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The Hong Kong government will spend lavishly on infrastructure projects to boost the city’s economic growth in the years to come.self storage As Oswald Chan reports, though infrastructure spending can provide immediate economic stimulus, the city needs to ponder more on upgrading and diversifying its economy. Government capital spending from 2013 to 2018 is estimated to reach over HK$70 billion ($9.0 billion) every year, far exceeding the average annual capital expenditure of about HK$40 billion during 2008 to 2013. The government spending spree exceeds in scale and breadth the “Rose Garden” project that centered on the building of the Chek Lap Kok International Airport in the 1980s, which helped to fuel an economic bonanza that lasted more than a decade. As the Hong Kong economy is losing steam with a projected average growth rate of less than 4 percent a year in coming years, many economists and politicians have been calling for bold action by the government, sitting on a pile of fiscal reserves amounting to HK$729 billion as at end-march 2014. More important is that economic growth has become too narrowly based on finance and property. As such, the economic imbalance is widely seen to have shut out the vast majority of the population from a fair share of prosperity. The resulting widening of the wealth gap between the minority rich and the rest of the population has been a major source of escalating social discontent. To be sure, the government has proposed to vastly increase the supply of housing to ease the burden of the middle-class. In addition, it has said it will introduce a slew of measures to bring relief to the poor. But what it can do to reshape the economic structure is limited to boosting government spending on infrastructure, with the hope that the spill-over effect can lift all sectors of the economy and help create many more well-paid jobs. That is obviously the focus of the government economic policy. Chief Executive Leung Chun-ying, in his Policy Address in January, outlined the blueprint of infrastructure investments in the next decades. Lantau Island particularly captures the spotlight as the administration strives to undertake fundamental changes to the island’s role and its development potential after the completion of the Hong Kong-Zhuhai-Macao Bridge in 2016 and Tuen Mun-Chek Lap Kok Link in 2018. The government plans to build an artificial island of about 130 hectares, near to the Hong Kong International Airport, to accommodate boundary crossing facilities at the Hong Kong-Zhuhai-Macao Bridge. The government has carried out a preliminary review of the supporting infrastructure to explore the feasibility of developing major shopping, dining, entertainment and hotel facilities at the artificial island. Government sources say that the land reclamation work of the artificial island may be finished in 2015 and the relevant departments will start the planning work as soon as possible. It is expected the shopping, dining, entertainment and hotel facilities at the artificial island may commence operation after 2025. The government also plans to reclaim land to develop the eastern waters off Lantau Island near Sunny Bay and Tung Chung Bay, aiming to develop the East Lantau Metropolis into a residential area and business hub, beside Central and East Kowloon. “The artificial island project will take on great value as a bridgehead economy for Hong Kong,” Leung reckoned in the Policy Address. The new infrastructure projects announced in the latest Policy Address are important to continue pump-priming the economy, especially the 10 mega infrastructure projects announced in 2007. Those will be completed gradually in the next year or two. “Increasing government expenditures on infrastructure projects can give an immediate push to employment and domestic demand that can support local economic growth,” Tse Kwong Leung, head of economic & policy research at Bank of China (Hong Kong), tells China Daily. “The discretionary nature of infrastructure spending can enable the Hong Kong government to utilize infrastructure spending as a cushion to stabilize economic growth when the local economy is battered by any global volatility.”There are other long-term benefits as well. “Infrastructure investments can render positive impact on the domestic economy through upgrading infrastructure facilities, paving the way for economic diversification and upgrading, especially since Hong Kong can leverage its own infrastructure networks to promote trades in services in the future,” Tsang notes. Mixed reactions However, some other economists are rather more cautious, saying the impact of infrastructure spending may not be as positive as anticipated. This relates to whether future infrastructure spending can be sustainable, whether long term economic benefits brought by infrastructure investments can be realized, whether resources for economic development will be diverted away from the private sector and whether sources of economic growth in Hong Kong can be adequately diversified. First, infrastructure spending that can propel the city’s economic growth in the long run, may not be sustainable.“We are comparatively more upbeat on the prosp迷利倉cts of capital spending, as the strength of global demand will continue to support future corporate demand expectations and thus increasing investment,” Hang Seng Bank Economist Ryan Lam said in its 2014 Hong Kong economic outlook report. “However, we project a slower capital spending growth rate of only 6 percent in 2014 in Hong Kong due to tighter credit conditions and the reduced need for stockpiling,” Lam cautioned. Benny Lam, co-head of research and chief economist at the Agricultural Bank of China (ABC) International, says infrastructure spending may not provide a long term solution to fuel local economic growth. “Infrastructure spending in Hong Kong may peak starting in 2016, and after that, the government needs to diversify its economic base to preserve economic growth,” Lam tells China Daily. Second, the long term economic benefits generated by these infrastructure projects are also being called into question. “The Hong Kong-Zhuhai-Macao Bridge can help Hong Kong better integrate with Zhuhai, Macao and other nearby areas in the western Pearl River Delta (PRD), but the bridge will generate more economic benefits to Zhuhai and Macao than to Hong Kong. Hong Kong’s more developed economy means that it will not draw as much benefit from the bridge,” Chinese University of Hong Kong (CUHK) Economics Department Professor Chong Tai Leung tells China Daily. “Compared to the Hong Kong International Airport, the Hong Kong-Zhuhai-Macao Bridge should generate less in the way of economic benefit to Hong Kong because the bridge provides Hong Kong only regional links with neighboring areas while the airport infrastructure can enhance Hong Kong’s international business connections,” Chong says. Third, public infrastructure spending may snatch economic resources that private enterprise need. The Heritage Foundation, the US economic think-tank which has published the Index of Economic Freedom since 1995, ranked Hong Kong as the world’s freest economy for the 20th consecutive year in 2014. The foundation cautions however, that the city’s overall standing in the last few years has eroded. One of the relevant factors is the large increase in government spending. “In recent years, populist policies that increase spending and empower the administrative bureaucracy have held back Hong Kong’s overall rating in economic freedom, The Heritage Foundation’s 2014 Index of Economic Freedom report said earlier in January. “When governments increase public expenditure, the increased expenditure has to be funded by increases in taxes and that reduces the city’s economic freedom because it takes resources away that can be enjoyed by private individuals,” says Terry Miller, an economic researcher at the Heritage Foundation. According to HSBC Asia Economics research, Hong Kong’s investment-to-gross domestic product (GDP) ratio, representing the share of investments in the city’s GDP, will rise to 26 percent in 2014 and 2015, from 25.3 percent last year, albeit it is still 7.4 percentage points lower than the anticipated Asian average ratio of 33.4 percent in 2014 and 2015. A higher ratio means investment spending occupies more a greater proportion of the city’s economic growth.Finally, there is concern that the sources of economic growth in Hong Kong are not adequately diversified, meaning the city’s economy may have higher exposure to global cyclical volatility. Economic diversification Hong Kong’s economic structure is heavily dominated by the Four Key Industries (financial services, tourism, trading and logistics, and professional services) which contributed 58.5 percent of the total value added in the gross domestic products (GDP) in 2011, according to the government statistics released in April 2013. The same tally was 57.8 percent in 2006, meaning the four pillar industries contributed more to the city’s economic growth during 2006 to 2011. Pursuing economic diversification can help Hong Kong economy to reduce risk exposure, but economists says that the city should not strive to diversify into every kind of industries because of the high operating costs, in terms of high rentals and high salary, in the city. “Hong Kong should maintain its competitive edge in providing high-valued services, but it can be diversified beyond the realms of financial services and property development. The government is correct, in this Policy Address, to advocate developing high value-added maritime services, dispute resolution services, intellectual property trading platform and creative industries,” CUHK’s Chong tells China Daily. “Hong Kong’s expertise still lies in the sectors of financial services and information technology, whereas the city can benefit from the financial reforms launched on the mainland and fully utilize its niches as an offshore financial market,” ABC International’s Lam tells China Daily. Contact the writer at oswald@chinadailyhk.com The discretionary nature of infrastructure spending can enable the Hong Kong government to utilize infrastructure spending as a cushion to stabilize economic growth when the local economy is battered by any global volatility.”Tse Kwong LeungHead of Economic & Policy Research at Bank of China (Hong Kong) 迷你倉