On July 1, Hong Kong will commemorate the 20th anniversary of its transfer of sovereignty from Britain to China. The Hong Kong Special Administrative Region (HKSAR) government has budgeted an extravagant HK$640 million (S$114 million) to celebrate this historic milestone, but ironically has also revealed that it will mobilise 10,000 police officers to "protect" the attending state leaders from China, including President Xi Jinping.
The local authorities also disclosed that "huge barriers" will be erected to cordon off the hotel where China's VIPs will take up their three-day residence.
For those who follow Hong Kong's tumultuous political developments in the past three years, the planned implementation of such tight security measures does not come as a surprise.
Rather than aiming to deter assassination attempts or terrorist attacks, they are more intended to shield Chinese state leaders from the embarrassment of being harassed by unruly local pro-democracy protesters and pro-independence "separatists".
Tellingly, these over-the-top security procedures only serve to highlight the political and socio-economic malaise that has been brewing in the SAR for nearly a decade.
On the pretext of the lack of progress in constitutional reform and universal suffrage, the eruption of the "Umbrella Revolution" in October 2014, which spurred tens of thousands of protesters to occupy public areas over a three-month period, was a clear manifestation of the local people's longstanding discontent with what they perceive as an unresponsive and unrepresentative SAR government. They hold the government accountable for the development of several economic and social "fault lines" that have had detrimental impact on their livelihoods.
Hong Kong's "fault lines" stem from chronic income stagnation and growing inequality, the soaring cost of living driven by ever-rising housing prices, and depressing employment prospects for the young, especially those without a university education.
According to official statistics, the real wage index for non-professional and non-managerial employees has been on a downward trend for several years.
Even university graduates are facing increasingly bleak employment prospects due to an oversupply of graduates from eight government-funded academies plus a myriad of privately funded post-secondary institutions, as well as a mismatch between salary expectations and skills.
Meanwhile, Hong Kong's Gini coefficient, a measure of wealth distribution, has climbed to a record high, from 0.518 in 1996 to 0.539 in 2016. Likewise, housing prices have become severely unaffordable, with the city's median home price being 18 times the median household income, the world's highest price-to-income ratio.
The root cause of Hong Kong's "fault lines" is the government's fiscal dependence on selling land at high prices through its continued collusion with real estate developers, which has sent housing prices skyrocketing in the past decade. The recent convictions and jail sentences meted out to the SAR government's former No. 1 (chief executive Donald Tsang early this year) and No. 2 (chief secretary Rafael Hui in 2014) officials for accepting bribes and favours from real estate and banking tycoons illustrate the breadth and depth of decay within the SAR public administration.
Adding to these two sordid cases, the current Chief Executive-Elect, Mrs Carrie Lam, who had received much of her election campaign donations from business magnates, is being investigated by the Independent Commission Against Corruption for "transferring benefits" by appointing an architect for a public building project without an open tender.
Even before these episodes, The Economist had in 2014 placed Hong Kong at the top rank of its "Crony Capitalism Index", which measures the extent of profiting by business tycoons from close relationships with government officials.
Financial services losing their edge
Besides alleged business- government collusion, the SAR suffers from an unsustainable economic structure, which deepens the "fault lines". Specifically, Hong Kong's industry pillars - financial services, entrepot trade and logistics, and regional headquarters (RHQ) services for multinational corporations (MNCs) - are increasingly facing fierce competition from China's ambitious first-tier cities.
In financial services, market capitalisation of the Shanghai Stock Exchange has surpassed Hong Kong's since 2011, followed by the Shenzhen bourse since 2015. These advancements, coupled with encouragements from the China Securities Regulatory Commission, have led to more mainland Chinese initial public offerings diverting from Hong Kong to China.
Likewise, offshore yuan payments are increasingly handled by centres beyond Hong Kong, with the combined share of these centres surging from 17 per cent in 2013 to about 30 per cent this year.
This is clear evidence that Hong Kong is losing its edge as the premier offshore yuan centre.
Last but not least, the inception of the Shanghai Free Trade Zone in 2013, with a clear Beijing mandate to become "the global centre of yuan trading, clearing, and pricing", will pose a long-term threat to the SAR.
In short, facing multiple challenges, Hong Kong's status as a financial hub will be less secure going forward.
Decline of port status
In entrepot trade and logistics, rapid expansion of mainland Chinese ports, which offer lower costs and competitive services, is eroding Hong Kong's hitherto tight grip on this industry. For example, the SAR charges US$276 (S$383) per 20ft equivalent unit (TEU), whereas Shanghai's port only charges US$185 per TEU.
Beijing's relaxation of "cabotage rules" since 2013, which now allow foreign-flagged ships to move their cargoes between China's coastal ports, is a severe blow to Hong Kong as it sets in motion an irreversible decline of the territory's role as the key transshipment centre for China.
As a result of these negative developments, the SAR's container-cargo throughput has recorded a persistent downward trend in recent years, averaging an annual contraction rate of 4.7 per cent between 2011 and 2015.
From being the world's busiest port in the early 2000s, Hong Kong has now fallen to the fifth position, outpaced by Shanghai, Singapore, Shenzhen and Ningbo-Zoushan. Guangzhou and Qingdao, currently ranked seventh and eighth, are catching up expeditiously.
Last but not least, Hong Kong faces mounting challenges to its attractiveness as a hub for MNCs' RHQs. Exorbitant operating costs, pervasive air pollution approaching China's level and aggressive self-promotions by some of China's ambitious tier-one cities are the key threats to the SAR's hitherto stranglehold on this business segment.
Mercer has rated Hong Kong as the most expensive location in Asia for expatriates, while CBRE Research ranks the territory's prime office market the most costly in the region. To lure MNCs to (re)locate their Greater China/Asia-Pacific RHQs to their municipalities, Beijing and Shanghai, aided by the Ministry of Commerce, have promulgated attractive RHQ schemes, offering generous tax rebates/exemptions, special distribution and export/import rights, wider market access and so on. Today, Beijing can boast the presence of nearly 200 MNC RHQs, while Shanghai hosts over 500 of these high value-added commercial entities. This unfolding trend is clearly developing at the expense of Hong Kong.
With the steady erosion of the competitive advantages of the SAR's main industry pillars by its mainland rivals, a fractured legislature split between Beijing-leaning and pro-democracy lawmakers, an executive government beholden to vested business interests and hiding behind an archaic policy of "positive non-interventionism", and an "old" economy captured by self-serving crony capitalists, Hong Kong's descent seems as inevitable as it is inexorable.
The 2014 "Umbrella Revolution" may thus be seen as a manifestation of the people's desire to directly elect a more responsive and activist government that can help reverse the SAR's declining economic fortunes.
However, with the constitutional reform being stalled and the government in limbo, unable to secure policy consensus and support from the divisive legislature and deeply entrenched business interests, the territory's "fault lines" will only deepen and widen.
On July 1, President Xi will be in town to "celebrate" the 20th anniversary of an HKSAR that is facing a much clouded destiny.
- A former Hong Kong resident, Dr Friedrich Wu is an adjunct associate professor at the S. Rajaratnam School of International Studies in Nanyang Technological University, Singapore. He previously served as an economics director at the Ministry of Trade and Industry, and was chief economist at DBS Bank.