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News analysis

HK needs to return to manufacturing to stay competitive

Service industries won't sustain growth amid volatility

Once the key starting point for doing business in Asia, Hong Kong is gradually losing its competitive edge to other regional hubs like Singapore.

To survive, Hong Kong can no longer rely on traditional financial, tourism, retail and other service industries, analysts say.

It was a point Chief Executive Leung Chun Ying raised in his annual policy address this week, when he said Hong Kong needs re-industrialisation to generate new economic growth.

At a time when the city's three pillar industries of financial services, shipping and tourism seem to be losing steam, re-industrialisation could serve as a new growth engine, said OCBC Bank economist Tommy Xie.

The reality of Hong Kong's changing status hit home in a World Economic Forum report released last September which saw the city losing its crown of the world's best financial sector to New Zealand and Singapore. Among its major industries, Hong Kong's financial sector is the biggest contributor to its gross domestic product (GDP).

Hong Kong, which has long been the preferred home for multinationals looking for a gateway to mainland China, saw its growth in the third quarter of last year taper off to 2.3 per cent year on year after expanding 2.8 per cent in the previous quarter - the slowest pace of growth in five quarters.

A new report by UBS Group predicted the city's growth this year could slow to just 1 per cent, the lowest level since the global financial crisis in 2009.

Although Hong Kong held its place as the world's seventh most competitive economy for the third year in a row in the 2015-16 World Economic Forum Global Competitiveness report, it is still five spots behind Singapore, which was ranked second, after Switzerland.

With 90 per cent of its economy today based on the service sector, the city becomes more vulnerable amid rising volatility in financial markets, global trade contraction and a weaker Chinese yuan.

In view of this, it needs to direct more resources to manufacturing, which has been phased out over the years because of high rentals and shortage of industrial space.

To tackle that, the government aims to recover idle factory premises to increase office floor space for high-value technology industries, and construct multi-storey buildings in the remaining space of industrial estates for lease to factory premises, said Mr Leung.

In a move to develop its innovation and technology industry, the government will set aside a HK$2 billion (S$370 million) matching fund to attract private venture capital funds to invest in local start-ups.

"The HK$2 billion fund on a matching basis is a good start," Mr Xie said. "However, it may need more government support, given Hong Kong's innovation has been lagging behind its regional peers.

"Whether Hong Kong will be the next Silicon Valley is hard to say. Nevertheless, Hong Kong is likely to enhance its cooperation with mainland China in terms of innovation and technology.

" Compared with Hong Kong, Shenzhen may have the better potential to be the next Silicon Valley. For Hong Kong, the focus is likely to be on robotics and big data."

Phillip Capital Management chief investment officer Linus Lim told The Straits Times that his company, which has had a presence in Hong Kong for about two decades, has started looking at investing in start-ups, including in Singapore.

"A matching fund from the Hong Kong government seems attractive," said Mr Lim. "We have just started investing in start-ups, including in Singapore. "Hong Kong didn't come to my mind because I still view it as a financial centre. But people will go to Hong Kong if Hong Kong still provides the springboard to China."

A version of this article appeared in the print edition of The Straits Times on January 16, 2016, with the headline 'HK needs to return to manufacturing to stay competitive News analysis'. Print Edition | Subscribe