This article discusses the politics of social policy development in Hong Kong following the Asian financial crisis. It examines the cause, mode and political significance of social policy reform in an Asian late industrialiser that has been experiencing the twin pressures of economic globalisation and socio-economic change. Financial austerity has prompted the state to adopt social policy reforms through re-commodification and cost containment, resulting in the retrenchment of the residual welfare state. The state's policy choices are structured by local politics, including the state of political development and the path dependence nature of policy change. The article questions the effectiveness of the social authoritarian approaches adopted by the state in attempting to renegotiate the social pact with its citizens, and contends that progressive development in social policy is inevitably bound to democratisation.