Stephen Roach, an economist who has taught at Yale since 2012, is well known in Hong Kong from his time in the city as Chairman of Morgan Stanley Asia from 2007-13, and prior to that as chief economist of Morgan Stanley. Known for his longstanding enthusiasm for China’s economic liberalization and growth, he has become far more cautious as Beijing put curbs on private enterprises and reinforced subsidies for the state-owned sector in the past few years. But he has rarely been as outspoken on the prospects for Hong Kong as he was in an op-ed article in the Financial Times in February. It created such a backlash that he saw fit to write a clarification in the South China Morning Post, Hong Kong’s leading English-language newspaper. Here we put the two articles together, at the suggestion of Professor Roach, to give readers a chance to judge for themselves.

First article is from Financial Times on February 12, 2024

There is more to economic vitality than the stock market. But for Hong Kong, the market has always been emblematic of success. Imagine, a small city state with what had long been the world’s fourth largest exchange (it is now fifth, according to Bloomberg data), a global leader of new stock offerings as recently as 2019.

It pains me to admit it, but Hong Kong is now over. A city I once called home and have cherished as a bastion of dynamism has had the world’s worst-performing major stock market over the past quarter of a century. Since the handover to China in 1997, the Hang Seng index has been basically flat, up only about 5 per cent. Over that same period, the S&P 500 has surged more than fourfold; even mainland China’s underperforming Shanghai Composite has far outdistanced the Hong Kong bourse.

Hong Kong’s demise reflects the confluence of three factors. First, domestic politics. For the first 20 years after the handover, its political scene was relatively stable. China was a passive Big Brother. The wheels came off in 2019-20 when, under Carrie Lam, the Hong Kong leadership made the mistake of proposing an extradition arrangement with China that sparked massive pro-democracy demonstrations. China’s response, clamping down through the imposition of a new Beijing-centric national security law, shredded any remaining semblance of local political autonomy. The 50-year transition period to full takeover by the People’s Republic of China had been effectively cut in half.

In the spring of 2019 at the onset of the democracy protests, the Hang Seng index was trading at nearly 30,000. It is now more than 45 per cent below that level at 15,750. Milton Friedman’s favourite free market has been shackled by the deadweight of autocracy.

Second, the China factor. The Hong Kong stock market has long been considered as a levered play on mainland China. For a variety of reasons, the Chinese economy has hit a wall. Structural problems — especially the dreaded three Ds — debt, deflation and demography — have combined with the impact of the Covid pandemic as well as cyclical pressures in the property market and local government financing vehicles. These forces have sparked a three-year bear market that has taken China’s broad CSI 300 index down more than 40 per cent from its spring 2021 peak. Reflecting collateral damage on Chinese enterprises listed in Hong Kong and the city’s China-sensitive services sector, the Hang Seng has fallen 49 per cent over the same period.

Third, global developments. Since 2018, the US-China rivalry has gone from bad to worse. Hong Kong has been trapped in the crossfire. Moreover, America’s “friendshoring” campaign has put pressure on Hong Kong’s Asian allies to pick sides between the US and China. This has driven a wedge between Hong Kong and many of its largest Asian trading partners. Outsize consequences are likely, especially since Hong Kong’s foreign trade totals 192 per cent of its gross domestic product.

There is no easy way out for Hong Kong from the interplay between these three developments. Hong Kong has no political discretion to chart its own course. While the Chinese economic factor might improve, I suspect any rebound is likely to be shortlived in light of lasting headwinds from a shrinking workforce and worrisome productivity prospects. Nor do I see an easy path to the resolution of US-China tensions that would prompt a reversal of the friendshoring trend.

The contrarian would argue, of course, that all this bad news is already discounted in an oversold Hong Kong stock market. China’s recent moves — a raft of government stimulus actions, jawboning, and replacement of the chief securities regulator — might trigger a temporary bounce. However, sceptical investors need to see more from Beijing than just another page from its timeworn countercyclical playbook. Until that happens, Hong Kong is likely to be mired in a trap made in China.

I will never forget my first trip to Hong Kong in the late 1980s. Notwithstanding a frightening, steep landing at the old Kai Tak airport, I was immediately taken with the extraordinary energy of the business community. Back then, Hongkongers had both a vision and a strategy. China was just beginning to stir, and Hong Kong was perfectly positioned as the major beneficiary of what turned into the world’s greatest development miracle. It all worked out brilliantly, for longer than anyone expected. And now it’s over.

Reprinted with permission from The Financial Times. The original story ran on February 12, 2024

Second article is from the South China Morning Post on February 27, 2024

I love Hong Kong. Yet I now find myself in the uncomfortable position as a naysayer. My recent opinion piece in the Financial Times, “It pains me to say Hong Kong is over”, has stirred up considerable controversy in the city I used to call home. Unsurprisingly, Hong Kong politicians have been especially critical. But former colleagues, business associates and good friends have also raised concerns. A response is in order.

While no nation, economy or city is ever definitively “over”, the title of my piece was intended to be more of a wake-up call to a city that has long prided itself as Asia’s world city, the gateway to China, one of the elite Asian tiger economies and Milton Friedman’s favourite free market.

I cited three reasons for saying Hong Kong’s glory days may now be over: a distinct loss of its high degree of political autonomy in the aftermath of the massive demonstrations of 2019-20; a weakening of Hong Kong’s economic underpinnings as a result of a protracted malaise in the mainland Chinese economy; and a squeeze from US centric friendshoring that has forced Hong Kong’s East Asian trading partners to choose sides in coping with the crossfire of the Sino-American conflict.

While the pushback has been fast and furious, few have taken serious issue with the three points raised above. Instead, many have rested their case on Hong Kong’s long-standing resilience, a seemingly innate capacity for the city to reinvent itself in the face of near existential threats.

After all, Hong Kong was written off repeatedly – in the aftermath of the 1967 riots under British occupation, the Asian financial crisis, the handover itself, and, of course, the outbreaks of severe acute respiratory syndrome and Covid-19. Louis Kraar’s scathing 1995 piece in Fortune magazine, “The Death of Hong Kong”, makes my recent missive look optimistic. Time and again, Hong Kong has defied those predicting its demise, with a series of Phoenix-like resurrections. Why shouldn’t we expect the same this time?

The three pillars of my argument noted above bear directly on this question. Resilience this time will require a new-found political and economic policy autonomy that seems highly unlikely.

A sharp resurgence of the Chinese economy would certainly help, but I would assign a low probability to that outcome, considering the mainland’s lingering structural problems – notably demographic headwinds, weak productivity, a multi-year shakeout in the property sector, and a Japanese-like debt problem. Nor do I see a kumbaya moment for the US-China conflict that would alleviate the pressures of friendshoring in diverting trade away from Hong Kong.

The counter is that resilience often arises out of new developments. Hong Kong’s role as an anchor in the US$2 trillion Greater Bay Area is often cited as such a possibility. While there can be no mistaking its potential dynamism, this regional agglomeration finds Hong Kong as one piece of a puzzle that also includes much larger and equally dynamic cities such as Shenzhen and Guangzhou. From this perspective, Hong Kong risks becoming “just another big Chinese city”.

Others pushed back on my characterization of Hong Kong’s new political constraints following the demonstrations of 2019-20.

With passage of Hong Kong’s own national security law likely and a court system that is taking aim at opposition politicians, might resilience arise from the enduring strength of Hong Kong’s rule of law? Fair point, but it seems to me that Beijing now has the last word on governance – and far more forcefully than before the demonstrations.

Finally, there were those, including Regina Ip Lau Suk-yee, convenor of Hong Kong’s Executive Council, who claimed my impressions were dated from the days I lived there (2007-12). The Financial Times piece was, in fact, written with a very fresh impression of the current atmosphere in Hong Kong that I did see for myself.

Not only have I continued to be a regular visitor to the city since I moved back to the US full time in 2012, but I made three visits to Hong Kong last year that played an important role in shaping the impressions that motivated my op-ed.

In fact, it was what I saw that troubled me the most. Many of my friends have left Hong Kong in the past few years. Companies were starting to do the same and many of those that are staying were discussing contingency plans for diversifying their exposure to Hong Kong. The risk of a talent exodus is very real.

Without talent, there can be no dynamism. Yes, the bulk of my circle of contacts remains in place. But an undercurrent of angst about the future of Hong Kong hung like a dark cloud over our recent discussions. The energy and unbridled optimism that was once Hong Kong’s most salient characteristic, its greatest asset, has been sapped.

There is a part of me that hopes I am wrong. I noted in my FT article that the Hang Seng Index, long emblematic of the city’s success, had returned to the level prevailing at the handover in July 1997. More than few have been quick to note that the index was up for six out of nine trading days since the piece was published on February 11. Dead-cat bounce, or was it all just a bad dream?

The late John Lewis, a legendary figure in the US civil rights movement, inspired a lifetime of protest in the name of “good trouble”. By raising serious questions about the future of Hong Kong, I am hoping my wake-up call can do the same.