performance of this year, the Mainland has been much less dependent on external demand after years of structural reform, and domestic demand is now an important driver to stabilize the economy. The Mainland shall continue pushing its economy towards quality development, deepening market reform, promoting opening-up in all directions and maintaining its economy to operate within reasonable thresholds.

 

As for the external environment, Chan foresaw that economy-boosting effect of the expanding fiscal policy in the US will gradually recede. In addition, the US stock market has been rather volatile and sensitive in the past few months. Therefore, the growth rate of the US this year is believed to fare worse than the last. He further analyzed the situation in Europe, noting that we should keep a close eye on the progress of Brexit, and the market generally expects further slowdown in the eurozone economy this year. As the recent Purchasing Managers’ Indices (PMIs) of many Asian economies have been hovering around the neutral territory, and the economic growth of a few ASEAN economies have also slowed down, he believed that performance of export sector and manufacturing activities in the region would turn weak in these few months.

 

Chan reckoned that Hong Kong as a small external-oriented economy would find it difficult not to be impacted amidst stronger downward risk of the external economy. He stressed that the HKSAR government will continue to develop external trade in multiple directions and uncover business opportunities in markets with high potentials to promote investment. The new Budget will strive to “support businesses, safeguard employment, and stabilize the economy”, making good use of budgetary policies to respond to measures in a reverse cycle and to alleviate the hardship faced by members of the public. Opportunities offered by the construction of the Greater Bay Area and brought about by the “Belt and Road Initiative” (B&R) will be seized to inject new momentum into Hong Kong’s economy.

 

George Leung: The banking industry approaching the virtual age

Regarding the future development of the banking industry, George Leung, Advisor, Asia Pacific, The Hongkong and Shanghai Banking Corporation Limited predicted radical changes in the next decade. The future will be an age of “mobile banking”, and the mainstay role of brick-and-mortar banks will be replaced by virtual ones. Following gradual reduction in their numbers, physical branches and ATMs will be eventually eliminated. The rapid development of big data, artificial intelligence and biotechnology will be critical, as they allow banks to verify customer identity with fingerprints or facial recognition, as well as to analyze customers’ assets and offer investment advice. The World Economic Forum has even predicted the “death of savings” in the next two decades because everyone’s money will be instantly distributed to payment, monthly contributions and investment the minute it is received.

 

The popularity of the internet and smartphones is the key criteria to materialize virtual banking. The penetration rate of the internet has now reached 53%, which is on par with the level of urbanization, which stands at 55%. At 68%, the penetration rate of mobile phones implies that the popularity of mobile phones has extended to rural areas. Leung pointed out that the biggest divide between the 20th century and the 21st century is that information flow will replace the flow of goods to become the biggest source for GDP growth. E-commerce will facilitate even closer global connection. At present, 50% of the world’s service trade has been digitized.

 

Leung anticipated that the world will turn into a cashless society as a result of the prevalence of virtual banking. China and India are the major contributors in facilitating a cashless society in the Asia-Pacific region. As more and more electronic wallets are launched in Hong Kong, the “Faster Payment System” rolled out by the HKMA is effectively linking various payment platforms, which is hoped to further accelerate the progress of cashless development in Hong Kong.

 

Leung emphasized that the next twenty years will see the transformation of banking services through fintech. In future, Hong Kong should strive to solidify its position as a hub for financial technologies. Otherwise, it would be very difficult to maintain its standing as a global financial center. As of today, neither the capital investment that Hong Kong made in fintech nor its competitiveness in the discipline is a match to Singapore. He urged the government to help the industries catch up immediately.

 

Liu Shijin: “Filling Gaps” to unleash growth potentials

Liu Shijin, Vice Chairman of the China Development Research Foundation, admitted that the overall Chinese economy has been on a downward trend since 2010. He reckoned that deceleration is unavoidable after 30 years of accelerated growth. With reference to the development experience of Japan, the growth and slowdown rates of China conform to international growth patterns. During the period of transition, the economy will demonstrate medium-to-high speed growth, which is underpinned by demand, supply and the fundamental changes in the financial structure. As different aspects achieve appropriate adjustments, the growth rate of the Chinese economy will stabilize, and the quality of growth will also be enhanced.

 

The economy of China touched the bottom in 2016. However, Liu thought that the U-shaped or V-shaped rebound anticipated by some people will not occur. On the contrary, the Chinese economy will enter a medium speed growth platform from now on. He also noted that by appropriately lowering expectation on growth, it is more favorable for stable development; it also prevents regional government with high leverages to further expand sizeable infrastructures for the sake of pursuing numeric growth, which would end up in augmented regional debts.

 

Liu thought that the next two years would be an important stage, because China will be able to actualize the century-old goal to become a moderately affluent society by 2020 as long as the economy maintains a growth of 6.2%. He expected the economic growth would be adjusted to 5 to 6%. Although some people may be anxious that this would illustrate economic problems in the Mainland, Liu pointed out that the high or low speed of growth is indeed a relative concept, which is pegged to the potential growth rate of the current growth stage. As such, 5% is already quite a high speed during a medium growth stage. At the same time, China is still the world’s top economy in terms of growth volume; its transformational upgrades and new development in innovation have also provided international investors with ample opportunities.

 

Speaking about the future growth direction, Liu emphasized that the Chinese economy needs to identify new growth drivers. As infrastructures and real estate market have both grown past their historic peaks, there will be limited growth potentials, reduced efficiency and increased risks. From now on, the focus should be placed on “filling gaps” rather than “climbing up”. He noted that the issue of administrative monopoly still exists in some places, which leads to inadequate competitiveness, high costs and low efficiency. On the other hand, the very wide disparity in income allocation has resulted in inhibited demand potentials and human capital. He observed that by knocking down administrative monopoly, the service industries can be opened up not only externally but also for the participation of private companies. State-owned assets, social insurance, etc. are the top priorities of China.

 

A Fresh Start for Reform and Opening Up

For its dialogue sessions, the forum invited Liu Shijin, Vice-Chairman of the China Development Research Foundation; Zhihuan E, Chief Economist of the Bank of China (Hong Kong); Herbert Chia, Member of the Board of Directors of Hong Kong Science and Technology Parks Corporation and Larry Hu, Head of Greater China Economics of Macquarie Group to analyze from multiple perspectives the opportunities and challenges for Hong Kong’s and the country’s economic development in the new phase of reform and opening-up.

 

Liu Shijin: Building a high-standard economic systemthe economy

China has made great achievements in its 40 years of reform and opening-up. Liu pointed out that the key was the establishment of a market economy system with Chinese characteristics, but he believes there is still room for improvement. Faced with a new phase of reform and opening- up, the Mainland economy must establish a corresponding high-standard system, involving numerous issues such as trade negotiations, fair competition, status of state-owned enterprises, industrial policies, government subsidies, intellectual property, and labour treatment. Liu stressed that these issues cannot be avoided, nor should they be resolved due to foreign or international pressures. Instead, they should be resolved independently according to the country’s own development.

 

The future economic opportunities in the Mainland lie in the rise of urban clusters, such as the Beijing-Tianjin-Hebei region, Yangtze River Delta and the Greater Bay Area. Liu said that the concept of urban clusters focuses on characteristics and strengths. Citing an example, he said that Shenzhen’s medium/high-tech manufacturing capabilities and Hong Kong’s high-standard professional services are strengths that are not available in other cities. The next step is to align these strengths with the needs of the Greater Bay Area and the entire national economy, which will surely create many new opportunities.

 

Zhihuan E: Capitalizing on late-mover advantage in fintech

E believes the new phase of opening up will focus on the service industries. Since Hong Kong is a modern economic system that focuses on services, it will gain more opportunities as the Mainland further opens up its service industries. Hong Kong can also provide a seamless connection with international markets in its role in the B&R, which is an important engine for the opening-up of the country’s economy. She added that if the various production factors and key resources in the Greater Bay Area can be effectively distributed in the next five years, they can strengthen the rise of industrial clusters and advantageous industries.

 

In view of the onset of fintech, she admitted that Hong Kong is lagging behind the surrounding regions in fintech development, so it must strive to capitalize on its late-mover advantage. She also stressed that Hong Kong’s banking sector must do well in fintech in order to capture the development opportunities in the Greater Bay Area.

 

Herbert Chia: Paying attention to details for technology development

Chia believes Hong Kong’s technology development was in a cold-start stage two years ago, but since last year, the HKSAR Government has focused on supporting I&T enterprises, which is a very important step. He pointed out that Hong Kong is most in shortage of I&T talents, but it should be able to attract such talents as long as there are opportunities.

 

Chia believes for technology development, we must pay attention to details. We should not only focus on the top-level design, but also find a suitable entry point to extend and expand. He advised businesses to expand their horizon and make the maximum use of the country’s resources and markets with their roots in Hong Kong and eyes on the world.

 

 

While technology R&D is important, he reminded that issues caused by technology must be properly addressed, such as personal privacy, data security, and ethical issues arising from technology. Therefore, he believes it is necessary to improve technology management capabilities.

 

Larry Hu: Allocating resources effectively

Hu has a more optimistic view of the Mainland economy in the near term. He pointed out that since the supply-side reforms implemented by the Mainland in 2015 and 2016, commodity prices have doubled and real estate inventories have halved in the past three years, which is a demonstration of the effectiveness of the administrative measures. Nevertheless, he noted that given the trade war, the Mainland economy will become increasingly more open and administrative measures will become increasingly less effective, but without opening-up, economic growth may slow down. Therefore, opening-up and not opening-up are both risky. However, if the Mainland economy could grow at a rate of 5% per year, China’s economic scale would be comparable to that of the US and would be two times as high as that of Japan in ten years’ time, so it still has a lot of development potential.

 

China’s economy has passed the rapid growth stage. At present, it is faced with mismatched allocation of resources for education, health care, land and capital. Such resource mismatches affect future economic growth. Hence, China should strive for effective allocation of resources in the next 40 years.