Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter. Read more opinion LISTEN TO ARTICLE 4:49 SHARE THIS ARTICLE Share Tweet Post Email

Photographer: Dale de la Rey/AFP/Getty Images Photographer: Dale de la Rey/AFP/Getty Images

Hong Kong has reinvented itself repeatedly through its 177-year history as a British colony and later a special administrative region of China, from farming and fishing community to trading post, and from manufacturing hub to financial center. Another makeover is overdue.

After six months of anti-government protests, the economy is in technical recession and will contract by 1.2% this year, the International Monetary Fund estimates. Business activity has slumped and the value of retail sales plunged a record 24.3% in October from a year earlier. Tourism, listed by the government as one of Hong Kong’s four “key” industries, is reeling, with visitor arrivals tumbling 44% in October from the same month in 2018.

The city is paying the price of tying its growth prospects too closely to visitors from mainland China, which has led to a related over-emphasis on sales of luxury goods. Tourists from across the border surged almost 18-fold between 2003 and a peak in January this year after Hong Kong signed a free-trade deal with China that allowed individuals to visit without joining tour groups. In September, there were 3 million fewer mainland visitors on the streets than at the start of the year: 2.4 million for the month, compared with 5.5 million in January.

Staying Away Mainland visitors to Hong Kong have plunged since the protests started Source: Bloomberg, Hong Kong Tourism Board

To create a more sustainable future, Hong Kong needs to adjust its retail mix and do more to attract tourists from other countries; invest more in its healthcare and education systems to retain and develop high-value workers; and make a renewed attempt to foster innovation and technology.

Trade and logistics remains the biggest contributor to Hong Kong’s $363 billion economy, though its importance has been diminishing as more goods are shipped directly through mainland Chinese ports. The trade war has put a further cloud over Hong Kong’s role as a gateway to the mainland, especially after the passage of a U.S. bill that could threaten the city’s treatment as a separate customs territory. The other two pillar industries identified by the government are finance — mostly banking and insurance — and professional services such as legal, accounting and architecture. These appear to have survived this year’s unrest relatively intact.

Salt Pillars Trade and logistics account for the biggest chunk of Hong Kong's economy, at 21.5%, but its importance has been shrinking Source: Census and Statistics Department

As a first step, the city has to become less of a luxury pit stop for tourists. Globally, mainland Chinese consumers account for almost a third of high-end goods sales. Yet even before the protests, they were starting to bypass Hong Kong and shop in Paris or Milan — or at home, where tax reductions have made luxury purchases more appealing.

Visitors aren’t the only potential source of retail growth for Hong Kong. Take Link REIT, for example. The real estate trust, which operates shopping malls mostly in public housing estates, chalked up a 4.5% increase in supermarket and food sales in the six months through September. A reduction in the intensity of the protests may encourage many Hong Kong residents to resume shopping and dining out; with the demonstrations targeting the government in Beijing and its supporters, mainland visitor numbers are far less likely to rebound quickly.

It’s shocking that Hong Kong — with its freedom of speech, uncensored internet and educated workforce — should be trailing so badly in innovation. The World Economic Forum identified the city’s limited capacity to innovate as its “biggest weakness” in the forum’s Global Competitiveness Report for this year. Hong Kong ranked 26th, fully 13 places behind Singapore, its closest like-for-like competitor in Asia.

The governments of Singapore and Shenzhen have done much to promote technology and innovation. Shenzhen, just a small border town 40 years ago, should have an economy twice as large as Hong Kong within little more than a decade, as Simon Cartledge wrote for Bloomberg Opinion on Sunday. While expensive rents and high salaries are a challenge, there’s no reason why Hong Kong shouldn’t be more competitive.

Unlike mainland China, Hong Kong has been slow to adopt digital cash. Yet the demand is there given the right impetus. PayMe, the payments app of HSBC Holdings Plc, has already garnered 1.7 million customers, or about a quarter of the population. Easing up on bank regulations that make life harder for startups and small businesses would help.

With fiscal reserves of about 40% of GDP, the government can afford to do more. The economy needs a short-term fiscal boost. This is the ideal time to increase investment in areas that will yield long-term benefits — such as spending on education to develop critical thinking skills, and relieving the pressure on Hong Kong’s overloaded, though highly rated, healthcare system. Instead, the government remains fixated on politically inspired and infrastructure-heavy projects such as the Greater Bay Area.

China helped rescue Hong Kong’s economy from a deep slump in 2003 with the package of business goodies known as the Closer Economic Partnership Arrangement. Yet the favors that Beijing bestowed may have fed complacency and dependence. It’s time for Hong Kong to rediscover its spirit of reinvention.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.