The city is dying

Many of us are very proud that several international organizations have rated Hong Kong as one of the best cities for living, shopping and travelling. The strong support from China and the very high level of freedom Hong Kong enjoys have sustained our economic growth over past years.

Being a small city, it is impressive for Hong Kong to achieve such an outstanding performance. It seems that everything is so good today, with low unemployment rate hitting 3.3%, historically high property price, and a strong positive sentiment in many business sectors.

But behind these cheerful numbers, can Hong Kong maintain its competitiveness?

Let’s first look at the decreasing consumption power. Since earlier this year, more and more people started feeling the pain of growing inflation, especially for many daily products.

If you compare the price of a can of Coke between January and now, you might not immediately notice its size is reduced by about 6%, but the fact that its price has already gone by more than 30% may draw your attention.

As Hong Kong dollar is tied to the US dollar under the current fixed exchange policy regime, the appreciating pressure on Hong Kong dollar has transferred to the domestic prices. While RMB is expected to appreciate steadily, the inflation will continue and social discontent will become much more serious.

Many individuals instead of experiencing higher consumption power have been able to afford less and less with their stagnant income.

Another important issue we face today is the unhealthy cost structure in many industries due to the extremely high rental cost, especially in the retail sector. I will use a café as a simple example to illustrate the serious extent of the situation.

In many developed countries such as Japan, if you have a café business, labour and food would account for most of the cost, and rent would only be about 15-20% of the expense.

In this way, customers can enjoy better food quality and staff can earn a higher salary. The higher discretionary income will translate to higher consumption power and this would then feed back to the consumption cycle of the society.

However, unlike Japan, my recent studies shows that in Hong Kong, rental cost often contributes to 40% or even higher of the total cost in a café. In fact, the increasing number of Chinese visitors, upto 28.1 million arrivals to Hong Kong in year 2011, has created a biased demand for fashion, jewelry, watches, cosmetic and electronic products.

This is closely link to the increasing direct demand for good retail venues. My latest research data of the Hong Kong retail sector reveals some extreme cases, where SMEs facing more than 200% rental increment after their contract expired.

Under a fair business environment with a healthy “value chain”, profit should be shared fairly between landlords, business owners and other parties involved.

However, in today’s Hong Kong, landlords take away most of the profit. Even when some business owners are running a good profit margin, once the landlords see the opportunities, they will quickly raise the rent to squeeze out the profit.

It is very sad to see many traditional SMEs that have weathered the ups-and-downs in in Hong Kong for many years are now going out of business. Except the global brands or large retail chains that can still enjoy a reasonable profit, under the current unhealthy environment, it is almost impossible for a local or small business to survive and thrive.

All these issues bring to another problem of social instability in Hong Kong. From my recent research on the retail sector, more than 92% of the samples mentioned about “high rental cost” being the most important business concern, followed by “increasing labor cost”, “over reliance on Chinese tourists”, and “unfair business environment”.

In fact, this problem has recently becomes more political, as the voice against the increasing flow of Chinese visitors and also the large property developers/landlords gains momentum. It is quite an ironical situation as the welcoming attitude towards Chinese tourists after the SARS has turned into hostility.

Hong Kong people no longer highly value the contribution of Chinese visitors to the development of various business sectors as they used to be. It is interesting that the traditional appraisement of success is now changed to the curse of monopoly towards the large property developers in Hong Kong.

When we realize that more and more familiar mom-and-pop shops disappearing around us, more and more young entrepreneurs have to give up their dreams, we should be careful when we hear the catchy highlights of Hong Kong and re-think whether it is still competitive.