Today, Hong Kong faces great economic uncertainty and unprecedented market volatility.

Recently, Hong Kong’s financial secretary John Tsang Chun-wah warned that the city’s economy is facing its “worst time in 20 years.” In the past half a decade, growth has more than halved close to 2.5 percent. With Brexit chills, analysts expect a contraction.

However, the writing has been on the wall since the global financial crisis. Yet, critical decisions have been delayed.

Growth engines fading

Hong Kong’s old growth drivers remain necessary but are no longer enough. In the past, export-led growth fueled Asia’s tigers, including Hong Kong. Today, advanced West can no longer absorb Asian imports, and China's growth is decelerating.

Last spring, concerns about Hong Kong's economy led some ratings agencies to downgrade their outlook to negative, after same action on China. But while the mainland can still rely on catch-up growth and rising living standards, Hong Kong’s aging economy must do with slower growth, stagnant living standards and income polarization.

In the past, Hong Kong’s property developers reduced risks by relying on prudent financial policies, funding flexibility and recurring income streams. Today, those positives have been offset by rising supply, slower growth, and the Fed’s future rate hikes. However, developers’ presence in China’s urban growth centers has protected margins.

Similarly, retail sales can contribute to Hong Kong’s growth but not without the mainlanders' role in the economy. The same goes for logistics and Chinese firms. Moreover, the city’s thriving tourism is not viable without mainlanders who account for more than three of total arrivals.

Without China, Hong Kong would be left with only half its trade and a quarter of its foreign investment.

To Brexit or to OBOR

Unfortunately, Hong Kong is also highly vulnerable to Brexit spillovers. Outside Europe, it has relatively greatest trade, investment and financial linkages with the UK. Due to the Hong Kong dollar, which is rising with the US dollar as investors are scrambling for safe havens, it faces even greater headwinds than Singapore.

Last year, Hong Kong’s exports to the UK and the rest of the EU were 14 percent of the total, relatively highest in Asia and thus exposed to Brexit and EU risks. In contrast, China’s One Road One Belt (OBOR) initiative would allow Hong Kong to continue to benefit from trade and investment.

In the past, Hong Kong was China’s financial gateway to the world. Today, that role belongs increasingly to Shanghai and other megacities in the mainland. Indeed, Hong Kong's sustained attractiveness as a financial hub is not viable without regional economic integration.

Guangdong is morphing into a global innovation hub, which could greatly complement Hong Kong's business services. But without China, Hong Kong’s innovation, as measured by R&D of GDP, is below 0.8 percent – a third of that in Singapore and at the level of South Africa and Egypt.

From growth to equity

In the coming years, the current trend lines will become more prominent. During the handover of Hong Kong in 1997, US economy was almost 10 times bigger than China's. Europe was integrating. Hong Kong’s living standards were 11 times higher than those in China.

Today – two decades later – US economy is only a third larger than that of China. Europe faces fragmentation threats. Hong Kong’s living standards are on average about 3.7 times higher than those of China, but almost at par in certain districts of Shenzhen.  

The key point is “on average.” In Hong Kong, income polarization has soared to alarming levels, as evidenced by the gini coefficient. Today, the city’s polarization is worse than that of Brazil and Zimbadwe.

Concerned with gloomy prospects, Hong Kong tycoon Li Ka-shing recently suggested raising profits taxes to boost public spending to narrow the wealth gap. In the absence of hope, political despair by a few may undermine living standards of many in the future.

However, there is a choice. Participating in Chinese economic growth can alleviate Hong Kong’s transition to greater equity. To thrive, small and open economies need growth, integration – and hope.