Dr Maurice Tse and Mr Clive Ho

25 June 2025

Artificial intelligence (AI) is fast becoming a core technology for optimizing efficiency and driving innovation, finding wide applications across sectors such as healthcare, business operations, and public safety. However, just like the other side of the same coin, these advancements also present opportunities for criminals. As AI technology continues to grow more sophisticated, it is difficult to guard against hacking, scams, blackmailing involving fabricated videos, and dissemination of disinformation orchestrated by criminal organizations.

Particularly egregious is the abuse of AI in the financial field. By 2027, generative AI is projected to quadruple scam-related losses across the world. The past decade has witnessed not only an acceleration of digitalization in the financial and banking sectors but also the coronavirus pandemic’s reinforcement of the dominant position of digital banks. Such a change has clearly enhanced both service efficiency and business volume, but it has simultaneously given criminals an opportunity to commit fraud. In 2023, approximately US$3.1 trillion in illicit funds passed through the global financial system, involving activities like human trafficking, drug dealing, and terrorist financing. Losses from bank fraud in the same year were estimated to total US$485.6 billion.

A foot of vice for every inch of virtue

As pointed out by the US Department of the Treasury in 2024, the existing financial risk management frameworks may be insufficient to address the challenges imposed by emerging AI technologies. This means that only by using AI against AI can an effective defense mechanism be built.

In this day and age, organized scammers rely on generative AI tools, instead of humans, to craft near-indiscernible phishing emails and deepfake frauds. Last year, there were multiple fraudulent cases where impersonation of senior corporate executives led to remittance by company staff of vast sums of money into fake accounts. This demonstrates that generative AI has become a key tool for scammers to bypass the traditional security and manipulate trust. A credit report of TransUnion reveals an 80% surge in digital fraud compared with pre-pandemic levels, with credit card scams rising 76% and account takeovers soaring between 81% and 131%.

The US Federal Trade Commission points out that losses from scams broke the US$10 billion mark in 2023, soaring by US$1 billion compared with the previous year. According to the Nasdaq Global Financial Crime Report, in the same year, fraud scams and bank fraud schemes totalled more than US$485 billion in projected losses worldwide (see Note). The rate of the 20-to-29 age group falling victim is even higher than that of the 70-plus age group, indicating that the scammers no longer target only the elderly.

“Rug pull” scams are now common in cryptocurrency investments. Investors lose every penny as a result of the currency developer fleeing with all the funds after shutting down their development projects. The globalization and professionalization of organized crime have created a new form of commercialized crime, for instance, “crime as a service”. The INTERPOL has reported that some victims have been lured by fake job advertisements and trafficked to fraud centres in Southeast Asia, South America, etc. The use of technology and personal exploitation has contributed to the rise of a large-scale and industrialized fraud industry chain.

Generative AI as a hotbed of fabrication

The advent of technologies like synthetic identity generators and automated cryptocurrency account setup tools has not only expedited money laundering but may also jeopardize the overall financial system and facilitate the expansion of transnational criminal networks. Money laundering has now become a commercialized service, offering different tiers of operational solutions based on clients’ payment levels. At various stages of the money-laundering process, high-end customers can utilize low-activity accounts and conduct multiple small transactions through separate money mule networks to evade regulation.

In the face of an enormous amount of information and multifarious data, financial institutions are often hard-pressed to identify irregularities. Meanwhile, criminals exploit the overwhelming volumes of information to devise hard-to-detect fraud schemes. From initial surveillance and analysis of defence system vulnerabilities to optimization of fraud patterns, AI is widely used in large language models (LLMs), video generators, and biometric identification technology. The synthesized content can be misused for criminal purposes, e.g. money laundering and fraudulent title deed activities.

The pervasiveness of technology crimes

Obviously, scams conducted through online meetings with impersonated financial consultants can have a severe impact on financial services. Existing security measures, including biometric recognition and third-party data verification, are now facing formidable challenges due to the rapid evolution of AI technology.

It is undeniable that the misuse of generative AI is getting more serious than ever, particularly in scams and cybercrime. In June 2023, WormGPT―a malicious counterpart of ChatGPT with illicit capabilities―made its debut on the dark web. FraudGPT has been revealed as an LLM specifically designed to identify system loopholes, write malicious codes, and automatically generate phishing emails. Since the introduction of ChatGPT-4, “jailbreak version” models such as BlackHatGPT and “jailbreaking-as-a-service” platforms have emerged, advancing the harmful use of AI.

Currently, financial institutions are heavily reliant on mobile devices and mobile banking apps to conduct digital businesses. Despite the significant improvements in efficiency and convenience, information security risks have also escalated. From user identity verification to one-time passwords, the procedures typically depend on a single device. If a SIM card is attacked by a virus or malicious app, the entire system could be paralysed. As pinpointed by various research studies, the potential for criminal exploitation appears almost limitless. The risks are substantial, ranging from manipulative attacks and infrastructure sabotage to the full weaponization of AI systems.

Alongside increasingly complex systems, driven by specific incentives and machine learning, AI could even devise new methods of criminality on its own. As much as this may sound like science fiction, cases of illicit behaviour by AI systems have already occurred in the financial sector due to flawed incentive designs. However, the existing security framework is still ill-prepared for such risks.

Watertight responses covering all bases

Amidst the mushrooming crime techniques enabled by AI, the authorities should tackle the problems through a four-pronged approach encompassing technology, policy, international collaboration, and education.

In terms of technology, AI-driven surveillance systems serve as the first line of defence. Given their proven practicality, tools for detecting deepfake fabrication and abnormal financial transactions should be further integrated into the information security framework in order to reduce the risk of large-scale attacks. For example, CryptoTrace is a virtual asset analytics platform jointly developed by the University of Hong Kong and the Hong Kong Police Force to effectively trace cryptocurrency transactions linked to criminal cases. In April 2025, this project was awarded a Gold Medal with the Congratulations of Jury at the International Exhibition of Inventions of Geneva.

In terms of policy, policymakers should establish a regulatory environment that fosters innovation and the prevention of AI abuse. The Report on Responsible AI in Financial Markets released in May 2024 emphasizes that despite its wide applications in risk management and predictive analytics, AI has also given rise to such risks as deepfake fabrication, phishing, and algorithm manipulation. The establishment of a corresponding AI risk management framework is therefore recommended.

In terms of international collaboration, given the cross-boundary nature of AI-related crime, joints efforts are essential to addressing these problems. Both the INTERPOL and the United Nations advocate for the unification of AI usage standards, the adoption of ethical criteria and punishment mechanisms, as well as the strengthening of legal enforcement across countries.

In terms of education, it is of utmost importance to increase the public’s ability to identify scams and disinformation. Launched by the Hong Kong Police Force, the Scameter Series, designed to facilitate real-time scam detection by the public, was awarded an International Press Prize and a Gold Medal at the International Exhibition of Inventions of Geneva in April 2025.

AI as both offence and defence

While scammers have AI as their weapon, the community can harness it as a protective shield. On the one hand, criminals use generative models to produce highly-convincing fake invoices and fabricated accounts, thereby fueling money laundering and scams. On the other hand, AI algorithms can automatically detect forged documents and flag abnormal transaction patterns, substantially improving risk identification and protection. When used appropriately, AI can present opportunities even amid crises.

Although there have not yet been patterns of crime dominated by AI, the current technological development trend clearly indicates that preventive measures should be implemented immediately to nip potential threats in the bud. Towards this end, public-private partnership should be made a top priority. Law enforcement agencies, governments, and businesses need to work more closely together to introduce AI-based security systems. Financial institutions and enterprises can integrate risk management and information security measures into AI systems. Meanwhile, through policy guidance and funding support, governments should encourage research and innovation, with a commitment to driving coordinated responses across sectors and national borders.

Note: https://www.nasdaq.com/global-financial-crime-report

Professor Heiwai Tang and Mr Beining Liu

18 June 2025

In the wake of the Second World War, London underwent a profound transformation from a global trade port to an offshore financial centre. In 1964, the city was one of Europe’s three largest ports, handling up to 61.3 million tonnes of cargo. However, by the 1980s, with the advent of large ocean-going vessels and container technology, its enclosed wharves could no longer adapt to the new shipping demands, both geographically and in terms of facilities. As a result, with its cargo handling volume drastically reduced to 25 million tonnes, London lost its crown as a leading regional port.

To address the pressures of transformation, the UK capital demonstrated outstanding adaptability. In 1982, the London Docklands was designated an enterprise zone and a dedicated development corporation was established, attracting £720 million worth of private capital for the development of modern infrastructure and service industries. In the 1990s, with the completion of the Docklands and the Canary Wharf in particular, a large number of multinational headquarters were set up, giving rise to the networks of high-efficiency logistics, warehousing, and financial services in the area. Gradually reducing reliance on traditional freight transport, London evolved into a diversified centre for services and finance worldwide.

By continuing to attract multinational investment and the relocation of corporate headquarters, London has not only moved away from reliance on local cargo transport, but has also succeeded in maintaining its vitality and strategic value as a global hub for the flow of capital, data, and professional services. London’s offshore status has provided the city with greater institutional and legal flexibility, allowing it to rapidly adapt its policies to changes in global markets and to lower the costs of corporate establishment and operations. Especially after the Brexit, London has beefed up financial and trade cooperation with non-EU markets and actively sought to enhance its influence in emerging markets and under multilateral frameworks, further expanding its international connectivity. Furthermore, London’s highly open information flows and judicially sound environment have also contributed to its appeal as a cluster for data, legal, and technological services, enabling its upgrading and transformation from “goods flows” to “knowledge flows” and “capital flows”.

Likewise, Hong Kong is at a similar crossroads today. According to data from the Census and Statistics Department, local private consumption experienced a 1.6% year-on-year decline in the first quarter of 2025. The consumption market showed contraction while the economic structure apparently exhibits homogeneity. Despite efforts to promote technological innovation, data fusion, and economic diversification, the Hong Kong SAR Government has faced challenges in terms of policy flexibility, financial innovation capabilities, location use efficiency, and the integration of comprehensive services.

In the process of planning its future, Hong Kong must perform an integrated analysis of such elements as historical factors, market dynamics, and the geopolitical landscape. To maintain and enhance its influence in the global economic system, Hong Kong must proactively seek transformation, synergizing its competitive advantages into policymaking and strategic deployment. Taking a leaf from London’s experiences, Hong Kong is likely to seal its place as a new hub in the international supply chain. We recommend focusing on the following four areas.

Flexible policies and all-round services

A flexible and highly efficient policy environment is a prerequisite for success in transformation. The financial Big Bang in 1986 marks the turning point in London’s financial reform. By relaxing financial regulations, the British regulators introduced market mechanisms and opened up the services sector, providing an immediate stimulus to the financial market. London soon drew in a large number of international financial institutions, reinforcing its status as a hub in the world’s financial system. Data from the City of London demonstrated that, as a result of the reform, the number of international banks in the city expanded considerably and financial transactions became much more active.

Having long upheld the principle of “big market, small government”, Hong Kong boasts a well-established financial regulatory system, which epitomizes its systemic advantage as a solid foundation for the transformation. To further increase its competitive edge in the international supply chain services market, Hong Kong should emulate London’s approach and strengthen professional support in legal, tax, and business consulting services, especially to address the increasingly complex cross-boundary compliance requirements in high value-added supply chain management.

In addition, to enhance policy transparency and market confidence, a clear and well-defined policy expectations mechanism is equally indispensable. For instance, reports on policy and industry trends can be released on a regular basis by the Census and Statistics Department, similar to the information disclosure and market communication mechanisms implemented during the initial stage of the London reform. This not only helps to win market trust but also serves to boost Hong Kong’s coordinating capabilities within the service economy.

Golden opportunity for financial innovation

During the Cold War, to circumvent US financial regulations, the Soviet Bloc countries deposited US dollars into banks in London, which contributed to the development of an active Eurodollar market. By the end of the 1970s, London accounted for over 25% of worldwide Eurodollar business transactions, laying the foundation for its status as an international capital hub. By the same token, Hong Kong can leverage its unique geopolitical and systemic advantages to further promote the internationalization of the RMB in global finance and trade.

Recent years have witnessed a climbing share of the RMB in the foreign-exchange reserves of central banks. Due to its close ties with the Chinese mainland, Hong Kong has emerged as the world’s largest offshore RMB trading centre. According to data from the Hong Kong Monetary Authority (HKMA), as of the end of April 2025, the total RMB deposits in Hong Kong amounted to RMB1.0309 trillion. To capitalize on this advantage, Hong Kong must accelerate financial innovation by fostering the creation of digital platforms and optimizing cross-border payment systems. These measures will bolster the RMB’s role in international trade and investment.

As a matter of fact, Hong Kong has no shortage of initiatives in financial technology. The stablecoin regulatory regime places the SAR as one of the first jurisdictions to establish a licensing framework for stablecoin issuers, thereby expanding Hong Kong’s influence in the digital financial arena. Against the backdrop of surging geopolitical uncertainty and growing demand for non-US asset allocation, the stablecoin regulatory regime offers Hong Kong an opportunity for institutional innovation. This new initiative will appeal to international investors seeking diversified assets and risk mitigation options and elevating Hong Kong’s status as a capital intermediary platform. At the same time, many international AI companies that have newly set up operations here are facilitating the extension of cutting-edge technologies such as blockchain and remote sensing to financial services. Additionally, the HKMA has also proactively expanded the digital RMB and mBridge projects to pave the way for the RMB internationalization through institutional measures.

By deepening financial cooperation networks with Middle Eastern and ASEAN countries, Hong Kong can further currency exchange, align financial products, and foster a supply chain financing ecosystem. These measures will help to build a financial services system characterized by technological advantages and systemic flexibility, empowering Hong Kong to take greater strategic initiative in global supply chain finance.

Leveraging strategic location for global connectivity

Boasting a unique strategic location between Europe and North America, within the Greenwich time zone, and spanning the trading hours of the three continents of Asia, Europe, and North America, London is naturally endowed as a global, round-the-clock financial and trade centre.

As China’s important gateway to the world, with the Mainland at its back and Southeast Asia to the east, Hong Kong is geographically well positioned to develop into a regional supply chain and trade services hub. Benefitting from the continued advancement of the Belt and Road Initiative, the city’s role in cooperation among related countries has gained more prominence. Furthermore, its active pursuit of membership in the Regional Comprehensive Economic Partnership (RCEP) has provided Hong Kong with greater opportunities for market access and service expansion.

At the institutional level, Hong Kong has also proved notable integration capabilities. The signing of the Convention on the Establishment of the International Organization for Mediation in May 2025 signifies Hong Kong’s milestone in the global legal service system. Harnessing its common law system and bilingual (Chinese and English) environment under the “One Country, Two Systems” framework, the city will incorporate an international mediation mechanism into the supply chain system to deliver high value-added services for the resolution of cross-border disputes. Consequently, Hong Kong will not only secure a place among traditional logistic nodes but is poised to emerge as an international legal and business services hub, paralleling London’s historical development.

A two-way development hub serving the world

The success of London hinges not only on its financial prowess but also on its standing in cross-border trade and capital flows. Since the 1970s, London has, through its flexible financial policies, become both a magnet for foreign funds and a prime destination for company headquarters. Its highly efficient, mutually complementary financial market and port logistics systems have provided enterprises with a wide range of services spanning financing, logistics, and management support.

Hong Kong is ideally positioned to develop a similar “twin hub”. As Asia’s leading financial centre, the city boasts a highly open financial system and a solid foundation in ports, airports, logistics, and warehousing. Looking ahead, Hong Kong can, through systematic advancement of supply chain management and service upgrading, support enterprises in optimizing processes and controlling costs, thereby attracting more multinational companies to establish regional headquarters and management centres here.

Regarding offshore RMB financing and trade settlement, it would be advisable for Hong Kong to draw on London’s experience by utilizing its world-class financial and infrastructural facilities to render integrated services for multinational corporations. Hong Kong has already been exploring the innovative use of central bank digital currencies in cross-border payments in collaboration with United Arab Emirates, Thailand, and other countries. Such collaborations can enhance the value-added of financial services and improve global network connectivity.

Besides, Hong Kong should encourage local professional services institutions to deepen their connections with international markets. The creation of industry ecosystems in areas such as supply chain management, risk control, and tax consulting, will enable the city to evolve from a service platform to a management hub, transforming into a strategic node for international enterprises seeking to penetrate the Asia-Pacific market.

In essence, amidst the increasingly complex backdrop of the global economy and geopolitics, Hong Kong now stands at a critical juncture of strategic adjustment. Inspired by London’s successful transformation from a traditional port city to a modern financial and services centre, Hong Kong can put in place reforms across multiple synergistic dimensions, including systems, services, and technology. Beyond encouraging policy flexibility, it is essential to increase supply chain service capabilities, expand room for the RMB internationalization, and capitalize on geographic and institutional advantages to build systematic and multifunctional international services platforms.

In the long run, Hong Kong should not only reinforce its status as an international financial centre but also redefine its fundamental role on the world economic stage, fully supported by high value-added supply chain services. We believe that Hong Kong is perfectly capable of leapfrogging from a trading entrepot to a management hub through a profound transformation and continuing to play an irreplaceable role in the global economy.

Prof. Yulin Fang, Yangchen (Kem) Mou, and Bingjie Qian

11 June 2025

Art vs. AI: reflections on survival of industries

Recent years have seen the explosive development of artificial intelligence (AI) technology raising heated debates and deep-seated concerns worldwide about whether AI can replace human workers and result in job destruction. Back in 2016, the late British physicist Stephen Hawking already made the prediction that “the rise of artificial intelligence is likely to extend this job destruction deep into the middle classes, with only the most caring, creative, or supervisory roles remaining” (see Note 1).

In this globally-pervasive wave of technological innovation, driven by uncompromising creative and aesthetic standards, the art sector is often regarded as the last bastion of human originality. The Hong Kong SAR Government holds the arts and creative industries in high esteem. Dedicated to promoting a vibrant art ecosystem, the authorities allocated close to $100 million in 2023 to nurture up-and-coming artistic talent and support the development of art groups. Meanwhile, in the face of emerging harsh realities, some artists reportedly bear resentment over losing job opportunities to AI.

The parameters for the discussion below define works of art created with AI drawing tools as “AI art”, and original works produced with traditional painting tools as “original human art”. So there is the firm conviction that “original human art is irreplaceable” on the one hand, contrasted with the reality that “AI art is on the rise” on the other hand. Such a cognitive conflict directly points to these core questions: How will AI reshape the creative logic of artists? With AI deeply integrated into related domains, will the market value of original human artworks be gobbled up by AI art?

Competing dimensions of aesthetics, creativity, and artist cachet

Prior to exploring the impact of AI on the art industry, it is crucial to crack the “codes” of evaluating the value of artworks. While this aspect may seem full of emotional overtones, it actually harbours an undercurrent of refined logic. Classic hedonistic pricing theory reveals the core nature of artwork value—its aesthetics and level of creativity. When admiring an artwork, the aesthetic characteristics and creative traits are akin to a pebble thrown onto the surface of a lake, stirring up ripples of pleasure, satiation of curiosity, and affective resonance (see Note 2).

However, a viewer’s evaluation of an artwork’s aesthetics and creativity is often largely subjective and can hardly be standardized. Hence the creator’s reputation widely acknowledged by the general public becomes the key metric for the artwork’s value. Even those who do not experience an emotional connection to Picasso’s abstract art will not deny the artistic value of his works. The standing and influence of an artist within their field provides the anchor for consensus on the value of artworks.

Overall, an artwork’s aesthetics and creativity, combined with the artist’s cachet collectively constitute the core elements that determine its market value. On this basis, how may AI technology intervene in the artistic creative process across these three dimensions? What effects might be generated on the value presentation of original human artworks?

AI: boon or challenge?

The relationship between AI and artistic creation is now food for thought within the industry. To the supporters, AI drawing tools can, in accordance with users’ directives, integrate techniques and concepts from various art schools to provide diverse inspirations for artistic creation. A case study of New York University shows that interaction with AI tools offers an artist significant inspiration to push the boundaries of her imagination. In addition to gaining new perspectives that facilitate stylistic breakthroughs, the artist enhances her aesthetic literacy and creativity throughout the process (see Note 3).

Moreover, “AI artist” is becoming a symbol for pioneers in the industry. Amidst the upsurge in the popularity of AI technology , artists who experiment with AI-assisted creation are more likely to attract public and media attention. Such exposure could serve to enhance the artists’ personal fame, providing them with a better chance to magnify their differentiated effects within the art ecosystem.

On the contrary, those in opposition have concerns. As indicated by a research study of the University of Toronto in Canada, long-term reliance on AI tools may undermine independent creative performance and lead to the homogenization of thinking (see Note 4). This suggests that excessive reliance might negatively affect the individual abilities of artists. Copyright and moral issues have also become prominent. A group of acclaimed artists have jointly filed a lawsuit against suppliers of AI drawing tools, accusing them of abusing relevant works for AI training purposes and infringing on copyright. As a result, even artists who use AI drawing tools risk having their reputations tarnished.

So far, while the impact of AI on artists’ aesthetic vision, creativity, and professional reputation is still a moot point, controversial issues of this subject remain to be explored through empirical data.

The value growth curve of AI-assisted creations

In recent years, the burgeoning digital art trading platforms have made it possible for artists to sell electronic artworks for customers to download and interact with potential clients within the community. A leading trading platform mandates that artists disclose whether their artworks are generated by AI. This measure not only sets a distinction between “AI art” and “original human art”, but also enables researchers to monitor the market performance of these two categories of works.

Our research team has conducted a comprehensive and systematic analysis of the trading records for 415,906 paintings by 3,355 artists on a prominent digital art trading platform. The study sample specifically examines original human artworks, independently created by the artists, showcasing their inherent artistic and innovative abilities. In the process of the analysis, state-of-the-art algorithms across various aspects are utilized: using BAID algorithm based on machine vision to evaluate the aesthetic quality of the artworks, and DINOv2 algorithm by Meta AI to extract image features. Coupled with the rolling cosine distance algorithm, these tools assess the innovativeness of artists in their original human creations. Besides, the number of medals awarded by art admirers is included to reflect changes in each artist’s reputation.

The study findings indicate that art creators who attempt to use AI exhibit upward trends in aesthetic literacy, creative abilities, and personal reputation. Subsequent to their interaction with AI drawing tools, their eventual original human works not only show significant improvements in ratings across both aesthetic and creative dimensions but also register growth in price, sales, and profit. This research result supports the positive hypothesis that AI most probably does not pose a threat to the traditional art market. On the contrary, it is conducive to expanding the value scope of original human artworks by empowering the artists.

The future of AI-driven empowerment

Our research findings illustrate that AI is probably not the terminator of original human artworks but may well be playing the role of empowerer, opening fresh opportunities for artists who willingly embrace AI. In the long run, if used rationally as a source of inspiration and skill enhancement, AI tools may become crucial for maintaining artists’ competitiveness.

Eyeing the huge potential of AI technology and positioning itself at the forefront of artistic and technological innovation in Asia, the Hong Kong SAR Government is actively investing in the development of AI within the creative industry and establishing a risk prevention and control system. The Hong Kong Generative AI Research and Development Centre (HKGAI) has launched its HKGAI V1 large language model, equipped with multimedia generative capabilities including text, graphics, voice, and video, to provide powerful creative assistance for industry applications. The Digital Policy Office has also released the Hong Kong Generative Artificial Intelligence Technical and Application Guideline, addressing critical issues such as copyright and ethics to lay a solid compliance foundation for the stable development of the AI-creative industry.

Looking ahead, arts and culture industries are poised to enter a brand-new era of deep integration between human creativity and AI. Through the constant interplay of technology and art, artistic boundaries will be continually redefined, giving rise to novel aesthetic paradigms and a widening variety of creative forms. Hopefully, this will bring more delightful surprises and heartfelt moments to culture and art enthusiasts around the world.

Note 1: https://www.theguardian.com/commentisfree/2016/dec/01/stephen-hawking-dangerous-time-planet-inequality

Note 2: Hernando, E., & Campo, S. (2017). “Does the Artist’s Name Influence the Perceived Value of an Art Work?” International Journal of Arts Management 19(2): 46–58.

Note 3: https://www.sps.nyu.edu/homepage/emerging-technologies-collaborative/blog/2023/embracing-creativity-how-ai-can-enhance-the-creative-process.html

Note 4: https://doi.org/10.48550/arxiv.2410.03703

Professor Xi Li

4 June 2025

Recently, Chinese Mainland e-commerce giants Taobao, JD.com, and Pinduoduo have upped their game by incorporating Hong Kong into their free shipping zones. In the past, Hongkongers relied on transshipment consolidation to facilitate the receipt of their ordered goods. Little wonder that customers have warmly welcomed the new one-stop shopping services.

The aggressive market expansion of leading Mainland e-commerce platforms will inevitably impact Hong Kong retailers, dealing a further blow to the already lacklustre performance of local retail sales. I suggest the following three ways for local retailers to tackle the problems.

Optimizing retail marketing through data utilization

Despite the common view that Mainland e-commerce merchants’ core competitiveness lies in low prices, in my opinion, they are also head and shoulders above their Hong Kong counterparts in digitization. The Mainland retailing businesses especially value data analysis and, more often than not, have sizable in-house data analysis departments dedicated to exploring how to offer consumers better pricing, product recommendations, and enhanced services through methods including statistics, economics, and machine learning. Take Taobao for example. To pique customers’ shopping interest, its “Buy This As Well” feature analyses user behaviour in product selection and content browsing to predict additional products users may want to purchase, then makes recommendations accordingly.

Apart from e-commerce platforms, Mainland offline retailers are also actively undergoing digitalization. I have collaborated with a fresh food market in the Mainland―comparable to Hong Kong’s wet markets―on a project to refine marketplace positioning and product selection, and to target users with more personalized marketing by leveraging shopping data and regional activity insights. These digital changes can facilitate a significant boost to retail cost-benefit without incurring additional costs.

On the contrary, the corresponding performance of Hong Kong retailers has been mixed. Many of them have neither the knowledge nor interest in digitalization. Due to their reliance on traditional marketing approaches to retailing, they do not even collect user data. Even those aware of the importance of digitalization have only dabbled in data utilization. For instance, despite heavy investments in establishing online shopping platforms, some well-known brands do not perform analytics on the valuable user data generated on their platforms. Offline retailers with bonus point schemes offering shopping rewards also fail to harness the value of transaction data, leading to a huge waste of digital resources. Failure by local retailers to fully adapt to and embrace digitalization will make it difficult for them to maintain a competitive edge in the intelligent age.

Mitigating competitive pressure through differentiated positioning

It is a basic principle of economics that differentiated positioning helps to reduce competition, enabling enterprises to gain a comparative advantage. Plagued by high wages and rents, Hong Kong retailers are cost-burdened. They would not stand a chance in direct competition with Mainland e-commerce businesses. Under these circumstances, local retailers might as well consider shutting down or cutting uncompetitive product lines, and focusing on more competitive products or those unlikely to be offered by Mainland e-commerce platforms. In Hong Kong, a well-known free port, almost all products are not subject to value-added tax or consumption tax, as opposed to the case in the Mainland. However, the shop rental and staff costs in the SAR are higher, making most products not cost-competitive. The exception is a handful of high-unit-price items, such as luxury-brand goods, gold accessories, electronics, and cosmetics, which still maintain price competitiveness.

Moreover, products with a distinctive local flavour, e.g. medicinal oils or ointments, local cultural creations, biscuits, and dim sum, that are unlikely to be available in the Mainland, are naturally competitive. Hong Kong retailers should develop and select products with a unique edge to engage in differentiated competition with Mainland e-commerce, so as to maintain their own competitive strength. Take rice as a daily staple, for example. It is unlikely for local retailers to gain price competitiveness by selling rice originating from the Mainland. Nevertheless, if they switch to rice imported from Thailand or Japan, they can benefit from Hong Kong’s tax-free advantage as a free port by targeting different customer segments through differentiated competition.

Strengthening government regulations to reinforce consumer confidence

The Mainland milk scandal from over a decade ago is probably still fresh in the memory of many Hongkongers. Due to the negative impact of the Sanlu infant formula incident in 2008, Mainland Chinese lost trust in locally-produced powdered formula and flocked in droves to buy milk products in Hong Kong. This not only resulted in a severe shortage of infant formula but also prompted the SAR Government to amend the law in 2013, imposing export control on powdered milk formula. Another example is Mainland infant formula brand Morning Glory’s “No. 1 milk supplied to Hong Kong”, a label designed to create an image of being in compliance with the city’s quality standards. Press reports last year revealed that fuel tanker trucks had been used to transport cooking oil in the Mainland, driving people to cross the border into Hong Kong to purchase cooking oil. These cases demonstrate Mainland consumers’ confidence in Hong Kong’s product quality, highlighting a proven advantage for local retailers.

Still, it is noteworthy that recent years have seen the emergence of counterfeit or fake goods in Hong Kong, which has eroded public confidence in the quality of Hong Kong products. For example, not only is it frequent to see knockoff Danish butter cookies for sale in local wet markets and counterfeit designer handbags on proxy shopping platforms, but counterfeit medicines and proprietary Chinese medicines are also common. Should these counterfeit or fake goods be allowed unregulated access to the market, the reputation of Hong Kong products will be compromised. In addition, the Nongfu Spring incident in July 2024 is also a case in point. A report published by the Consumer Council found that the quality of Nongfu Spring’s bottled water marginally met European Union standards. In response to a legal letter from the company, however, the Consumer Council reclassified the bottled water sample as a new type of water and raised its rating from four and a half stars to five.

The incident undoubtedly undermined public confidence. Once Hong Kong products no longer enjoy comparative advantage and are labelled as poor quality, they will become utterly uncompetitive. Therefore, it behoves the SAR Government to establish stringent quality standards and to strengthen enforcement efforts to combat fakes, which will safeguard the quality advantage of goods. Coupled with complementary publicity campaigns by retailers, this will reassure local residents and give them ease of mind when shopping for Hong Kong products.

Keeping pace with the digital age, capitalizing on differentiation strategies, and bolstering quality confidence are all viable approaches. When implemented together, these strategies are likely to enable the Hong Kong retail industry to sustain its competitive advantage.

Dr Tingting Fan

28 May 2025

Further to the 12.2 million visitor arrivals in Hong Kong registered in the first quarter of 2025, a new quarterly high since the coronavirus pandemic, Mainland’s Labour Day Golden Week ushered in another 1.1 million visitors, representing a 22% increase year-on-year. Of course, a rise in visitor numbers alone does not necessarily indicate that all is well. With a slackening global economy and consumption downgrade, many visitors come and go in a single day, while some have even “invented” a new money-saving travel strategy―spending the night at 24-hour fast-food restaurants.

An increase in visitor arrivals, rather than spending, may create a burden too taxing on local urban resources and cause public grievances over congestion and inconveniences brought by tourists. Ultimately, this would only undermine the sustainable development of tourism in the city.

But how to elevate both visitor numbers and spending? This reminds me of my previous article in this column last month, which analyses Pop Mart’s IP strategy (see Note 1). If this trendy pop culture and entertainment company’s product IP can achieve a win-win of enhanced reputation and healthy sales, can Hong Kong’s tourism IP draw inspiration from the company’s successful approach?

One of a kind and unmatched elsewhere

By signing exclusive agreements with its artists, Pop Mart holds the sole rights to all IP images of Labubu. In contrast, when it comes to Hong Kong’s tourism IP, which is its own valuable asset, the city is not required to enter into any such agreements with any parties. From the four main hiking trails spanning a total distance of 298 kilometres and the “Monster Building” in Quarry Bay–featured as a backdrop in the Hollywood movie Transformers: Age of Extinction, to the “Ding Ding” trams weaving through Chun Yeung Street (wet market) in North Point and the neo-gothic Bethanie boasting a history of over a century, or even the everyday waterfront scenery in Kennedy Town, each of these sights is uniquely characteristic of Hong Kong.

Being blessed with these scenic attractions is, of course, only the first step. Successfully promoting them to become international household names depends on effective publicity. Behind Labubu’s popularity in Southeast Asia lies Pop Mart’s strategic sales approach. Among all trendy toys on the market, only Labubu can find its way onto the handbag of Blackpink’s Thai member Lisa; feature in a photo with a Thai princess; and serve as Thailand’s first IP tourism ambassador. At both social and official levels, Pop Mart has provided Labubu with ample exposure opportunities, enabling it to make a huge splash in Thailand overnight.

Hong Kong’s diverse tourism resources also need similar exposure to maximize their popularity. From A-list stars and influential KOLs, to official promotional initiatives, only by forging distinctive landmarks that project its image as an international metropolis can the mission be considered accomplished.

Standing out from the competition through constant improvement

Even the existence of extraordinary sceneries does not eliminate all competition. For example, Shenzhen also offers hiking trails with mountain and sea views while Gothic churches can be found in Guangzhou, Shanghai, and Qingdao. So, why would tourists choose Hong Kong instead? By the same token, Pop Mart did not invent blind boxes, nor does it monopolize the market for them. Why do consumers favour its products over competing brands?

A blind box may look simple enough. However, given the exquisitely designed trendy toy inside, plus all the ingenious marketing ideas behind it, pricing it too low could undermine the brand value of the IP. Conversely, pricing it too high could drive consumers away. Setting the price at between HK$70 and HK$100 will make it affordable even for secondary school students by skimping just a little on pocket money. To reduce the likelihood of consumers receiving duplicate blind boxes, Pop Mart encourages exchanges among buyers and predicts the next hit item based on the exchange data. Epitomizing the “taller than the rest” strategy, this approach constitutes Pop Mart’s winning formula.

Hong Kong may draw inspiration from Pop Mart to “stand taller than the rest” in addition to just being “unique”. For instance, although the Hong Kong Palace Museum (HKPM) lags behind the National Museum of China in both the quantity and quality of its exhibits, the former excels in exhibition curation, exhibit descriptions, and even the use of background music within its galleries. Large-scale exhibitions in the Mainland are often jam-packed with visitors. In contrast, visitors at the HKPM can leisurely enjoy the exhibitions, musing on and taking in the exhibits at their own pace. Such meticulous arrangements made to “stand out from the rest” will serve to attract National Museum visitors to explore the HKPM and experience a new dimension of art appreciation.

A one-stop microcosm of the best on offer

Though modest in size, Hong Kong comes with a full package. In terms of natural scenery, Victoria Peak is the only night view destination that has been ranked twice among the top three in the world while the Dragon’s Back Mountain ridge has been acclaimed by CNN as one of the world’s best hiking trails. The urban landscape showcases skyscrapers such as the Bank of China Tower and International Commerce Centre, alongside traditional rituals like “petty person beating”, which still thrives under the Canal Road Flyover in Causeway Bay. As for the dining scene, the range spans from Lan Kwai Fong’s trendy social hotspots to the historic Lin Heung Tea House, where dim sum trolleys―a rarity these days―continue to operate.

From urban to rural areas, from modernity to traditions, and from history to the latest trends, everything is easily accessible, offering visitors immersive and vibrant experiences. Such a “small but comprehensive” nature is precisely what constitutes a favourable factor of Hong Kong’s role in “East meets West” and the interaction between old and new.

How best to optimize the advantage as “a one-stop shop for comprehensive excellence”? It is advisable for the SAR Government to emulate Pop Mart’s successful approach to debuting product series. The same Labubu can come in various scenarios―a seaside stroll or a leisurely yoga series, thus adding a dynamic and playful appeal. This strategy entices customers to purchase the entire series after buying one doll, ultimately collecting subsequent series. By the same token, with its abundant tourism resources, Hong Kong can develop a kaleidoscope of themes such as “Hong Kong Nite and Day”, “Hong Kong: East Meets West”, “Hong Kong’s Mountainous Landscapes and Beautiful Coastlines”, and “Hong Kong: Vibrancy and Slow Living”. Only by offering a great variety of delights can a city attract visitors to stay longer, thereby boosting hotels and related industries.

Despite the fact that tourism accounts for a mere 2.6% of Hong Kong’s GDP, its value added is the source of living for 150,000 employees in the industry. Tourist consumption also contributes 18% to the total retail sales and 24% to the total revenue of the catering industry (see Note 2). This highlights why the success of tourism matters for every Hongkonger. Needless to say, tourism is a city’s calling card, symbolizing its soft power. Only a well-developed city can create and promote its embedded tourism resources. Only a society that is mature enough can anticipate and cater to visitors’ needs. Only an externally-oriented culture can extend its open arms to travellers from all corners of the world.

Hopefully Hong Kong can genuinely realize the goals of “tourism everywhere” and “thoroughness everywhere”, motivating time-constrained tourists to stay longer.

Note 1:  “The IP Strategy behind Pop Mart’s Overnight Popularity”, Hong Kong Economic Journal, 16 April 2025

Note 2:  Development Blueprint for Hong Kong’s Tourism Industry 2.0 (https://www.cstb.gov.hk/file_manager/en/documents/consultation-and-publications/Tourism_Blueprint_2.0_English.pdf)

Dr Yim-fai Luk

21 May 2025

To the surprise of most, consensus was readily reached on a truce at the recent tariff talks between China and the US in Geneva. For the time being, tariff rates have reverted to the levels prior to the so-called “Liberation Day”, though the international landscape can hardly return to its previous state. The US president Donald Trump has been manipulating “negotiation tactics”, with the asking price constantly fluctuating―now high, now low; now real, now fake. Both carrots and sticks are used to create more room for negotiation. Nevertheless, due to a lack of underlying strength and messy logic, the trade war resembles poorly-executed acrobatics on the part of the US, pushing the Global Economic Policy Uncertainty Index to a historical high (see Note 1).

After over a month of turmoil, Trump’s tariff myth has now been debunked. Despite his claim that tariffs would be paid by foreign countries, he demanded Walmart absorb the tariff-induced additional costs instead of passing them on to consumers, soon after the company notified its customers of the price increase. Despite his claim that tariffs will revitalize America’s manufacturing industry and create jobs, Trump criticized Apple CEO Tim Cook for moving the production of iPhones to India instead of relocating it to the US.

What is more, the sharp reactions from financial markets worldwide to both rising tariffs and temporary tariff pauses further highlight the negative economic impacts of America’s tariff sticks. The Trump team cannot help but retract their previous claims, admitting that tariffs do have short-term effects though they will ultimately do more good than harm to the country in the long run.

So far, apart from reaching an insubstantial agreement with the UK, the US has made little headway in its trade negotiations with other countries. The 90-day pause on the “reciprocal” tariffs is scheduled to end on 9 July 2025. Many countries are starting to see through America’s tough façade and have decided to observe how other nations fare to gauge America’s bottom line. Their hesitation to kowtow is becoming more and more embarrassing for the US. A few days ago, Trump and Treasury Secretary Scott Bessent said separately that America will unilaterally levy the “reciprocal” tariffs announced on “Liberation Day” on other countries if they show no interest in negotiating. This is an American modus operandi to browbeat other countries. Nonetheless, a solution will need to be found and there may be opportunities for breakthroughs in the coming weeks.

Misconception: imports curb domestic production

Trump and his cabinet must have their views and reasons, though not necessarily correct, to go to such lengths with their tariff weapon. They are even gambling with America’s economy and global image. Below is a discussion of this based on two macroeconomic identities 101.

America’s gross domestic product (GDP) figures for the first quarter of 2025 announced at the end of last month reveal a real growth rate decline of 0.3% on an annualized basis compared with the previous quarter. Public opinion in the US shows that this is the result of American businesses importing foreign products in bulk before Trump’s tariff hikes take effect. Mainstream media outlets, including The Wall Street Journal, The Washington Post, Bloomberg, and CNBC, have reported this view. The rationale is that imports have reduced domestic production.

By this logic, the huge amount of Chinese exports to the US over the decades has contributed significantly to a reduction in US production and economic growth while displacing American workers. One of the reasons why Trump has been elected as president twice is his ability to take advantage of this public sentiment, highlighting his commitment to using tariffs to resist foreign goods and protect the interests of America and its workers. His trade advisor Peter Navarro has echoed similar claims over the years.

It is, in fact, a misconception that imports will curb domestic production. Simply put, imports are “foreign production”, i.e. the volume of imports affects foreign rather than domestic production. This may not completely clear all doubts, so let us focus on the GDP.

Macroeconomics 101 textbooks usually explain how to measure GDP with the following equation: Y = C + I + G + EX – IM, where Y represents GDP, C stands for consumption, I represents real investment, G is government expenditure, EX denotes exports, and IM represents imports. More often than not, readers may mistakenly think that since IM is subtracted, an increase in IM will result in a corresponding decrease in Y. However, this equation is just an accounting identity. With production volume already fixed (e.g. GDP from the previous year), to find the total value, a simpler way is to calculate the sum of the components on the right side of the equation. To understand the relationship between imports or trade deficits and GDP, it is essential to look beyond this equation by incorporating hypotheses and analyses related to economic behaviours.

Imports, investment, and consumption cancelling each other out

Suppose that in anticipation of the tariff hikes, US companies import foreign goods in advance. Despite the increase in imports, this is not the only economic activity. If the imported goods are then stored in warehouses, in the above equation, corporate inventory investments (i.e. part of I) will accelerate with imports, thus cancelling each other out without changing Y (GDP). If the imported goods are immediately sold to consumers, that will be tantamount to a rise in consumption and, in the above equation, C and imports will go up simultaneously and cancel each other out.

Similarly, if the goods are imported by the government rather than by enterprises, there will be a corresponding surge in G.

In other words, the slight contraction of US GDP in the first quarter of 2025 has nothing to do with the increase in imports by American companies prior to the implementation of new tariffs, but is caused by other factors. By the same token, any change in the value of IM will generally result in corresponding change in C, I, or G but will not affect domestic production.

Assuming the demand for imports is to replace domestic products, this means local consumers will buy fewer local products and switch to foreign products instead, causing domestic production to fall. However, strictly speaking, import behaviour alone will not directly reduce domestic production. A cut in production only occurs when consumers stop buying local products for some reason. If the reason is that local products cannot compete with cheaper and better foreign goods, then cutting back on domestic production in uncompetitive sectors and enabling consumers to purchase more affordable imported goods could be a suitable approach. In so doing, freed-up resources may be reallocated to more competitive industries. In addition, imports and domestic production are not necessarily mutually exclusive. They can complement each other, particularly when importing parts, components, and raw materials is involved. In such cases, the greater the import volume, the higher the domestic production.

All in all, the relationship between import volume or trade deficits and GDP presents multiple possibilities. More imports do not invariably result in less domestic production. On the contrary, limiting imports by tariffs or other trade barriers does not necessarily benefit domestic production and may even backfire. In the past few years, while the US has seen continued growth of expanding imports, the country’s unemployment rate has remained at a historical low of 4% (with the exception of the period of the coronavirus pandemic). This contradicts the view that imports hinder domestic production.

No direct causal link between current account deficits and foreign capital inflows

Another macroeconomic identity misused by the Trump administration is the notion that current account deficits equal net inflows of foreign capital. The current account primarily consists of the trade balance. For the sake of simplicity, the minor parts are left out of consideration here. Foreign capital inflows refer to the use of foreign capital within a country, similar to loans provided by foreign entities for domestic purposes.

To explain why current account deficits are equivalent to inflows of foreign capital, consider the US as an illustrative example. The fact that the US runs up trade deficits, meaning that Americans consume more foreign goods than foreigners consume American products, implies that, regardless of transactions at the individual or corporate level, the additional foreign goods consumed by Americans are, in effect, provided on temporary loan to the US by foreign entities. The larger the trade deficit, the greater the debt the US owes other countries, or alternatively, the greater the inflow of foreign capital. The coexistence of these two phenomena represents the two sides of the same coin.

Even if the US prints more money to settle its trade deficits, this will still translate into debts owed to other countries. It is because US dollars function not only as liabilities of the Federal Reserve but also as assets for foreign holders. Nonetheless, the nominal return on cash holdings of US dollars is zero, in contrast to that generated by US dollar-denominated bonds.

The equivalence between a current account deficit and capital inflows is also an accounting identity. Although it does not represent any causal relationship, the Trump team insists on framing it as follows.

Since the greenback is the primary foreign exchange reserve currency, central banks around the world have been purchasing US dollars in foreign exchange markets, leading to an appreciation of the dollar against other currencies. As a result, on the one hand, America’s rising imports and declining exports have created a colossal long-term trade deficit, a contraction of manufacturing, higher unemployment among workers, and a reliance on foreign goods. On the other hand, foreign countries enjoy trade surpluses, which they convert into US government bonds through deployment of the US dollars earned. Expanding foreign holdings of US bonds would pose a threat to the dollar’s status as a reserve currency and to US national security.

In other words, the fact that foreign capital has been flowing into the US to acquire dollars and US treasury bonds, leading to a trade deficit and diminished domestic manufacturing, appears to support the claim that America provides the world with a reserve currency, only to end up shouldering economic losses. To “Make America Great Again” and to mitigate America’s “grievances”, Trump has dramatically raised tariffs on many trading partners and is toying with the idea of converting existing US Treasury bonds into 100-year, non-tradeable zero-coupon bonds.

However, these narratives simply do not tally with reality. First, the value of US treasury bonds held by foreign central banks hovered around US$4 trillion from 2012 to the end of 2024, and even showed signs of a slight decrease (see Note 2).

This indicates that, on the whole, foreign central banks have not increased their holdings of US treasury bonds as foreign reserves while America’s current account deficit has expanded substantially since 2020.

Furthermore, if the share of manufacturing employees among non-farm employees is used as an indicator of manufacturing’s importance to the American economy, this proportion has progressively fallen from 35% at the end of the Second World War to approximately 8% today (see Note 3). Yet, over the same period, the US dollar’s exchange rate has experienced multiple fluctuations. For example, the real effective exchange rate of the dollar drastically declined from 118 at the time of the signing of the Plaza Accord in 1985 to 90 a few years later. The rate remained low for several years, with no change in the speed or trend of the decline in the share of manufacturing employees.

It may well be that the economic narratives of politicians merely serve the purposes of influencing public opinion and serving political ends. Only four months into Trump’s second term, the logic underlying US economic policy is already riddled with contradictions and barely coherent. During the presidential campaign last year, voters generally regarded economic policy as Trump’s forte, but according to a recent Reuters survey, only 37% of respondents still have the same view. It seems likely that the Global Economic Policy Uncertainty Index will continue to fluctuate at high levels in the next few years.

Note 1: https://www.policyuncertainty.com/
Note 2: https://fred.stlouisfed.org/series/BOGZ1FL263061130Q
Note 3: https://fred.stlouisfed.org/graph/?g=cAYh

Professor Joseph Chan

12 May 2025

Hong Kong has long recorded successful performance in its four pillar industries, comprising trading and logistics, financial services, professional and producer services, and tourism. According to research by the Hong Kong SAR Government, they contributed close to 60% of the Gross Domestic Product (GDP) and almost half of the total employment before COVID 19. However, all four of these pillars have experienced a decline in their respective areas as a result of the rapid changes in market needs and user behaviour, regional and global competition, the development of new value chains, the impact of advanced technologies, and changes in the geopolitical environment. To address such challenges, “innovation” has been introduced to tackle these pain-points of Hong Kong. The question is how we should develop innovation strategies instead of coming up with ideas just for the sake of “innovation”. This article will discuss how innovation strategy can be approached from the perspective of poverty alleviation and how the Web3 industry may develop―both topics likely to shed light on how best to chart Hong Kong’s future course of development.

The Chief Executive announced in the 2022 Policy Address the restructuring of the Commission on Poverty to study targeted poverty alleviation for groups in need. In his 2024 Policy Address, the focus was on the following three areas: sub-divided flats, single-parent families, and the elderly. No doubt, these are key issues of concern in the wider community, but we can look back at the journey the Mainland has taken in the past two decades and see how innovation has played a pivotal part in the journey―from the “targeted poverty alleviation” strategy introduced in 2013 to the “rural revitalization” strategy in 2021. Our team at the University of Hong Kong has recently published the book, Poverty Alleviation Case Analysis in China―Poverty Alleviation Best Practices via Practices and SDG Strategies, with International Poverty Reduction Centre in China (IPRCC), with the support of the Bill & Melinda Gates Foundation. Previously under National Bureau of Rural Revitalization, the IPRCC now operates under the Ministry of Agriculture and Rural Affairs. By analysing different strategies implemented to address specific key pain points in focal regions and villages, via the effort and collaboration of key stakeholders, we can gain an overview of how the United Nations Sustainable Development Goals (SDGs) can be achieved within the framework of Chinese national policy. 

The concept development of “poverty alleviation” starts with “who should help”, “who should be helped”, “how to help”, and “how to move on”. From the microscopic perspective, it involves details of the focal poverty conditions, including understanding the root causes of the users and regional pain points, along with their corresponding solutions. From the macroscopic perspective, it involves deploying a wider range of available resources to further long-term economic and industrial development. As the Chinese saying goes, “Giving someone fish is not as good as teaching someone to fish.” For example, in areas where low education levels among the youth compromise local industrial development, effective talent-cultivation programmes are established, with enterprises providing job-pairing assistance and the government organizing further training workshops. In remote areas, apart from infrastructure development and supply-chain establishment, comprehensive solutions combined with enhancement of cultural confidence to coordinate primary, secondary, and tertiary industries are also provided. In addition, creative solutions like wealth-creation evening schools supported by TV broadcasts are also introduced, with impact amplified by various online and offline supplementary activities. These collective efforts have enabled China to achieve the first target of the United Nation 2030 Agenda for Sustainable Development―10 years ahead of schedule upon complete eradication of extreme poverty in the country. 

China’s achievements and related experience in poverty alleviation demonstrate that the key to success lies in an in-depth understanding of the pain points and core problems, coupled with deployment of available resources through coordinated efforts among local governments, nationwide enterprises, and government departments. The core factors are “in-depth understanding”, “coordinated efforts”, and “creative confidence”. This approach mirrors the principles of Design Thinking in problem-solving, which emphasizes empathy, interdisciplinary innovation, and iterative optimization. Since the launch of the “Unleash Hong Kong” initiative in 2018, the Hong Kong SAR Government has been supporting the application of Design Thinking and related training activities. This approach has proven effective in poverty alleviation cases. Further discussion is required to review whether this innovation strategy has been carried out thoroughly and whether its implementation is in-depth and creative enough.

A similar innovation strategy can be applied to the development of Web3 in Hong Kong.

Over the past decade, the decentralized blockchain protocol Web3 has brought about a digital revolution in the financial sector. While the financial market has experienced roller-coaster rides because of bitcoin and cryptocurrency, the resulting transformation extends beyond the speculation market. An even greater impact is seen in digital asset management, cross-border transactions, and the updating of financial, monetary, and securities policies. The Hong Kong Government aims to become an international Web3 hub and create a buzz in global financial markets to attract investors and capital. However, under the Design Thinking framework, it is worth considering how we can formulate an innovative strategy to fully align with the Policy Statement on the Development of Virtual Assets (VAs) in Hong Kong released in October 2022 and the vision of the Task Force on Promoting Web3 Development established in June 2023.

The general view is that 2025 will be a pivotal year for Real World Assets (RWA), a product generated by Web3 technology. RWAs are tangible assets like commodities or equities that have value in the real world. These assets can be divided through tokenization into smaller, more manageable units, broadening the investor base and enhancing market liquidity. Research has shown that financial institutions like JP Morgan and Goldman Sachs are actively promoting asset tokenization, which is estimated to have a market value of over US$10 trillion, and holds the potential to significantly raise market efficiency and liquidity.

Hong Kong’s robust financial system, strategic geographical position connecting Mainland China with overseas markets, and gradually opening regulatory environment provide a solid foundation for Web3 development and asset tokenization. Beyond real estate and bulk commodities, this state-of-the-art fintech tool is expanding into niche markets such as carbon credits, green finance, luxury collectibles, and intellectual property. It is encouraging that the SAR Government has launched a sandbox to facilitate experimentation with new ideas and has rolled out consultations and white papers on the topic. Despite challenges from regulatory fragmentation, custody risks, and limited secondary market liquidity, in order to embrace this financial technology and its ecosystem, we can start with asking the following questions: What assets are suitable for tokenization? Where do they come from? Who are the buyers? How to make good investments in the Web3 environment? And how to exit the market? The answers to these questions will guide Hong Kong on its path to becoming an International Web3 Centre.

In an increasingly complex geopolitical environment, China faces its own economic challenges. As the bridge between East and West, Hong Kong plays an important role in navigating an environment currently fraught with challenges and competition. It is therefore absolutely crucial that various sectors adopt an innovative strategy.

We can start with the three key ideas mentioned above: “in-depth understanding”, “coordinated efforts”, and “creative confidence”.

Dr Maurice Tse and Mr Clive Ho

7 May 2025

Released by the International Monetary Fund (IMF) in April 2025, the World Economic Outlook significantly lowered global economic growth forecast from 3.3% in January 2025 to 2.8%. The report identifies China and India as the main growth engines, with the two countries predicted to contribute 23% and over 15% respectively to global economic growth in the next five years. The estimated contribution from America, nevertheless, has been lowered to 11.3% in view of the uncertainties surrounding its tariff policy.

Needless to say, the recovery of the economy worldwide is subject to the impact of continuing trade conflicts and policy uncertainties on both flanks.

Hegemony as self-destructive as it is damaging to international interests

The lowering of economic forecasts is primarily due to the tariff policy implemented by the Donald Trump Administration this year, which has caused supply chain disruptions and weakened investment sentiment, and has pushed up production costs of commodities worldwide. Forecasts indicate that global trade growth will decelerate to 1.5%, the US economy’s growth will be halved from 1.8% to 0.9%, and the eurozone economy’s growth will decline to 0.8%. The Institute of International Finance predicts that the US could experience negative growth in the second half of 2025.

According to Bloomberg’s latest survey of 82 economists conducted in April 2025, the US economy is projected to have a 45% chance of entering a recession within the next 12 months. This stems from increased tariffs imposed by the American government on various countries, which are expected to exert long-term pressure on consumption expenditure and economic growth.

In 2024, trade between China and the US totalled around US$585 billion, of which American imports from China, at US$440 billion, significantly exceeded American exports to China, which amounted to merely US$145 billion. The US trade deficit with China, at US$295 billion, accounted for roughly 1% of the US gross domestic product (GDP) (see Figure).

From Trump’s first term to Joe Biden’s presidency, the US has steadily raised tariffs on imports from China. The decline in the share of Chinese imports from 21% in 2016 to 13% in 2023 indicates America’s diminishing reliance on trade with China. Yet during the same period, some Chinese products, such as solar panels, found their way into the US via Southeast Asian countries. According to the US Department of Commerce’s data in 2023, Chinese solar panel manufacturers had relocated their assembly operations to Malaysia, Thailand, Cambodia, and Vietnam. The goods were then exported to the US, effectively circumventing tariffs.

If the US imposes reciprocal tariffs on these products manufactured in Southeast Asian countries, the prices of imports into the US market originating from China will inevitably rise.

Figure   US goods trade deficit with China

US imports from and exports to China (in US$ billion, seasonally adjusted), 1999–2024

US imports from China           2016: 479.7                 2024: 440

US exports to China                2016: 169.4                 2024: 145

Trade deficit                            2016: -310.3                2024: -295

Source: US Bureau of Economic Analysis

Head-to-head comparison between China and US economies

In 2024, the largest American export product to China was soybeans, a key animal feed for China’s livestock industry. Chinese exports to the US mostly included electronics, computers, and toys. Among these, smartphones were the largest category, accounting for 9% of America’s total imports. A major part of the mobile phones consisted of Apple devices manufactured in China. Amid rising tariffs on Chinese goods, Apple’s market capitalization has plummeted, with its stock price collapsing 20% in the last month. These China-made US imports have become more expensive since the Trump administration implemented 20% tariffs. Should the tariff rate soar to 100% or higher, the price pressure on US consumers could quintuple. Meanwhile, China’s punitive tariffs on American imports will drive up the prices of US goods in the Mainland market, causing local consumers to incur losses.

Economic theory has long recognized that tariffs raise the prices of imported goods, thus compromising consumers’ purchasing power. Inflated import costs also shoot up the production costs of domestic companies and affect related industries through supply chains, leading to a fall in production. Greater funding pressure on enterprises may even trigger a chain reaction that stymies the investment environment.

Furthermore, as a leading supplier of the world’s copper, lithium, rare earth elements, etc.―crucial for military equipment―China can choose to limit export of these minerals to the US, disrupting its defense industry and related manufacturing sectors. On the other hand, the US has already banned the export of advanced microchips, which China has yet to be able to produce domestically, and may also pressure countries such as Cambodia, Mexico, and Vietnam to curb their trade with China.

Tariffs set to boomerang on America itself

In the US government’s bid to levy at least 10% tariffs on most countries this time, some of the punitive tariffs have been put on a 90-day pause. However, as pointed out by research of Bloomberg Economics, America’s current effective tariff rate already stands at 23%, a record high in this century. This is bound to trigger a sharp contraction in US household demand, given that consumption expenditure is the driving force of the country’s GDP (with roughly a two-thirds share), and to induce an extra risk of economic recession.

International agencies warn that maintaining high tariffs on a long-term basis will have a cascading impact on global supply chains and economies. Data of Bloomberg shows that US imports in the first quarter of 2025 increased by 19.2% year-on-year, as companies managed to stock up in advance of the new tariffs. Even so, forecasts for US imports and exports towards 2027 have been adjusted downwards, with exports expected to decline until 2026. Retaliatory tariffs on American goods imposed by other countries, including China, will further undermine the international competitiveness of these goods.

Similarly, the potential repercussions on inflation should not be overlooked. Survey results reveal that the Personal Consumption Expenditures (PCE) Price Index at the end of 2025 is estimated to be 3.2% while the core PCE inflation rate is forecast to reach 3.3%, both of which are higher than the earlier estimate of 2.7%. According to Comerica Bank economists Bill Adams and Waran Bhahirethan, although America’s inflation is unlikely to return to its peak in 2022, inflation surge will narrow the Federal Reserve’s room for rate cuts. Despite the slowdown in economic growth, the labour market remains resilient. Forecasts indicate that unemployment rate in the US will edge up to 4.6% by the end of 2025, slightly higher than the previous estimate of 4.3%.

Progressive transformation of the Chinese economy

Undoubtedly, owing to the impact of the escalating US tariff policy, the growth forecast for the Chinese economy has been adjusted downwards to 4%, which is lower than the earlier forecast of 4.6%. In the opinion of economist Stephen S. Roach, while China’s state-led industrial policy may initially withstand the effects of the trade war, its export-oriented economy is likely to suffer heavily if tariff tensions continue to build up.

Even though China has advocated shifting from an export-oriented economy to one driven by domestic demand, achieving this transition will be no easy task. As a result of a less than perfect social security system, Chinese families prefer to scrimp and save, contributing minimally to consumption expenditure. In spite of the introduction of the “30-Point Action Plan to Lift Domestic Consumption”, which demonstrates the Central Government’s concern about related issues, the social security system still requires substantial improvement. The US tariff policy has not only exacerbated tensions between China and the US but has also limited the growth potential of both economies. In addition to addressing external pressures, China should also focus on internal structural problems. This will likely have a far-reaching impact on future economic developments.

The global bane of high tariffs

Given that China and the US together account for 43% of the world economy, if the two countries engage in a full-on trade war, it could cause a slowdown or recession, implicating global economic stability and severely compromising investment activities worldwide.

As the world’s largest manufacturer, China has a production capacity that significantly exceeds its domestic demand. Hence, it does not come as a surprise that the nation exports much more than it imports. Thanks to policy measures such as government subsidies and low-interest loans, many products (e.g., steel) can be manufactured at lower than actual costs. Should Chinese companies find it impossible to export their products to the US, they will likely look elsewhere. Consequently, while consumers in other countries may benefit, manufacturers and employment in those markets will suffer. For example, UK Steel, the trade association for the UK steel industry, has already warned that the possibility of China’s excess capacity in steel production being redirected to the UK market could threaten related sectors in the UK.

Moreover, there is a consensus among economists regarding the China-US trade war that it will create highly destructive spillover effects. With a divergent trend among developing countries, some emerging markets could be subject to a greater impact. Growth in emerging markets and developing economies this year is projected to be reduced to 3.7%, which is 0.3% lower than the previous estimate. The downward pace of global inflation will also be slower than anticipated, with the average global inflation rate forecast to stand at 4.3% for the year. Developed economies are expected to face particularly intense inflationary pressures.

According to simulation analysis, should the tariff war further escalate, global economic growth could slide by another 1.5%, setting off seismic waves in the international financial market. Heightened multinational trade tensions will pose a long-term threat to productivity and economic growth. It is therefore essential to maintain stable trade policies. Governments worldwide should avoid taking unilateralist measures and should strengthen monetary policy coordination to prevent fragmentation of the global financial system.

Professor Heiwai Tang and Ms Yang Chen

30 April 2025

After seven years of negotiation, the world’s largest free-trade agreement―the Regional Comprehensive Economic Partnership (RCEP)—officially took effect on 1 January 2022, covering close to 30% of the world’s population and accounting for over one-third of the global GDP. Amid intensifying global economic fragmentation, the RCEP carries high expectations. By encompassing both large and small Asia-Pacific countries with different systems, the agreement demonstrates great potential and resilience for inclusive regional cooperation.

What impacts has the RCEP had on the Asia-Pacific trade landscape since its implementation three years ago? How will it reshape the patterns of trade among its members? Based on the RCEP Trade Tracker developed by HKU Asia Global Institute (see Note), this article provides a comparative analysis of trade performance among RCEP economies between the first quarter of 2020 and the third quarter of 2024. The findings demonstrate the following four prevailing trends shaping trade dynamics under the agreement.

1. China remains the dominant exporter within the region, but its trade growth has clearly slowed down. While its exports to RCEP partners experienced a modest recovery in 2024 after a decline the previous year, the overall momentum has weakened.
2. In pursuit of a deliberate trade diversification strategy, Japan has strengthened ties with Vietnam, Malaysia, etc. while effectively reducing reliance on China. Its overall trade within the RCEP framework saw a marginal contraction in 2024.
3. After a downturn in 2023, intra-ASEAN trade recorded a strong rebound by 7% in 2024, reflecting deepening regional economic integration and providing member nations with a fresh growth impetus.
4. RCEP economies are increasingly trading with non-member countries. In 2024, this trade expanded by 5% to reach US$3.4 trillion, surpassing intra-RCEP trade growth for the first time.

Trend 1: Mild growth of China’s trade with RCEP  

As a core RCEP member, China has been playing a prominent role in regional trade. In the first three quarters of 2024, its exports to RCEP nations totalled US$2.76 billion. The 3.6% year-on-year increase marks a cautious recovery following an 8.5% downturn in 2023. This modest rebound suggests that China’s trade within the region has entered a phase of steady growth.

In the wake of the coronavirus pandemic, China’s exports to the RCEP bloc surged by an impressive 24.9% in 2021, followed by continued strong growth in 2022. However, Chinese exports to the RCEP bloc contracted for the first time by 8.5% in 2023, as a result of global supply chain restructuring and intense competition from ASEAN manufacturing industries.

The uptick in 2024 was accompanied by a significant change in market structure. On the one hand, China’s exports to Japan have fallen for two consecutive years (by 1.9% in 2024 and 5.1% in 2023), indicating that Japan is actively diversifying its supply chains and gradually reducing dependency on China. On the other hand, the performance of the Vietnamese market stood out. China’s exports to this market rose by 12.7%, reversing the 7.5% decline in 2023. This demonstrates Vietnam’s escalating status in the global supply chains.

Within the ASEAN region, China’s trade performance varied. Laos, Cambodia, and Vietnam recorded the fastest annual growth of 17.7%, 14.6%, and 12.7% respectively for Chinese exports. This underscores the rising economic vibrancy of the Indo-Chinese countries. In comparison, the relatively mature markets such as Singapore and Thailand maintained stable growth at around 6%, while Indonesia registered a slight growth of 0.3%. China’s exports to Australia and Myanmar shrank by 7.5% and 17.6% respectively, due to weaker demand triggered by domestic factors in both countries.

Particularly noteworthy is that China’s exports to South Korea showed a remarkable recovery in 2024, incrementing by 9.6%, mainly thanks to renewed demand for electronic components and industrial equipment. This change not only hinges on a resurgence of manufacturing in South Korea, but also testifies to the positive effect of RCEP tariff concessions on high-tech supply chains.

On the whole, while China remains the largest trade hub within the RCEP, intra-bloc trade flows have diversified. This shift is simultaneously driven by members’ industrial upgrading and supply chain adjustments, as well as the deepening progress in regional economic integration under the RCEP agreement.

Trade ties between China and RCEP partners have entered a new phase. On the one hand, with its comprehensive industrial system and scale advantages, China will continue to serve as the key supplier of mechanical equipment and electronic products. On the other hand, by upgrading their manufacturing capabilities and signing diversified trade agreements, the ASEAN countries gradually reduce overdependence on a single market. Such a state of dynamic equilibrium is expected to continue reshaping the future trade map of the RCEP region.

Trend 2: Gradual stabilization of Japan’s trade with RCEP after pandemic volatility

From 2020 onwards, Japan’s trade relations with RCEP countries have been characterized by fluctuating patterns of both substantial ups and downs. Despite a remarkable 23.2% growth in its exports to RCEP nations in 2021, the momentum soon faded. Japan’s total exports to the region plunged by 13.3% in 2023 and further dropped by 3.5% in 2024, reflecting a persistent cooling of regional demand.

One of the most striking shifts is Japan’s evolving relationship with ASEAN markets. The Vietnamese and Malaysian markets are fairly resilient, with Japan’s exports to these two markets expanding steadily, in contrast to the sharp declines of 11.8% and 12.9% to Thailand and Indonesia respectively. Japan’s trade with the Philippines, after a staggering 19.1% contraction in 2023, experienced a diminished decline to 2.6% in 2024, showing initial signs of stabilization.

These diversification trends align with Japan’s strategic adjustments to its supply chains, prioritizing Vietnam and Malaysia as important bases because of their prosperous manufacturing sectors, lower production costs, and active participation in strategic trade pacts, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the RCEP, in support of Japan’s China+1 strategy for supply chain diversification. In contrast, owing to higher production costs, political uncertainties, and slower economic recovery, Thailand and Indonesia are notably less competitive among Japanese export markets.

Clearly evident is Japan’s progressive disengagement from the Chinese market. In 2020, China was Japan’s primary trading partner within the region, representing 48% of Japan’s total RCEP-bound exports. This percentage slipped to 41.7% in 2023 but slightly rebounded to 42.8% in 2024, illustrating China’s indispensable role and the structural constraints Japan faces in its endeavours to redirect trade dynamics.

Trend 3: Intra-ASEAN trade growth outpacing RCEP bloc

Intra-ASEAN trade showed strong growth in 2021 and 2022, followed by an unforeseen contraction of 13.3% in 2023 but a modest recovery of 7.03% in 2024. These volatilities suggest that, in addition to facing external impacts including a slowdown in global trade and supply chain disruptions, some ASEAN economies were also subject to the structural problem of weak domestic demand.

Nevertheless, intra-ASEAN trade performed better than intra-RCEP trade. In 2022, intra-ASEAN trade growth even doubled that of the RCEP economies (see Figure), highlighting deepening regional economic integration within the ASEAN. Despite experiencing a downturn similar to intra-RCEP trade in 2023, intra-ASEAN trade recorded a pronounced rebound of 7.03% in 2024, demonstrating the ASEAN’s strengthening resistance to external impacts.

Trade performance varied across ASEAN members. Vietnam’s exports to the ASEAN region leapt by 23.6% and 26.2% in 2021 and 2022 respectively, resulting in an accumulated rise of over 50%. This achievement secured the country’s position as a key node in ASEAN’s supply chains. Despite a fall of 7.63% in 2023, Vietnam’s exports to other ASEAN nations rebounded with 3.92% growth in 2024, suggesting its trade network’s gradual adaptation to the new normal.

As for Indonesia, Malaysia, and Singapore, their trade performance was highly volatile. After surging by 21.2% and 39.6% in 2021 and 2022 respectively, trade among these countries saw a sharp decline of 18.6% in 2023, followed by an additional 8% drop in 2024. The downturn for two consecutive years implies that this trilateral trade may be facing structural challenges. In contrast, Thailand demonstrated stronger adaptability. After peaking at US$54.8 billion in 2022, Thailand’s intra-ASEAN exports declined by 10.3% in 2023 but rebounded with a 5.5% growth in 2024. This illustrates a recovery in demand for Thai exports, driven by a resurgence in investment and production activities within ASEAN.

Trend 4: RCEP deepening trade ties with non-members

Trade between RCEP members and non-member nations has exhibited a dynamic trajectory, reaching a total trade value of US$3.37 trillion in the first three quarters of 2024, representing a 5% increase over 2023. The most unprecedented expansion occurred in 2021, when trade shot up by nearly 30% (spurred by post-pandemic recovery and robust demand worldwide). Despite a temporary contraction of 7% from global economic downturn pressures in 2023, a rapid rebound in 2024 underscores the adaptability and resilience of the RCEP economies as they continued to strengthen their global trade networks.

South Korea has been a leading force in this expansion, with its exports to non-RCEP partners climbing to US$289 billion in 2024, marking a year-on-year growth of 12.8%. An extraordinary 30.62% jump in its exports to non-RCEP partners in 2021 signalled South Korea’s vitality and resilience, derived from its deep integration into the international market.

Indonesia’s journey, however, has been more turbulent. After skyrocketing by 33.68% and 35.1% in 2021 and 2022 respectively, its exports plummeted by 16.01% in 2023, reflecting multiple challenges, including weaker global demand, supply chain disruptions, and shifts in trade policies. While 2024 saw a minor increase of 3.14% in exports, the country’s pace of recovery clearly lagged behind that of other major economies in the region.

Overall, while intra-RCEP trade remains a vital driver of economic integration, member nations are actively diversifying their partnerships beyond the bloc, generating a vigorous export-oriented momentum. The RCEP is gradually transitioning from a regional economic growth engine to a pivotal force in reshaping the global trade landscape.

Note: https://www.asiaglobalinstitute.hku.hk/rcep-trade-tracker

Dr Yifei Zhang

23 April 2025

In April 2025, global financial markets witnessed a textbook case of a credit crisis. The yield on the US 10-year treasury bonds shot up over 50 basis points within a single week, reaching a peak of 4.5%, marking the biggest weekly increase since the aftermath of the 9-11 incident in 2001. This phenomenon has not only subverted the traditional belief that the US treasury bonds are the world’s safest assets, but has also highlighted the deep-rooted vulnerabilities in the US dollar credit system.

American debt market in the midst of risky changes

The key to gasping the severity of this crisis involves understanding the fundamental financial concept of the “risk-free rate”. Long regarded as the anchor of global asset pricing, the US treasury yield has been used as a benchmark for calculating stock valuations, foreign exchange rates, and even residential mortgage rates. The core of the credit system hinges on the American government’s ability to repay its debts. Theoretically, the government can print money to meet its debt obligations, making a default improbable. However, if the market starts to question such a logic, the stability of the entire financial system is subject to challenge.

Apparently, the crisis has been triggered by technical factors. On 8 April 2025, the US Treasury Department’s auction of three-year treasury notes drew weak demand, receiving bids only 2.26 times the amount offered, registering a record low since 2023. However, an even deeper structural conflict lies in the fact that the basis trade strategy of hedge funds amplifies market fluctuations. Given the 50 times leverage on yield spreads between long-term and short-term government bonds under this strategy, if the yield fluctuates by more than 1%, positions exceeding US$600 billion would be forced to close, potentially leading to a chain stampede. During the recent mass exodus of traditional bond buyers, China has reduced its holdings of US bonds for two consecutive months and has augmented its gold reserves. Amid the weak-yen crisis, Japan has dumped US bonds to rescue its economy. Meanwhile, Saudi Arabia has begun settling oil payments in RMB through Hong Kong’s Cross-border Interbank Payment System (CIPS).

The fact that the above three major events coincided is no coincidence. As the world’s largest holder of US treasury bonds, China has been disposing of its holdings, thus weakening the demand for the dollar as the official reserve currency. Japan’s passive selling of American bonds reveals the weakness of US treasuries amid extreme foreign exchange volatility. Saudi Arabia’s attempt to settle trade transactions in local currency poses a direct challenge to the monopolistic status of the dollar in bulk commodity pricing. Once the greenback has been compromised as the “official reserve currency anchor”, a “stable foreign exchange rate anchor”, and a “bulk commodity pricing anchor”, markets will come to realize that the myth of “risk-free asset” is actually a collective compromise made by countries in response to America’s financial and military hegemony during the globalization era.

According to data from the US Department of Treasury, the federal government’s interest expenses for 2025 could amount to US$1.5 trillion, representing one-third of its fiscal revenue. If American bond yields continue to surge, the US may find itself in a debt abyss ― repaying old debts by borrowing anew, thereby triggering a sovereign credit crisis. The disintegration of this logic signifies an unprecedented threat to the US dollar-centric financial order worldwide in the aftermath of the Second World War.

Market logic disrupted by weaponization of tariffs

In the traditional financial model, a stock market crash often redirects fund flows to government bonds, which are considered a safe haven. However, the market performance this month utterly upended this principle. Within merely a week, the US stock market lost US$8 trillion in value, while the US Dollar Index plunged below the 100 mark. Instead of prompting investors to seek refuge in US treasury bonds, the three markets―US stocks, bonds, and foreign exchanges―experienced simultaneous crashes. These market anomalies stem from the White House’s policy vacillations, compounded by geopolitical rivalry.

Trump’s tariff policy has become a catalyst for market volatility. His administration adjusted tariff rates on China three times within eight days, driving the rates up to 145%. Besides making it impossible for enterprises to formulate long-term production plans, policy uncertainty has also created chaos in supply chain arrangements within 90 days. Investors find themselves in a “liquidity black hole”, where assets including stocks, bonds, and foreign exchanges have all become high-risk targets, leaving cash as the only investment option. Although the White House has suspended some of the tariffs, the persistent 10% baseline rate and the 90-day pause are insufficient to alleviate the ongoing panic.

The impact of the self-undermining hegemonic US dollar is particularly far-reaching. America’s frequent weaponization of the financial system has compelled China and Russia to switch to local currency settlement, resulting in 83% of their energy trade being decoupled from the dollar-denominated system. Saudi Arabia has begun conducting oil trade transactions in RMB through Hong Kong’s financial infrastructure, directly challenging the dollar’s monopolistic status in bulk commodity pricing. There are market concerns that the US may resort to legal defaults to address its national debt crisis. This could involve forcing other countries to convert short-term American bonds into 50-year zero-coupon bonds, effectively shifting American bonds from a safe-haven instrument to a source of risk.

Investment pointers on navigating the financial paradigm shift

Beyond altering the market’s operational logic, the current crisis has reshaped public awareness of the nature of the financial system. The changes reflected in the three macroeconomic indicators below are instrumental in fostering people’s understanding of the new financial order.

Extent of the inverted US bond yield curve. An inverted yield curve, i.e. short-term bond yields higher than long-term bond yields, is a warning sign of an economic recession. Currently, the latest rate difference between 10-year American bonds and two-year treasuries has widened to -120 basis points, signifying the steepest inverted yield curve since 1981. Evidently, the market has grown wary of the US government’s financial sustainability. Once interest expenses consume two-thirds of fiscal revenue (estimated figure amounting to US$1.5 trillion in 2025), investors would demand higher risk premiums.

Share of US dollar in global reserves. Data of the International Monetary Fund shows that the share of US dollar as the world’s reserve currency has slid from 73% in 2001 to 52% in the first quarter of 2025. This drop coincides with rising allocations to RMB-denominated foreign-exchange reserves and gold holdings, reflecting a re-assessment of the dollar’s credit stability among central banks worldwide. Saudi Arabia’s use of RMB to settle oil trades via Hong Kong’s CIPS system exhibits a microcosmic sign of de-dollarization.

Share of RMB in cross-border payments. The use of RMB in international trade settlement has soared from 2.7% in 2022 to 9.3% in April 2025. As the world’s largest offshore RMB centre with deposits surpassing RMB1.2 trillion, Hong Kong serves as a vital window for observing the geoeconomic power shift.

Hong Kong’s unique position in global financial order transition

The financial turmoil of 2015 is in essence a collective reflection on “American exceptionalism”. As the Trump administration attempts to maintain American hegemony through tariffs and sanctions, international markets react by dumping US bonds, stocks, and dollars. This crisis signals an irreversible trend away from sole reliance on the dollar, heralding a multipolar transformation of the global financial system.

Much like its role as an entrepot in the dollar-gold delink in 1971, Hong Kong now stands both as a witness to the fading old order and as a testing ground for the emerging new rules. The dynamic balance of the city’s Linked Exchange Rate System, the gradual internationalization of the RMB, and its position bridging Eastern and Western capital jointly provide individuals with a micro-perspective on the changing macroeconomic landscape.

While the investment bank traders in New York continue to debate over when the US Federal Reserve will cut rates, bankers in Hong Kong have already quietly increased their holdings of the Vietnamese Dong and the Malaysian Ringgit. The support for these currencies lies in Southeast Asian factories taking over parts of Chinese industrial chains. This may represent a new way forward for globalization: as the dollar hegemony progressively loses steam, nimble, small open economies have taken the initiative to carve out niches for their survival. It is within these niches that Hong Kong is proactively sowing the seeds for its future growth.