Lost in Hong Kong

Author: Sleepy.txt; Source: BlockBeats

A city that uses yesterday's rules to embrace tomorrow's innovation is destined to lose its way today.

Today's Hong Kong is shrouded in a tremendous sense of division. Or rather, it's more like two Hong Kongs in parallel universes, folded within the same city.

One ​​Hong Kong, within the skyscrapers of Central.

In 2025, Hong Kong's economy is expected to perform strongly, with real GDP growth projected to reach 3.2% for the year. The Hang Seng Index is expected to rise 27.8%, marking its best annual performance since 2017. Merchandise exports are expected to reach a record high, with December's export value reaching HK$512.8 billion, a year-on-year increase of 26.1%.

Net capital inflows remain robust, and private wealth management assets have surpassed the HK$10 trillion mark. Here, the bubbling of champagne never ceases; prosperity is the sole theme. Another Hong Kong exists: in the shared office spaces of Cyberport, on the streets of Sham Shui Po, and at the crowded Lok Ma Chau border crossing. Entrepreneurs struggle to survive amidst high costs; shop closures are frequent in sectors like retail; the unemployment rate is projected to rise gradually by 2025; and more and more Hong Kong residents are abandoning their former "shopping paradise" status, heading north to Shenzhen and Guangzhou to spend their money. Here, a sense of loss and confusion permeates the air. On one hand, financial data is booming; on the other, the public feels like they are walking on thin ice. This extreme contradiction is a true reflection of Hong Kong's current situation. Hong Kong is resting on its laurels, trying to cope with today's new changes using yesterday's experience, and the result is obvious. Two Crises and Muscle Memory Hong Kong's current rules are actually the result of two painful lessons: the 1997 Asian financial crisis and the 2008 global financial tsunami. These two crises thoroughly hurt Hong Kong and instilled fear in it. It has even developed muscle memory; its first reaction to any risk is to withdraw its hand. In 1997, Hong Kong had just returned to China, and international speculators, led by George Soros' Quantum Fund, set their sights on this lucrative opportunity. They shorted the Hong Kong dollar with one hand and shorted Hong Kong stocks with the other, attempting to directly collapse Hong Kong's exchange rate system. A fierce battle, known as the "Hong Kong Financial Defense War," ensued. Donald Tsang, then Financial Secretary of Hong Kong, later recalled that it was a period that was almost suffocating. Soros and his ilk, through short selling and lending, orchestrated a complex scheme in the stock and currency markets. They first dumped large amounts of Hong Kong dollars in the currency market, forcing the Hong Kong Monetary Authority to raise interest rates to maintain exchange rate stability. High interest rates inevitably led to a stock market decline, and subsequently, they took advantage of the situation to close out their massive short positions. Thus, the operation was complete, and the stock and currency markets became their double ATMs. Faced with this attack, the Hong Kong government initially retreated. However, on August 14, 1998, the Hong Kong government decided to use its foreign exchange reserves to directly intervene in the market. Over the next ten trading days, the Hong Kong government invested a total of HK$118 billion (approximately US$15 billion), confronting the international speculators head-on. On August 28th, the settlement day for Hang Seng Index futures, the trading volume of the Hang Seng Index reached a record high of HK$79 billion. The Hong Kong government held firm at 7829 points, ultimately forcing Soros and his ilk to settle at a high level and suffer a crushing defeat. This victory, though brutal, at least preserved the linked exchange rate, Hong Kong's financial lifeline. However, it left behind lingering problems, leading regulators to establish an ironclad rule: stability is paramount. Any factor that could potentially threaten financial stability must be subject to the most rigorous scrutiny. This is Hong Kong's first layer of muscle memory. If the 1997 crisis was merely an external shock, then the 2008 crisis was a fire in its own backyard. Although the fire originated in the United States, what ultimately burned away was the trust of Hong Kong citizens in the elites of Central. That year, Lehman Brothers collapsed across the ocean, and its aftershocks swept through Hong Kong like a tsunami. More than 40,000 Hong Kong citizens, the vast majority of whom were elderly people living on pensions, saw their mini-bonds linked to Lehman Brothers become worthless overnight. These mini-bonds were packaged as low-risk, high-yield financial products and sold through banks to ordinary people with the least risk tolerance. This event exposed regulatory loopholes and sales misrepresentation within Hong Kong's financial system, severely shaking public trust in financial institutions. This event directly spurred stricter investor protection regulations and more complex financial product sales processes in Hong Kong. It led regulators to adopt an almost obsessive-compulsive cautious attitude towards any financial innovation that might trigger systemic risks, especially those that could harm the interests of ordinary investors. This is Hong Kong's second layer of "muscle memory." It was only after experiencing these two crises that Hong Kong's financial regulatory system embarked on a path that extremely emphasizes stability and security. This path dependence has helped Hong Kong successfully withstand external shocks time and again over the past two decades, but it has also made it incompatible with, and even ill-suited to, a completely new fintech revolution characterized by disruption and decentralization. So, what kind of fractured economic reality has this muscle memory, rooted in historical trauma, given rise to in Hong Kong today? A Divided Hong Kong: Whose Prosperity? Whose Loss? The wounds of history have ultimately carved three deep chasms into Hong Kong's landscape. Today, Hong Kong is experiencing a comprehensive economic fragmentation. The first chasm is between finance and the real economy. While global capital brokers and investment bankers are once again focusing their attention on Hong Kong, celebrating its return to the top of the global IPO fundraising list, Hong Kong's real economy is experiencing a prolonged winter. According to data from the Hong Kong Official Receiver's Office, 589 company winding-up petitions were filed in 2024, a record high since the SARS outbreak in 2003. Within a year, over 500 shops quietly closed down, including many long-established local brands like China Resources Pharmacy, Tai Cheong Foods, and Sincere Department Store, which had been a part of the lives of generations of Hong Kong people. The once-desirable locations in Causeway Bay and Tsim Sha Tsui, where shops were in high demand, are now replaced by rows of closed shutters and "For Rent" signs. The downturn in the real economy is directly reflected in the job market. Hong Kong's overall unemployment rate is projected to remain around 3% for most of 2025, with the retail, accommodation, and food and beverage service sectors experiencing significantly higher rates. The unemployment rate among young people aged 20 to 29 remains particularly high. On one hand, job postings in the financial industry are booming, and traders' bonuses are hitting new highs; on the other hand, layoffs in the retail sector continue unabated, leaving ordinary citizens' jobs in jeopardy. Prosperity has never been so concentrated; despair has never been so widespread. The second chasm is between the elite and the general public. If the gap between finance and the real economy depicts the stark contrast in industrial fortunes, then the gap between the elite and the general public reveals the alienation of hearts and minds. This alienation is most directly reflected in the flow of money and people. On the one hand, global billionaires and mainland elites are voting with their money, flocking to Hong Kong. In 2024, Hong Kong's asset and wealth management business recorded a net inflow of HK$705 billion, a record high. Mainland buyers' transaction volume and value in Hong Kong's property market surged nearly tenfold, purchasing HK$138 billion worth of residential properties within a year. The booming sales of luxury homes worth over HK$100 million seemed completely unaffected by economic cycles. On the other hand, ordinary Hong Kong citizens voted with their feet, flocking to the mainland. In 2024, the total number of Hong Kong residents making trips to the mainland reached 77 million, spending nearly HK$55.7 billion there. From meals and milk tea to dental care and skincare, Shenzhen and Zhuhai became the top weekend destinations for Hong Kong residents. A deeper level of population mobility is reflected in cross-border marriages, education, and elder care. According to data from the Hong Kong Census and Statistics Department, the proportion of Hong Kong women marrying mainland men surged from 6.1% in 1991 to 40% in 2024; more than 30,000 cross-border students travel between Shenzhen and Hong Kong daily; and nearly 100,000 Hong Kong seniors choose to retire in Guangdong, enjoying lower prices and more spacious living environments. While a city's elites discuss the globalization of asset allocation, its citizens are contemplating which restaurant in Shenzhen is the cheapest and most affordable for their next meal. On one hand, there is the fading glory of a financial empire; on the other, a stagnant undercurrent. The third chasm is between assets and innovation. Hong Kong has never lacked money, but it seems that the money hasn't flowed to where it's most needed. Hong Kong's R&D intensity, or R&D expenditure as a percentage of GDP, has hovered around 1.13% for many years. This figure is less than half that of Singapore, and even only a quarter of that of South Korea. Even more worrying is that Shenzhen, just across the river, has already crossed the 5% threshold for R&D intensity. Although the number of startups in Hong Kong reached 4,694 in 2024, a year-on-year increase of 10%, the average size is only 3.8 people, showing a predicament of numerous small startups but few large ones. Capital prefers to chase assets with high certainty, such as real estate and stocks, rather than high-risk, long-term technological innovation. High housing prices and rental costs have also severely squeezed the survival space of startups. In Hong Kong, the biggest headache for a young entrepreneur is often not finding a good direction, but being unable to pay next month's office rent. The gap between finance and the real economy, the gap between elites and the general public, and the gap between assets and innovation together create a bizarre and surreal economic landscape in Hong Kong. It's like Mordor in the Marvel Universe: its head (finance) is exceptionally developed, while its body and limbs (the real economy and innovation) are gradually shrinking. So, in such a fertile ground, how will the seed of financial innovation take root and sprout? Will it transform this soil, or will it be transformed by it? There are no winners in financial innovation. The answer is that it has been transformed by this soil. From the very beginning, Hong Kong's fintech innovation has been a top-down, strictly controlled reform movement. Here, you cannot both tame the flames and expect them to illuminate the darkness. The first battlefield of this reform movement was payment. Once upon a time, a small Octopus card was an innovation that Hong Kong people were proud of. But when the mobile payment wave swept the globe, Octopus responded slowly, giving mainland payment giants and local innovators enormous room for imagination. However, what ultimately unified the battlefield was neither WeChat Pay or Alipay, nor any ambitious startup, but two products with strong "official" and "establishment" characteristics: HSBC's PayMe and the Faster Payment System (FPS) led by the Hong Kong Monetary Authority. PayMe, born with a silver spoon in its mouth, backed by HSBC, Hong Kong's largest note-issuing bank, possessed a huge existing customer base and unparalleled brand trust. The Faster Payment System (FPS) is an interbank payment infrastructure built directly by regulatory agencies. Their victory is less a victory of products and more a victory of "order." This so-called payment war was never a fair contest from the start. Traditional financial giants and regulators, by proactively launching improved products, successfully kept other innovators out and consolidated their positions. If innovation in the payment sector was initially fostered, then virtual banks were expected to act as "catfish." In 2019, the Hong Kong Monetary Authority issued eight virtual bank licenses in one go, hoping to introduce these "catfish" to stir up the stagnant traditional banking industry. However, five years later, the eight virtual banks have burned through more than HK$10 billion but have only gained less than 0.3% of the market share.

Until the first half of 2025, ZA Bank, WeBank, and Invesco Great Wall finally recorded profits for the first time, but the eight banks still suffered a combined loss of HK$610 million. The vast majority of Hong Kong citizens still use traditional banks as their primary accounts, with virtual banks more like an e-wallet occasionally used for transfers or "coupon hunting."

They haven't disrupted anything; instead, they've fallen into a survival crisis. The few virtual banks that have achieved profitability haven't relied on disruptive innovation in products or services, but rather on finding their niche by exploiting gray areas that traditional banks are unwilling to touch, such as providing account services to Web3 companies.

This is less a victory for the "catfish" and more a compromise of being co-opted. They ultimately didn't become challengers, but rather patches to the existing financial system. An even more interesting phenomenon occurred in the wealth technology and insurtech sectors. These two sectors were listed by the Hong Kong Monetary Authority as the fintech tracks with the greatest growth potential and the most worthy of support, because they perfectly align with Hong Kong's core interests: consolidating its position as a global asset management center. Wealth technology makes asset management more convenient for high-net-worth clients, while insurtech makes the sale of insurance products more efficient. They are safe innovations serving the existing order, tools that add icing on the cake. Thus, we see a "selective prosperity" in Hong Kong's fintech sector. On one hand, there's the booming scene of assets under management exceeding HK$35 trillion; on the other hand, virtual banks are struggling with a mere 0.3% market share. Fintech serving the wealthy has enjoyed smooth sailing, while those aiming to serve the masses and reshape the landscape have encountered obstacles at every turn. From payments and banking to wealth management, Hong Kong's fintech innovation exhibits a clear pattern: embracing reform while resisting innovation. This has ultimately evolved into a war with no winners. While traditional giants have preserved their competitive advantages, they may have consequently lost the drive for more thorough and future-oriented innovation; and those passionate innovators, after paying a heavy price, have ultimately failed to truly change the rules of the game in this market. If Hong Kong has chosen such a conservative path of appeasement even in relatively mature fintech sectors like payments and banking, then what choice will it make when faced with Web3, a truly wild, unpredictable revolution driven by decentralization? The Hong Kong-Style Awkwardness of Web3 If Hong Kong's approach to fintech is one of appeasement, then its approach to Web3 is a different kind of choice: embracing its form while rejecting its essence. At the end of 2022, Hong Kong announced its ambition to become a global virtual asset center. Policy pronouncements poured in, from retail investor access to stablecoin regulatory sandboxes, Hong Kong adopted a posture of embracing the future. However, more than two years later, what we have received is a typical Hong Kong-style awkwardness. In April 2024, when Hong Kong launched Asia's first batch of virtual asset spot ETFs before the US, the entire market was abuzz. However, the honeymoon period was as short-lived as a summer downpour. By the end of 2025, the total assets under management of Hong Kong's six virtual asset ETFs amounted to only US$529 million, more than 80 times less than the over US$45.7 billion of similar products in the US. The same ETFs, the same assets, but the difference is stark; Hong Kong's market is more like the north. A deeper predicament lies beneath the tight constraints of compliance. Hong Kong has established one of the world's most stringent regulatory standards for virtual asset trading platforms. While this has prevented a collapse similar to FTX, it has also brought extremely high compliance costs. According to industry insiders, a licensed virtual asset trading platform in Hong Kong has monthly operating costs of up to US$10 million, with 30% to 40% allocated to compliance, legal affairs, and auditing. While this might be manageable for giants, it represents an insurmountable obstacle for the vast majority of small and medium-sized startups. The JPEX incident in 2023 further amplified this predicament. This unlicensed trading platform, through aggressive online and offline marketing, lured a large number of ordinary citizens with the promise of "zero risk and high returns," ultimately collapsing with a total amount involved reaching HK$1.6 billion. The negative impact of the JPEX incident lies in its societal effect of creating a "bad money drives out good" scenario, fostering widespread distrust of the Web3 industry among the general public and reinforcing regulatory bodies' determination to maintain strict control. This creates a paradoxical cycle: the pursuit of absolute security increases regulatory costs; higher costs make it harder for licensed institutions to compete with unregulated "wild platforms"; and the collapse of these "wild platforms" further reinforces the necessity of absolute security. Hong Kong attempted to build a rock-solid safe haven for Web3, only to find that once the house was built, innovators either chose to start from scratch outside or suffocated by the cumbersome rules inside. Thus, Hong Kong's true attitude towards Web3 is now crystal clear. It welcomes cryptocurrencies as an alternative asset integrated into the existing financial system—a financial product that can be valued, traded, and managed. But it rejects, or rather fears, cryptocurrencies as a tool of innovation, the kind of Web3 whose core spirit is decentralization, censorship resistance, and the disruption of intermediaries. The former could add a new segment to Hong Kong's asset management landscape, while the latter could shake the very foundations of the entire landscape. This is the most fundamental conflict between "yesterday's rules" and "tomorrow's innovation." Hong Kong is using the logic of managing stocks, bonds, and real estate to manage a new species. As a result, it has rejected innovation itself, leaving only a policy solo performance that no one applauds. Looking back at Hong Kong's fintech journey is like observing the difficult turn of a giant ship. This behemoth named Hong Kong has undoubtedly been one of the most successful ships in the world over the past half-century. However, financial innovation brought not a storm, but a drop in sea level and the rise of new continents. It exposed countless narrow, winding, and reef-strewn new channels in the once unfathomable ocean. In these new channels, the behemoth's advantages became its most fatal disadvantages. It was too large to turn in narrow channels; it was too heavy to navigate in shallow waters; its navigation system completely failed in the new hydrological environment. There is a concept in economics called the "curse of the victors." It refers to how past great success can create a strong path dependency and mindset, making it impossible to adapt to new paradigms, ultimately leading to being devoured by one's past success. This is perhaps the most accurate summary of Hong Kong's current predicament. Hong Kong's disorientation lies not in what it did wrong, but in repeating the right things it did in the past at the wrong time. It attempted to embrace a moveable feast by building fortresses; it tried to embrace a revolution aimed at complete overhaul by reforming the old system. Today, this giant ship is anchored in the middle of Victoria Harbour, its engines still roaring, but the captain and crew are lost in deep confusion. On the distant horizon, countless nimble speedboats are swiftly navigating new routes, leaving it far behind. History has never granted any city permanent immunity. When yesterday's glory becomes today's shackles, only the courage to break free of those shackles can win tomorrow.