ON the edge of Hong Kong’s Victoria Harbour, workers are building a cavernous station that will be the terminus for one of the most expensive high-speed rail links ever constructed. The $11bn fast train linking Hong Kong to mainland China is meant to be a showpiece for integration between the semi-autonomous territory and its mother country.

Instead, the over-budget and behind-schedule project has turned into a symbol of the deteriorating political and economic relationship between Beijing and Hong Kong. It could be a foretaste of the profound difficulties that lie ahead for the global financial centre.

To smooth rail departures, the Hong Kong government is planning to place Chinese border police inside Kowloon station, much like French police conduct checks on outgoing Eurostar passengers at the King’s Cross terminus in London. The project had been scheduled to open in 2015 but will not be operational before late 2018.

“Hong Kong is really dependent on China and external trade,” says Lily Lo, an economist at DBS, the Singaporean bank, in Hong Kong. “The Chinese economy is slowing down and this is a structural slowdown so we don’t think there will be a V-shaped recovery any time soon. There’s no quick fix.”

Hong Kong’s battle over its future is coming as its China-dependent economy faces the

‘worst time in 20 years’

The rail link and other large infrastructure projects are supposed to secure a place for the city as a hub in the sprawling and wealthy Pearl River Delta region on the southern coast of China. A 30km sea bridge and tunnel is being built to connect Hong Kong with the casino centre of Macau and the mainland city of Zhuhai and is also beset by cost overruns and delays. Escalating tensions, both with Beijing and within Hong Kong, are further complicating these projects and adding to the economic clouds over the territory.

Its traditional pillars of wealth- tourism, retail, trade, financial services and property development — have all been hit by cyclical and structural downturns that have exposed the reliance on China, which accounts for 40pc of trade.

Over the past decade, China has opened its economy further and more investors are doing business directly with the mainland, causing Hong Kong to lose its relevance as a gateway. Its container port, which was the world’s busiest in the 2000s, has fallen to fifth place, overtaken by Shanghai, Shenzhen and Ningbo. Facing a severe shortage of space, high costs and Chinese rivals with strong government support, more downward pressure is likely.

Previously Hong Kong benefited from rapid growth in China and low interest rates in the US, given that its currency is pegged to the dollar. Now the situation is reversing, with China facing a period of restructuring and slower growth, while the US Federal Reserve is expected to raise interest rates further, although many investors are betting it will not happen in 2016. China’s gross domestic product is forecast to grow by about 6pc this year. In Hong Kong, the government predicts that it will be lucky if GDP increases by 1-2pc.

Mr Tsang and Li Ka-shing, the billionaire whose interests in Hong Kong stretch from ports to property and retail to telecoms, have both warned that the economic outlook is worse than that faced during the Sars epidemic in 2003, which killed 299 people and prompted the last sharp slowdown.

Retail has taken the biggest hit in the current downturn. Sales had been buoyed when wealthy Chinese consumers flocked to the territory to buy luxury goods and cosmetics, but takings slipped 11pc year on year during the first five months of 2016 and the number of mainland tourists dropped 12pc in the same period to 17m.

Chow Tai Fook, the biggest jeweller in the world by market capitalisation, is seen as a bellwether for mainland demand for Hong Kong’s luxury goods. Its sales in Hong Kong and Macau fell on an annualised basis by 22pc in the three months to the end of June. Other companies, such as handbag retailer Coach and watchmaker Jaeger-LeCoultre, which viewed Hong Kong as a cash cow, have been closing stores.

Even Hong Kong’s humble tea shops — known as Cha Chaan Teng — have seen a slide in sales of their cheap noodles and milk tea. At Tsui Wah, a popular chain, profits for the year to March fell by more than half to HK$72m ($9.3m).

Additional reporting by Gloria Cheung.

Published in Dawn, Business & Finance weekly, July 25th, 2016