This unsightly growth is caused by the feeding of a tiny mite, invisible to the naked eye, called the hibiscus erineum mite. It has been in the Hawaiian Islands since 1989 and is carried from place to place by wind, birds and insects.
The mite is difficult to get rid of, and even when it is gone, it will likely return. Biological control is the best long-term solution. Soon after the mite becomes established, a predatory mite will most likely move in and begin feeding of the erineum mite.
Since the predatory mite will only reduce the pest population and not eliminate it, there will always be some damage. If you do not want to tolerate any damage, then you will have to spray. Prune first to eliminate the worst damage, then spray with a registered miticide (wettable sulfur has worked). Apply 2-3 times, at weekly intervals, paying special attention to spraying the undersides of the leaves. In addition to killing the mites, the spray will protect the new growth from further infestation so gradually the shrub will begin to recover.
A miticide application will also kill the predatory mites, so it is either biological control or chemical. If you see tiny, fast moving mites on the leaves, these are the predatory mites. You may want to give them a chance before pesticide applications.
Research conducted at CTAHR’s Kahului Experimental Station (Maui) indicates that some hibiscus varieties are more susceptible to this mite than others. The more susceptible varieties are: Chinese Red, Herman Shierman, Orange Hibiscus, Nii Yellow and Kardinal. Those varieties that show a lesser susceptibility to the mite are: Itsy Bitsy Peach, Monch, Zahm, Apple blossom, Apricot, Empire and Pink hibiscus.