Colin James: The fast changing economy of Hong Kong
23.12.2003
COMMENT
This is the second of a two-part series on Hong Kong and China.
What does a small economy do when in difficulty? At first, retreat into its shell. Then think big. That's Hong Kong as it emerges from six years in transition and under pressure.
No sooner did Hong Kong rejoin China in 1997, uneasy about economic and other freedoms, than it was hit by the Asian crisis. Then came the dot.com bust in 2000. Then Sars this year.
Property values dropped 60 to 70 per cent. Wages and salaries were cut by up to 40 per cent for some. Unemployment climbed to near 9 per cent. Across the border, in what Hongkongers call the "mainland", rival cities began to modernise and internationalise. Hong Kong was in a vice.
The initial reaction was defensive - maintaining what K. C. Kwok, senior economist at the Standard Chartered Bank, described as a "Gore-tex border" - much more could go into China than could come out. Cars and trucks joined long queues going through slow-acting checkpoints at each land crossing.
"There was a fear Chinese workers working in Hong Kong would lower wages and drive down property prices," said Hugo Restall, editorial page editor of the Asian Wall Street Journal.
"It took an incredibly long time for Hong Kong to figure it had to develop a partnership with Guangdong [the next-door province].
"Hong Kong was arrogant in thinking China needed Hong Kong more than Hong Kong needed China."
But: the banks did not collapse as property owners' equity went heavily negative, which proved their skill and the financial system's resilience.
The city has rebranded itself "Asia's world city", it has committed about NZ$30 billion for capital works over the next five years; and it is about to build, with the mainland, a 29km - yes, 29km - bridge across the Pearl River Delta to the former Portuguese colony of Macau.
Contrast that with the incrementalist approach to Auckland's infrastructure deficit.
But Hong Kong has had help Auckland can only dream about.
Over the past few months China, trying to stem Hongkongers' democratic demands which owed at least something to the stalled economy, has liberalised tourism, freed trade in goods and services in a closer economic partnership, agreed to cross-recognise professional qualifications and is about to let Hong Kong banks deal in renminbi, the Chinese currency which at present cannot be freely traded.
The tourists have helped fuel a rise in retail sales. Hotels have filled and room rates are up. Property has begun to sell again, though prices have not yet lifted.
That doesn't mean an automatic return to the golden days when Hong Kong was the one gateway into China during the first two decades of its economic liberalisation.
Chinese cities, notably Shanghai and Beijing, are fast becoming international centres. Foreign companies increasingly bypass Hong Kong and invest directly in mainland cities, and transport links are improving and being liberalised.
"Now Hong Kong must hold its place by being more efficient," said Elley Mao, principal economist in the Government's Finance Services and Treasury Bureau.
How? By supplying high-end skills and services. Hong Kong has experience and skills that Chinese companies - many owned by Hong Kong and foreign investors - need.
It has long played host to multinational companies, it has skills in research, design, marketing and finance, and it has an internationally respected legal system China lacks.
Hong Kong is also a place where cautious central Government leaders can test liberalisation before applying it more widely. Hong Kong banks handling renminbi deposits, remittances, exchange and credit cards will be a step towards making the renminbi freely tradeable.
"For tourism purposes, RMB is already a hard currency," Kwok said.
"It could be imagined that companies would in the future do business in renminbi and renminbi bonds might be raised to tap savings. Long term, we might get Chinese companies' shares listed in Hong Kong but traded in renminbi."
Shiu Sin Por, executive director of the One Country Two Systems Research Institute, agrees, saying: "China is using Hong Kong as a way of managing the process of moving to a convertible currency."
There has been another shift of perception.
"Hong Kong was seen as the engine of growth for China. Now China is seen as the engine of growth for Hong Kong," said political scientist Michael DeGolyer.
That is to say, China has a huge and rapidly enriching population who are consumers as well as producers.
The Pearl River Delta, at the mouth of which Hong Kong and Macau are sited, is China's and one of the world's fastest growing regional economies and Hong Kong companies alone account for 11 million jobs there.
How sustainable is China's expansion?
There are wide income disparities between rich and poor, town and country, coastal and inland provinces, and employed and unemployed.
The population will become top-heavy over the next decade as decades of low birth rates reduce the proportion of working-age people.
The banks are laden with bad loans. There are severe energy shortages. The legal system lacks western rigour and commercial reliability. The Communist Party is still in charge.
Much also still depends on the international trading system remaining stable and the world economy ticking along.
But China is turning itself into a potentially self-sustaining market in which the inland provinces, which have low wages and plentiful resources, might sell to the higher-wage, resource-poor but export-oriented coastal provinces.
A start is being made on fixing the banks, and western financial skills are gradually coming in through licences for foreign banks, insurance companies and investment funds.
And the Communist Party is training smart younger cadres more attuned to business needs.
So, yes, most agree, China's growth is sustainable. And, Kwok said, "as the scale of China's economy grows, economic interaction between China and the outside world only multiplies ... which will generate a lot of demand for business and financial services from China's cities, which Hong Kong is in an excellent position to cater for."
Hong Kong is still the place for multinationals to have their regional offices, even if they also have offices in China.
Air, sea and electronic communications are excellent. Cultural facilities match those of many of the world's major cities.
Hong Kong is also high-tech. An example: a new smartcard official identity card will soon allow residents to check themselves through immigration in seconds. If they wish they can also use it as a library card, driving licence and bank card, with more to come.
And Hong Kong can extract more value from its investments in the mainland - for example, by fostering high-end research focused on Chinese manufacturing, an activity singled out by Secretary of Commerce, Industry and Technology John Tsang.
Hong Kong can provide the protection China cannot yet for intellectual property.
What Hong Kong is not doing is buying investment. Its Trade Development Council and Invest Hong Kong (counterpart to Invest New Zealand) promotes Hong Kong as a place to sell to, not just sell from.
It refuses to compete with the likes of Singapore in subsidies, tax breaks and other inducements, relying instead on an attractive operating environment, consistently rated the world's most economically free. "We just give you Hong Kong," said Tsang.
Even so, Hong Kong's advantages as mentor, facilitator, funder and connector are temporary if China's leaders are serious about modernisation.
Transport is likely to feel the pinch early. "Hong Kong is on a no-growth path" as a port operator, Chiu said.
Among "plenty of new opportunities" Chiu sees "also new challenges".
For example, the Macau side of the delta may develop partly at the expense of the Hong Kong side because of a one-third cost advantage.
Longer term, the challenges might be in setting higher social and environmental standards, which will lift taxes and quasi-taxes.
Already there is a mandatory pension into which employers and employees must pay, in effect adding a payroll tax to the low 15 to 16 per cent company tax rate and 15 per cent maximum income tax rate.
The Government is cutting health and education spending to try to tame a structural budget deficit. But democracy will likely increase demands for those very services, especially much-prized education.
There are also nascent environmental concerns in a city renowned for its crowded living.
But that is well in the future. For the moment Hong Kong looks well placed.
New Zealand business eyeing China might well take another look.
And business and politicians might contrast New Zealand's think-small with Hong Kong's big thinking.
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Part I
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