Hong Kong strategy Market outlook
Christine Loh CEO, Civic Exchange cloh@civic-exchange.org (852) 98028888
Chris Lobello Head of Hong Kong Research (852) 26008208
14 September 2007
Hong Kong Strategy
Brand and retail
giants in the making
Don’t worry about
container throughput
Shrinking the ports
will be a breakthrough
Still strong and doing
fine as a financial centre
Shenzhen may be
Hong Kong’s best friend
Southern China is a
key economic region
Love thy neighbour more Hong Kong and the Pearl River Delta www.clsa.com Find CLSA research on Bloomberg (CLSA <go>), Thomson First Call, Reuters Knowledge - and profit from our powerful CLSA evalu@tor® database at clsa.com
Hong Kong strategy
Contents Foreword............................................................................................ 3
Executive summary ............................................................................ 4
The next 10 years............................................................................... 6
Look at regions, not cities .................................................................. 7
Chinaâ&#x20AC;&#x2122;s development history ............................................................ 11
Collaboration innovation .................................................................. 13
Transformation ................................................................................ 19
Whatâ&#x20AC;&#x2122;s next? (2008-17) ................................................................... 24
Christine Loh Dr Christine Loh, OBE, is the CEO of Civic Exchange, an independent nonprofit, public-policy thinktank established in Hong Kong. Loh is a lawyer by training, a former commodities trader, and ex-legislator before founding Civic Exchange in 2000. She has a long track record working on air-quality issues, both in Hong Kong and China, and is an international advisory member to the G8+5 Climate Change Dialogue. Loh is also a non-executive director of the Hong Kong Exchanges and Clearing Limited. Her rare combination of skills and experience makes her a leading voice on many aspects of politics and public policy. She is a sought-after presenter locally and internationally, and she has authored many academic as well as popular publications.
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Hong Kong strategy
Foreword Returning to Hong Kong after time away in Japan and Malaysia, it is amazingly easy to slip back into things. A few bars and restaurants have changed, the air is dirtier and the harbour smaller, but the city is booming with enthusiasm, buzz and excitement that are stronger than ever. This is mind-boggling given that just 10 years ago a number of pundits were questioning Hong Kong's future in light of the sovereign handover. Journalists were flying in by the hundreds to report about the monumental change that we were about to face and, largely, to predict problems and crises as Hong Kong became just another city in China. But 10 years forward, Hong Kong has faced down the challenges and moved from strength to strength. There is no doubt that economically, as well as on several other key measures, the past decade has been a great success for Hong Kong. Going forward though, the pundits are yet again pointing to questions of Hong Kong's future as other Chinese cities gain attention and seem to be “winning”. To examine what the next 10 years will hold for Hong Kong, we have asked Dr Christine Loh to return as a guest CLSA commentator and examine Hong Kong's competitive environment, key drivers, and its role within China. In her October 2002 report, Ports, airports and bureaucrats, Loh inspected the linked fortunes of Hong Kong and Guangdong. Subsequently, in the March 2003 follow-up report, Love thy neighbour, she reviewed Hong Kong’s role in transforming the Pearl River Delta into China’s fastest-growing area and difficulties it faced during the process. With her help, we have been able to stay close to the rapid changes taking place, and the issues that Hong Kong people are pondering. As an ex-legislator, as founder of the Civic Exchange in 2000 and as a board member of Hong Kong Exchanges, Loh is a leading voice on many areas of public policy and is uniquely suited to look into the crystal ball of Hong Kong's future. Fortunate for all of us based here, new, old, and newly-returned, her views in this new report suggest that while the city’s relations with China and its many regional neighbours within the country will change, the end result is likely to be a Hong Kong that is successful not by competing with its peers but through cooperation. While any 10-year forecast comes with uncertainty, Loh addresses key concerns that Hong Kong needs to address, which sectors and industries it should work to develop and which it should move beyond, and how an understanding of China's regions and willingness to work with these diverse groups for mutual success is key to the city's continued success in the decade to come. This report is the type of independent, broad-based research that CLSA is known for, and is well worth your attention in understanding how Hong Kong is likely to succeed in the years to come.
Chris Lobello Head of Hong Kong Research
14 September 2007
cloh@civic-exchange.org
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Executive summary
Hong Kong strategy
Love thy neighbour more Hong Kong’s success depends on it being even more international
To guarantee its future success, Hong Kong needs to be even more the international financial, trade and maritime centre that Beijing believes it could be. The emphasis must be placed on being “more international” because this is a status that no other city in the mainland can come close to yet.
Hong Kong is part of the Greater Pearl River Delta region
We must also look at China’s key cities, including Hong Kong and Macau, as parts of economic regions to understand their interactions, as well as the roles each geographical zone play in the nation’s development. Hong Kong is part of the Greater Pearl River Delta (PRD) region. This is without doubt the most dynamic area in China by a very long stretch because of the presence of Hong Kong and Macau.
Hong Kong needs to learn to navigate local politics
Guangdong is a pivotal province of southern China that Hong Kong needs to team up with so that the PRD region can pull its weight vis-à-vis other regions. The city should also enhance its political smartness in order to navigate the complex interests among Shenzhen, Zhuhai and Guangdong, as reflected in stalled negotiations over the Hong Kong-Zhuhai-Macau Bridge.
Hong Kong is not marginalised
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Hong Kong is transforming up the value chain
Hong Kong needs not feel marginalised just because Shenzhen’s containerport throughput is growing at a faster rate than Kwai Chung’s. Shenzhen has more land and is closer to manufacturing bases in the mainland; Hong Kong companies have invested heavily on ports in Shenzhen as well. Meanwhile, the Hong Kong Special Administration Region (HKSAR) government should not worry about the loss of jobs yet because throughput in tonnage terms is still high in the territory and the sunset will be gradual.
Shrinking HK’s terminal operation can lead to high-value uses of land
There could be yet another brilliant Kwai Chung container terminals sunrise if Hong Kong can capture the opportunities arising from shrinking the container terminals in Kwai Chung, so the land could be given over to higher-value uses. As an international financial, trade and maritime centre, the city needs more land for commercial, residential and recreational purposes. Moreover, ports and accompanying trucking operation are highly polluting. Hong Kong can benefit from adopting a “green port” policy - what Long Beach and Los Source: Graham Uden, HKTDC Angeles are doing in the United States. Hong Kong should entice Shenzhen into clean-up collaboration in Shekou and Yantian, since pollution there affects Hong Kong’s air quality.
SMEs know the days of low-value assembly are over and are upgrading
Hong Kong’s manufacturing small- and medium-sized enterprises (SMEs) have realised the days of low-value assembly and processing operations across the border is over. The good news is that there is a tendency to upgrade. Those who cannot make the transition will fade. There are many who have completed the passage - they do not only produce but are making good profits from higher-value merchandising, ie, design, marketing, distribution and retail. Watch out for a new generation of retail brand giants emerging as the mainland opens up its consumer markets.
cloh@civic-exchange.org
14 September 2007
Hong Kong strategy
Executive summary
Shanghai financial market will become more like Hong Kong’s
No need for HK officials to intervene
As for whether Shanghai’s rise as a financial centre would marginalise Hong Kong, there is no wisdom in being blinded by the sheer volume of its stock market. Hong Kong’s officials should not be so nervous and kick the habit of market intervention. Its 5.88% acquisition of Hong Kong Exchanges’ (HKEx) stock was an unfortunate move. China’s best companies are listed in Hong Kong and the city should aim to be a quality market. Shanghai will become more like Hong Kong, which should strive to move further along the development path. Those in the front have to accept that the gap is closing after all, this is the purpose of development. Hong Kong has to keep a few steps ahead to stay competitive. Hong Kong SMEs’ upgrade strategies Strategies Develop higher-quality products Improve product design Strengthen inventory control Automate production Develop own brands Switch from processing Develop related products in other industries Implement “green” production Invest in R&D Abandon production for purchasing/marketing No action taken
% of enterprises 53.1 45.1 36.7 35.9 35.0 24.6 22.7 18.0 17.8 12.2 8.7
Source: HKTDC survey
HKEx is right to explore new products, such as emissions trading
The Hong Kong Exchanges’ new study on roles it could play in emissionsrelated products is the right way forward. If Hong Kong can stake a claim in the emerging asset class, it stands a good chance to win the game.
The next decade will see more civic pride, action, civil-society investments
Hong Kong’s energetic residents have matured. They show their pride through making social investments, as well as by actively exercising their civic responsibilities. Today, Hong Kong people are committed to their city as part of a big country - China. Over the next 10 years, they will keep urging the authorities to transform Hong Kong into something more inviting, set against the city’s stunning landscape of mountains and water. The natural setting of Hong Kong is the most dramatic of any major city in China. The city compromises this unique asset at its peril.
Reshaping the cityscape is a big civic arena
Hong Kong people are far from being politically apathetic
Top priority for government to address Improving the economy Reducing income inequality Better public housing Increasing democracy Pollution Improving education
(No. of respondents) 0
100
200
300
400
500
600
Source: CLSA Asia-Pacific Markets
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Section 1: The next 10 years
Hong Kong strategy
The next 10 years Guangdong’s great success
Hong Kong and Guangdong together have created an export-processing and production-services economy, a powerful machine that has contributed enormously to China’s modernisation since the 1980s. The model was superimposed on and ran parallel to China’s old socialist production structure. The processing system was so successful in Guangdong that it was adopted elsewhere in the country, which laid the foundation for the nation’s export might in light industrial products today.
Beijing not discriminating against south China, it is just helping weaker areas
What’s next for this section of south China? As far as the Chinese government is concerned, the region has done so well that it needs little help from Beijing. As the saying goes, ‘you’re on your own, kid.’ This does not mean Beijing is discriminating against southern China. The central authority knows that its overall success as a national leader depends on all provinces doing well. While the government will help regions that need an extra push, such as the northeastern old industrial areas, the vibrant south is going to have to get on with finding a way to propel itself into a higher stage of development.
Collaboration to decide the ultimate success HK and Guangdong need to collaborate to exert regional leadership
The ultimate success of Hong Kong and Guangdong depends on whether they can collaborate and exert regional leadership to take southern China several notches up the competitiveness ladder earlier rather than later. This transit is leaving some Hong Kong firms behind, but there are also successful stories in merchandising and other high-end services. The laggards will fade - this is the law of natural selection at work.
Talk about HK being marginalised has to do with ports and logistics
The recent talk about Hong Kong being marginalised has much to do with the withering of low-value processing trade (assembly). But as we said, those with foresight have already made the transition. ‘Marginalisation’ is also linked to the strong growth of Shenzhen ports vis-à-vis Hong Kong, which is going to reshape future shipping-line strategies and vessel deployment in the former’s favour.
Time for Hong Kong to reposition itself
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Services are doing well and can do even better
It is time for Hong Kong to actively reposition itself to be an international maritime services centre rather than trying to compete with Shenzhen on port expansion and low-end physical cargo handling. In any event, having so many port operations in close proximity to the heart of the city compromises its environmental condition, as well as aesthetics.
HKSAR government must resist special interest pleading
Minister Frederick Ma had talked about setting up a special HK$8.2bn fund to help SMEs to deal with difficulties.1 The HKSAR government needs to resist special pleading from those who are having trouble coping with changes. Thus, subsidising manufacturers in any form is not in the public’s interest
Success will depend on the peoples’ choices
Hong Kong’s socioeconomic transformation will depend on individual decisions of entrepreneurs and citizens – not government trying to pick winners and sustaining losers. The government should play the role of a facilitator, to help attract global talent, improve institutions, strengthen the rule of law, update legislations where necessary, promote fair competition, enhance market transparency, provide better education and training, clean up the environment, beautify the cityscape and protect the health of its residents.
cloh@civic-exchange.org
14 September 2007
Section 2: Look at regions, not cities
Hong Kong strategy
Look at regions, not cities Bets against HK are based on wrong assumptions about Beijing’s interest
It used to be fashionable to compare Hong Kong and Shanghai and to predict which would triumph in zero-sum terms. Bets on Shanghai were based on the assumption that Beijing was trying to sap Hong Kong’s strength so that Shanghai could overtake its “rival” sooner rather than later. Beijing wanted to exert effective political control on Hong Kong after 1997, but it was not its plan to weaken the former British colony’s economic might. The tussle between “one country” and "two systems” led to some rocky moments in Hong Kong politics but it is wrong to assume that the central authority wants to put the city out of business in favour of Shanghai. That is not to say politics do not matter. However, it is important to look at the whole picture from a regional perspective, instead of focusing on comparing Hong Kong with Shanghai, in order to get a better handle on the nation’s development. This helps assess what Hong Kong and Guangdong need to do on their own, as well as together, to advance further. After all, other provinces are also flexing their muscles, particularly those in the Yangtze Delta. Below, we look at China from three angles.
Three parts - Coastal, central, western Chinese provinces in three sections - coastal, central and western
The simplest way is to divide China into three parts - coastal, central and western. The coastal area has grown the most since the 1980s and is the richest in terms of income. The central and western provinces are much less developed and still have problems catching up 2 . The problem of disparity remains a challenge. The Western Development Programme launched in 1999 is a high-profile, but not yet too successful, attempt to redress the problem. Figure 1
China - The coast, the centre and the west
Source: CLSA Asia-Pacific Markets
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Section 2: Look at regions, not cities
Hong Kong strategy
Seven regions A regional perspective
Another perspective is CLSAâ&#x20AC;&#x2122;s division of China into seven regions. Figure 2 provides a useful summary of the current state of each of the regions.
Figure 2
One country, seven regions
Source: CLSA Asia-Pacific Markets
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Section 2: Look at regions, not cities
Hong Kong strategy
The 10 clusters In terms of regional economies . . .
We can also view China in terms of economic agglomeration. We can say the country has 10 regional metropolitan economies with relatively independent industrial and market structures: six along the coast and four inland.3 1. The capital cluster: Beijing-Tianjin-Tangshan-Shijiazhuang 2. The Liaoning cluster: Liaoning province-Dalian-Shenyang 3. The Shandong cluster: Shandong province-Jinan-Qingdao 4. Greater Shanghai: Shanghai-Hangzhou-Suzhou-Ningbo
. . . there are 10 clusters
5. The Taiwan-Fujian cluster: Taiwan-Xiamen-Fuzhou 6. Greater Pearl River Delta: Hong Kong-Macau-PRD-Guangdong 7. The Jilin-Heilongjiang cluster: Changchun-Harbin 8. The Yangtze River cluster: Nanjing-Yangzhou-Hefei 9. The south-central cluster: Wuhan-Changsha-Nanchang 10. The Sichuan cluster: Sichuan province-Chongqing-Chengdu
Figure 3
Chinaâ&#x20AC;&#x2122;s 10 regional economies and 150-million-population cities
Source: Civic Exchange, CLSA Asia-Pacific Markets
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Section 2: Look at regions, not cities
The 10 clusters make up 80% of China’s GDP
Hong Kong strategy
The 10 clusters together comprise 65-70% of China’s population and over 80% of GDP (excluding Hong Kong and Macau). All of them have reasonably good intra-railways and highway links and have developed their own regional markets with relatively independent industrial structures. These are mostly along the coast or inland along the Yangtze River. If we grouped clusters 1, 4 and the PRD (excluding Hong Kong and Macau) together, they would make up about 50% of China’s 2004 national GDP, nearly 80% of its foreign trade and about the same percentage of its foreign direct investments (FDI).4 Not surprisingly, the most developed and richest places are centred round a number of major cities: Beijing-Tianjin, Shanghai and Hong Kong-PRD. The triangle formed by the port cities of Tianjin-Dalian-Qingdao is also referred to as the Bohai area. Cities have always been the hub of trade and are therefore the key driver of a nation’s economy. With population growth and urbanisation, they are coalescing into metropolitan clusters, the join-up that are turning them into identifiable regions. Figure 4 shows the richest and the poorest areas in China. National development efforts are going to focus on those less advanced provinces with large populations.
Figure 4
Richest and poorest
Source: CLSA Asia-Pacific Markets
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Section 3: China’s development history
Hong Kong strategy
China’s development history In the early days: ‘let some get rich first’
Former Chinese Premier Zhu Rongji noted, when he introduced the 10th FiveYear Plan (2001-05), that the time had come for the government to focus policies on helping poorer regions. He explained that in the initial opening-up of China, the central and western areas had to support the coastal region because of its ability to grow faster. In the second stage, as coastal provinces gain strength, they will have to return the favour.5
Basic manufacturing trade proved highly successful
In the 1980s, China opted for attracting basic manufacturing trade in order to leverage its advantages of land and abundant labour. Its policy aimed at luring Hong Kong and Taiwan companies to move their manufacturing facilities to the mainland. Much of the production initially took place in Guangdong before expanding further up the coast. In assembly trade, raw materials - parts and components, accessories and packaging materials - are imported in bond, and assembled products reexported. This very basic form of business did very well in China. It turned the country into a manufacturing platform for international markets. The next rung up is where there is an element of domestic input. Since the 1990s, basic manufacturing trade has helped China post surplus after surplus, contributing significantly to its international balance of payments. Every 1% growth in the processing business increased China’s GDP by 0.29%.6 Over the years, the component of domestic input has gradually increased, which accounts for the slowdown in intermediate imports, thereby contributing to the expansion in China’s trade surplus.7
Burden of the riches trade friction mounted, particularly with the US
Hu-Wen policies upgrade, cleanup
The surge in trade surplus (now standing well above US$1.33tn) has put pressure on the renminbi to appreciate and intensified trade friction, particularly with the US. The huge trade surplus is largely attributable to processing trade. Meanwhile, the rate of resource and energy consumption, as well as pollution levels, has become extremely high. New leadership, new direction When they stepped up to lead the country in 2002, President Hu Jintao and Premier Wen Jiabao signalled China’s need to change tact. They suggested it was time to embark on an industrial upgrade. This would require the nation to wean itself off processing trade, particularly in more developed regions.
A new climate-change policy in 2007
Industries must become more energy- and resource-efficient, while bringing pollution under control. The 11th Five-Year Plan sets target for energy efficiency and pollution reduction, requiring all provinces and cities to incorporate the targets into their local plans. On this year’s World Environment Day (4 June), the Chinese government released a climatechange plan that dovetails with the 11th Five-Year Plan. Figure 5 shows the eight categories of improvement. So far the energy-saving goals are proving to be challenging but officials believe they can be met by 2010.8 However, without Beijing’s push, runaway consumption would likely have continued unabated.
Richer places should help poorer places
The present leadership is also pushing for regionally balanced growth to narrow the income gap between the rich and the poor, so as to maintain social stability. Richer provinces should do their bit to help poorer areas, while cities must play an active role in pulling their poorer peripheries along.
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Section 3: Chinaâ&#x20AC;&#x2122;s development history
Priorities are tradesurplus suppression and investment diversion
Hong Kong strategy
To avert looming trade conflicts, export expansion and foreign-exchange generation are no longer policy priorities. Today, the strategy is to focus on trade-surplus suppression and foreign-investment diversion.
Figure 5
The 11th Five-Year Plan - eight categories of improvement Category Improve energy efficiency
Protection of the environment
Enhance grid construction
Increase hydro deployment
Optimise coal-fired generation
Promote nuclear power Renewable generation
Gas-fired generation
Details To reduce: per Kwh coal consumption to 355g by 2010 from the 370g level of 2006; power plantsâ&#x20AC;&#x2122; own consumption to 4.5% by 2010; reduce T&D line losses to 7% by 2010 To reduce: sulphur-dioxide emissions to 2.7g/kWh by 2010; particulates to 1.2g/kWh by 2010 Waste-water treatment to reach 100% of all sewage by 2010 Three corridors bringing power from west to east Link regional grids north to south Pilot 1,000KVa and 800KVa transmission Add 73GW by 2010, bringing it to 190GW Focus on Jinsham, Yalong, Dadu and Yellow River Compensation of displaced people to increase by 60% Construct pumped storage Speed up shutdown of small plants (less than 300MW) - the plan is to close 60GW by 2010 Put in place environmental protection Promote mine mouth plants Encourage 600MW super and ultra critical coal 10GW by 2010 (from 6.8GW currently) then to 40GW by 2020 Mainly local content with some input from international suppliers 10% of installed capacity by 2010, up from 7% in 2005 and moving to 16% by 2020 Wind - 5GW by 2010, rising to 30GW by 2020 Biomass - 5.5GW by 2010, 30GW by 2020 Solar - 300MW by 2010, 1800MW by 2020 (all achieved by series of favourable tax and fiscal policies) 36GW of gas power plants by 2010 Imports of LNG to hit 18.3m tonnes by 2010
Source: CLSA Asia-Pacific Markets
Lowered and then removed export VAT . . .
. . . but tremendous GDP growth still
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Policy actions In September 2006 and April 2007, China first lowered and then removed the export value-added tax (VAT) rebates for certain low-end, low-value, or highly polluting products, as well as expanded the categories of prohibited processing trade. Authorities announced it would make further adjustments from time to time. However, it also raised the export VAT rebates for hightech and high-value products, demonstrating clearly its policy preference.9 Despite these measures, China reported GDP growth of 11.9% in 2Q07 - the biggest increase in 12 years.10 Beijing immediately imposed rules requiring exporters to pay a deposit of half the amount they spend importing 1,853 types of raw materials, such as metals, plastics and textiles. It also expanded the list of goods subject to export limits in an effort to stem the rise of garments, toys and other low-value exports. These measures raise costs and affect the cashflow of exporters. However on 5 September, in response to lobbying from the HKSAR government and manufacturers, the national government relaxed the rule by allowing exporters to settle the deposit with a letter of credit, bank guarantee or some other means (unspecified) of payment instead of paying cash as a concession.11
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Section 4: Collaboration innovation
Hong Kong strategy
Collaboration innovation The “9+2” initiative shows Guangdong’s political savvy
Politically astute Guangdong understood there was an opportunity for it to show leadership in light of policy change. In 2003, the province proposed a cooperation forum among a number of rich and poor provinces. Nine provinces - Guangdong, Guangxi, Hainan, Fujian, Jiangxi, Hunan, Sichuan, Guizhou and Yunnan - came together with the two Special Administration Regions of Hong Kong and Macau in what became known as the 9+2 PanPearl River Delta (PPRD) Cooperation and Development Forum.
Bringing together nine provinces and two special administrative regions
Guangdong’s idea caught national attention and received the support of the National Development Planning Commission (NDRC) - the central government body that puts together national plans - and the Ministry of Commerce. The first meeting was held on 1-3 June 2004 in Hong Kong, Macau and Guangzhou under the theme “Cooperation and development - Create the future together”, which resulted in the signing of the Pan-PRD Cooperation Frame Agreement, enabling respective authorities to work together. 12 This arrangement has also led to the annual PPRD Regional Economic and Trade Fair with the aim to facilitate government-to-business dialogue and businessto-business relations.
Guangdong anticipated the 11th Five-Year Plan
Guangdong’s move proved prescient. The 11th Five-Year Plan (2006-10), announced in October 2005, took a city-clusters agglomeration approach. The state promotes balanced cooperation between urban and rural areas, and development among regions.13 In many ways, Guangdong’s 9+2 PPRD idea fits what the new national plan called for. Guangdong was prepared for an extremely important message in the 11th Five-Year Plan that it was not going to be part of a named focus region. It knew it needed to find ways to stay ahead. It would need to build alliances so to create the necessary conditions for remaining competitive vis-à-vis the Beijing-Tianjin and the Yangtze Delta areas.
Guangdong is highly political; it pursues every chance to assert itself
The 11th Five-Year Plan stated that the central government would promote development in western China, revitalise the old industrial bases in the northeastern region, and give more assistance to the central provinces. Tianjin, with the development of the Tianjin Binhai New District, and Shanghai (further development of Pudong and the World Expo 2010) received special positive attention.
Guangzhou Development Zone as the nationwide reform pilot programme?
A postscript must be added, however. Guangdong recently applied to Beijing to designate the Guangzhou Development Zone (a business district set up in 1984) as a pilot programme for a nationwide comprehensive reform. If granted, it will be on par with Tianjin’s Binhai and Shanghai’s Pudong. 14 In other words, Guangdong doesn’t accept being left out and is gatecrashing the party. However, a special-economic-zone status will no longer matter as much in terms of tax advantages when China’s new Enterprise Income Tax Law comes into effect in January 2008 (passed in March 2007). The new law will impose a unified 25% income tax on local and foreign companies. Nonetheless, local authorities can still grant favourable tax rates, keeping competition among cities intense.
An interesting turn of events
But the most interesting turn of events took place on 20 August 2007 when the State Administration of Foreign Exchange (SAFE) announced that it would allow mainland individuals to invest directly in Hong Kong securities using their foreign-exchange holdings. The investments must be done via Bank of
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Section 4: Collaboration innovation
Hong Kong strategy
China’s Tianjin branch and its Hong Kong securities arm. This pilot scheme is open to all mainlanders. BOC Tianjin was probably chosen because of Tianjin’s mayor, Dai Xianglong, a former governor of the People’s Bank of China - the country’s central bank. Perhaps Dai would help to oversee the scheme in its early stage of implementation. “Details” are still being worked out (see page 43). Guangdong is as feisty as ever in national politics
Let’s take another look at the 9+2 PPRD (Figure 6). Guangdong brought together in 2004 an alliance among the south, southwest and southerncentral provinces. The PPRD accounts for a fifth of China's territory, a third of its population, and over a third of its economic output. On top of that, Guangdong has made a smart move by bringing the substantially more developed Hong Kong and Macau into the partnership. Let not forget that the province has been the pacesetter of China’s economic reform and opening-up over the past 25 years, it should not be seen as a lesser competitor than Shanghai or Tianjin by any means.
Figure 6
The 9+2 PPRD cooperation
Source: CLSA Asia-Pacific Markets
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Section 4: Collaboration innovation
Transport plans in 11th Five-Year Plan is relevant to southern China
Hong Kong strategy
The 11th Five-Year Plan also accords priority to advancing transport systems. The following projects are important to both Guangdong and Hong Kong: 1. Rampup of Beijing-Guangzhou-Shenzhen and Shanghai-Ningbo-Shenzhen rail lines, and Guangzhou-Zhuhai intercity rail transit; 2. Acceleration of the Beijing-Hong Kong highway construction; 3. Expansion of container ports in Shenzhen, Zhanjiang, Guangzhou, Xiamen and Fuzhou; and 4. Extension of major airports, such as Guangzhou Baiyuan International Airport and Shenzhen Baoan International Airport.
Guangdong wants stronger links to the PPRD . . .
Beyond these projects, Guangdong is also interested in strengthening transport links with the whole of the PPRD. At present, it has planned 12 outbound expressways and railways. According to the Ministry of Communication’s Planning principles on road and waterborne transport infrastructures under the PPRD cooperation, Guangzhou and Shenzhen have been designated as the major comprehensive transport nodes of the PPRD.15
. . . something for Hong Kong to think about
Hong Kong needs to consider the best way to stay connected to the PPRD, physically and virtually, while taking into account cost benefits and environmental sustainability. Dovetailing the mainland’s central-planning process with Hong Kong’s has not been easy, as could be seen from discussions over the Hong Kong-Zhuhai-Macau Bridge (see below).
Development agenda Guangdong, the processing giant, is shifting gear
Guangdong has been the envy of other provinces for a long time. Being Hong Kong’s closest neighbour, it was the first to start processing trade in China. In 2005, processing trade accounted for 42% of the nation’s total.16
Low-end processing won’t be the key forever
However, Guangdong realised in 1998 that while this form of business had many benefits for an underdeveloped economy, it also had its limitations. The province’s own research showed that basic processing trade was not going to improve much the intrinsic capabilities of domestic enterprises, as it was was designed to take advantage of China’s cheap land and labour. To go up the quality scale, Guangdong needs to improve the overall competence of domestic enterprises so that they would be more competitive.
Experiments on boosting competitiveness of local enterprises
In the late 1980s, Guangdong embarked on a decade of experimentation. The conclusion was to first push local enterprises to invest in research and development, while facilitating the establishment of district-based industrial clusters and innovation centres, and then encourage links between enterprises and universities, innovation centres and industrial clusters17.
Guangdong has set energy and pollutionreduction targets
Transformation takes time and is no easy task, especially for Guangdong as processing investment continued to pour in, generating a substantial portion of the government’s tax revenue. To wean itself off processing trade, the province needs sustained determination.
In 2005, processing made up 73.5% of Guangdong’s GDP
Processing trade contributed to 80.2% of Guangdong’s GDP in 2001, 73.5% in 2005, and about a third of its total tax revenue (approximately Rmb130bn). Currently, over 70,000 enterprises are engaged in processing trade in the province, employing some 16 million workers, of which 13 million are migrants from outside Guangdong. China is estimated to have 92,000 processing trade enterprises in total.18
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Section 4: Collaboration innovation
Hong Kong strategy
PRD has reached “optimised” development
Following the broad stroke of national initiatives, the Guangdong Provincial 11th Five-Year Plan aims to focus on continuing to restructure its industries to enhance their competitiveness. The province also strives to improve electricity supply, as well as to promote energy efficiency, so as to fulfil the mandated target of lowering per-unit-GDP energy consumption by 13% by 2010 versus 2005. Moreover, it must draw up plans to reduce pollution, as well as to investigate and punish polluters. Industries causing the most pollution in Guangdong include chemical, petrochemical, smelting, electroplating, tanning, printing, dyeing, cement, papermaking, etc.
Low-end plants have to move out to make room for higher-end industries
Another reason to transform the PRD is that it has reached optimisation in development. Almost all of Guangdong’s processing and production activities are concentrated in the PRD, but the district accounts for only 23% of Guangdong’s land area. The PRD is facing shortages in land supply, electricity and labour. Thus, existing low-end activities must be relocated to free up space and resources so to make room for higher-value industries.19 Guangdong’s policy to encourage relocation of low-end factories out of the heart of the PRD has another purpose. By moving processing to less developed parts, it helps enterprises to lower costs. This serves both sides well since Guangdong still relies on these industries for tax revenues and for spreading development opportunities to areas in need. To facilitate the relocation, Guangdong has stepped up its effort by constructing industrial parks and offering favourable terms for factories to move to the province’s mountainous north, as well as further east or west so to free up land in the most populated parts of the PRD.20 Figure 7
Guangdong’s own FiveYear Plan dovetailed with the national plan
Summary of Guangdong’s 10-point 11th Five-Year Plan Restructure industries and promote services mprove innovation capability
Restructure industrial upgrade led by high-tech industries and promote financial, logistics, and business services. Turn Guangdong into an important national base for high-tech R&D and technology transfer.
Balance development
Welcome foreign investments but also strengthen domestic enterprises ability to advance.
Strengthen regional collaboration
Develop east, west and north Guangdong: Raise cooperation level among Guangdong, Hong Kong and Macau, enhance PPRD cooperation and facilitate regional development; and promote Guangzhou as radial focus in southern China and Southeast Asia. Improve farmers’ income and village living standards.
Coordinate rural and urban development Improve the environment Develop education and culture Develop infrastructure Deepen institutional reform Facilitate social development
Enhance resource conservation, improve resource-utilisation efficiency, compulsory elimination of outdated technology; introduce new laws and pricing mechanisms. Give priority to education, develop creative industries, and build all spheres of provincial talent. Plan and develop transport, energy and irrigation infrastructure. Reform administrative system, public institutions and SOEs, explore financial reform and improve markets. Observe requirements for social stability and harmony.
Source: Adapted from the HKSAR government
Guangdong’s industrial restructuring has a big impact on HK SMEs
16
Guangdong has about 120,000 foreign-invested enterprises with 90,000 of them from Hong Kong and Macau, accounting for US$290bn of the US$420bn total investment. 21 Hong Kong has always been the largest investor in Guangdong. As of end-2005, its cumulative direct investment in the province added up to US$105bn, representing 65% of Guangdong’s total FDI. Of the FDI in processing trade, 70% came from Hong Kong.22 In the PRD, there are 57,500 factories operated by Hong Kong-related firms, of which 80% are in
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Hong Kong strategy
Section 4: Collaboration innovation
processing trade. Half of these are located in Dongguan and Shenzhen, where 90% are in electronics and telecoms equipment (17.4%), garments (13.6%), hardware (10.5%), plastics (9%), leather, fur and down products (7.7%), textiles (6.4%), chemical products (3.4%) and paper (3.3%).23 Don’t just look at the laggards, there are successes too
Obviously, Guangdong’s policy to push for industrial upgrades also affects Hong Kong SMEs. What does this mean in Darwinian terms? The Hong Kong Trade Development Council (HKTDC) estimated that, in the worst case, 14,500 companies would be seriously impacted. 24 The latest trade-surplussuppression measures, announced in July 2007, may cost smaller firms from HK$300,000 to HK$1m, enough to threaten their survival25 although they now have a reprieve as noted on page 12. Figure 8
HKTDC believes14,500 SMEs could be affected in the worst cast
Worst case: Affecting 14,500 Hong Kong SMEs 1,500 enterprises would cease production
10,000 enterprises would cease production or scale down
375,000 mainland workers would lose their jobs
2.5 million mainland production workers’ jobs would be under threat
10,000 Hong Kong employees would lose their jobs
70,000 Hong Kong employees would be affected
Source: HKTDC
Areas further away from the heart of the PRD have attracted relocation of Hong Kong factories as a result of lower investment costs and stable energy supply. As of March 2007, over 80% of the 18 approved industrial relocation parks were reportedly filled by Hong Kong-connected factories 26 . Some of them have moved to Hunan and Jiangxi, where costs are even lower. Surveys on enterprises show 37.3% of them have plans to relocate all or part of their production operation away from the PRD.27 Many HK SMEs know they need to upgrade
Yet, the most compelling part of the story is not about those that are struggling, but those that are coping with the situation. A 2006 survey shows 35% of Hong Kong-connected enterprises in the PRD have ventured into original-brand manufacturing (OBM). Over 50% of manufacturers would opt for developing products of better quality, while 45.1% would improve product design. While not all of these are necessarily going to make it, they know the way to compete is to make their product unique28. Figure 9
Hong Kong SMEs’ upgrade strategies Strategies Develop higher-quality products Improve product design Strengthen inventory control Automate production Develop own brands Switch from processing Develop related products in other industries Implement “green” production Invest in R&D Abandon production for purchasing/marketing No action taken
% of enterprises 53.1 45.1 36.7 35.9 35.0 24.6 22.7 18.0 17.8 12.2 8.7
Source: HKTDC survey
Most SMEs are private companies and do not have to release information publicly. Thus, it is through the listed ones that we can get a glimpse of the next phase of China’s industrial transformation. Hong Kong-listed manufacturers are solid performers with the ability to grow.
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Section 4: Collaboration innovation
Hong Kong strategy
Figure 10
Some of the small caps that appear to be transforming successfully
Hong Kong-listed manufacturing leaders Arts Opticals Automated System Chen Hsong China Ting Group Fong’s Industries Fujikon Industries
Hung Hing Printing Lee and Man Paper Minth Group Nostar Founders Group Sun Hing Vision Tak Fat Group
Techtronics Industrial Texwinca VTech Yip’s Chemical Yue Yuen Industrial
Source: CLSA Asia-Pacific Markets
While Guangdong’s dream is to lure global companies from heavy and hightech industries to set up operations there, the bulk of its foreign trade will still come from processing in the foreseeable future. Guangdong should not ignore the Hong Kong companies operating in the province because many of the industry leaders are also good performers in their fields globally. Moreover, Guangdong will also do well by attracting SMEs from Hong Kong in the service sector to set up across the border since many of them are well managed and have strong international connections. After all, there is a shortage of experience in Guangdong in such areas as finance, accounting, law, exhibition management and logistics.29
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Section 5: Transformation
Hong Kong strategy
Transformation Hong Kong is said to be marginalised in logistics
With so much happening on the mainland, is Hong Kong being marginalised? The debate first exploded when former Hong Kong chief secretary, Rafael Hui, said in March 2006 that the city was being marginalised by the rapid development of the PRD, as well as Shanghai. He highlighted logistics as a key area where Hong Kong was losing out. Hui’s statement was in fact narrowly focussed on port operation and logistics. The use of the word “marginalised” gave a singularly negative connotation without considering the positive opportunities for Hong Kong to gradually move out of container-terminal operation and low-end logistics businesses, although it will inevitably come into public discourse (see below).
Marginalisation - centre versus periphery Note small versus large jurisdictions
The concept of centre versus periphery in development studies relates to the relationship of conditions of a given geographical space. The concept is used to analyse the relative concentration of influence by looking at the roles cities play relative to each other in order to explain their interdependence and competition in a region.
Large countries by definition have more centres of activities
Small countries are often dominated by one major city, usually the capital or the traditional economic centre. But in large countries, there are numerous key centres. As a British colony, Hong Kong was seen as part of the West and a city state. It had certain appeal with a romantic past of opium and taipans.
Hong Kong’s role over time
However, as part of the extremely heavily populated People’s Republic of China, Hong Kong is bound to be seen as just an important city within a very large rising country. With Beijing as the political capital and Shanghai with its vast hinterland, Hong Kong seemed much less sexy than before. Meanwhile, Guangdong was often ignored and its hinterland in south China overlooked. A more useful perspective is to see Hong Kong in terms of what it can do that sets it apart from other important cities, all of which are bigger in size with larger populations. To assess the city’s changing role vis-à-vis the mainland, three phases can be identified, which lead to the question of ‘what is next?’:
When Hong Kong was China’s two-way window
1949-1979 Hong Kong was China’s “window” to the world, when the country was in a state of self-imposed isolation. As a British colony, Hong Kong was a place of convenience for China and the West to make contact. In the 1950s, the large numbers of low-skilled refugees from Guangdong ended up as factory workers in Hong Kong, making cheap goods for export to western markets. Throughout much of southern China’s history, the radial centre was Guangzhou. Yet, its fortune faded in the 20th century, when China endured a turbulent history of civil war, revolution and isolation. Moreover, during the Mao Zedong era, key industries were mostly located in northern and interior provinces, as Mao wanted to focus development far from colonial Hong Kong. Thus, as Guangdong lapsed into torpor, Hong Kong rose to prominence.
The roaring 1980s – “front shop, back factory” winner
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1980-1997 Hong Kong companies invested in and relocated their factories to Guangdong and elsewhere in China. Hong Kong became the “front shop” to the “back factory” across the border, creating China’s export-manufacturing development model. At the same time, the Guangdong province began to do cloh@civic-exchange.org
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Hong Kong strategy
Section 5: Transformation
well economically because of its proximity to Hong Kong, with Guangzhou reviving and Shenzhen coming to life as a special economic zone. On the other hand, Hong Kong began to turn itself into a service-based economy, concentrating on such activities as commerce, production management, market development, banking and insurance. 1997-2007 Despite two economic slumps and one epidemic, Hong Kong emerged as a higher-end service economy with depth and breadth. Services now contribute 91% of the city’s total production output, an increase from 68% in 1980.30 Moreover, recent events have shown that Hong Kong will soon play a new key role in helping mainlanders to invest outside China (see below) even though Hong Kong firms continue to invest on the mainland.
Becoming China as China rises . . . whole different geopolitics
Figure 11
Hong Kong’s economic structure - 1980 versus 2005 1980 Others 11%
Community, social & personal services 12% Finance, insurance, real estate & commercial services 22%
Manufacturing 22%
Construction 7%
2005
Transport, warehousing & communications 7% Wholesale, retail, importexport, catering & hotel 19%
Share of total services: 68.3%
Others 14% Manufacturing 3%
Community, social & personal services 19%
Construction 3% Wholesale, retail, import-export, catering & hotel 29%
Finance, insurance, real estate & commercial services 22% Transport, warehousing & communications 10%
Share of total services: 90.7%
Source: HKTDC
Hong Kong still exerts huge socioeconomic influence on China
Today, Hong Kong remains China’s key FDI provider. It is the largest investor in Guangdong, Shanghai, Jiangsu and Zhejiang. In other words, it dominates investments in the Yangtze Delta area too.31 In recent years, questions began to rise about the viability of the “front shop, back factory” model as China becomes more sophisticated. Moreover, despite series of spectacular IPOs, there are still fears that Shanghai will ultimately take over Hong Kong’s position as a leading financial market in the region. Nevertheless, the fact is that Hong Kong still exerts considerable socioeconomic influence on the mainland.
Greater PRD is a powerful region
20
In spatial terms, the Greater PRD region has changed over time (Figure 13). Instead of having one dominant city (Guangzhou at one time and then Hong Kong), there are now multiple centres of intense activities. The cities of Guangzhou, Shenzhen, Macau and Hong Kong can each set their own agendas. This spatial change should not be seen as either good or bad for Hong Kong, and it would be too simplistic to see the change as marginalisation of the city.
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Hong Kong strategy
Section 5: Transformation
Figure 12
Hong Kong investments dominate PRD
Total FDI in Guangdong, Shanghai, Jiangsu and Zhejiang (as of 2005)
100
Hong Kong
(%)
90
British Virgin Islands
Other Regions
25.9
80
47.2
70
58.4
9.4
64.6
60 50
13.5
40
14.6
64.7
30
10.9
20
39.3 27.0
24.5
Shanghai
Jiangsu
10 0 Guangdong
Zhejiang
Source: HKTDC
Hong Kong needs a regional strategy
What is in fact happening is the rise of a powerful region, where grown much bigger for all. Hong Kong needs to see other cities in PRD as friends, with whom it can keep the region as Chinaâ&#x20AC;&#x2122;s economic centre. As the most advanced city among them all, it most for itself and the region by welcoming its neighbours.
the pie has the Greater best sociocan do the
By focussing on regions rather than just cities, we can see that any city in China is simply one of several in a region (those by the coast are the most economically significant). No city, not even Beijing or Shanghai can be the single dominant window to a country of 1.3 billion people. To assume Hong Kong would suffer from the rise of other mainland cities is the wrong focus. Figure 13
Spatial development in the PRD and radial cities Early 1990
2003
Â&#x201E; Urban area Source: Institute for the Environment, Hong Kong University of Science and Technology
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Section 5: Transformation
Hong Kong strategy
New friends, old friends Guangzhou - former memories To reclaim the days of glory by hosting the 2010 Asian Games
The city is getting ready for the 2010 Asian Games, which requires extensive building and construction works. Like the upcoming Beijing Olympics in 2008, the event is seen as an opportunity for heavy public investment and commercial deals. Guangzhou wants to reclaim the days of its former glory when it was the undisputed commercial and cultural centre of the south. It is one of its strategies to revive the Lingnan (southern leadership) tradition. Southern China’s history is also related to that of Southeast Asia, where there are millions of ethnic Chinese whose ancestral homes are in Guangdong. Guangzhou wants to be better linked to the rising Southeast Asia and the Chinese communities there. Taking opportunities that the Asian Games presents, it aspires to create a modern riverside city that showcases water, mountains and farmland. Its key challenge is bad air, which is a condition that affects the whole of the Greater PRD region.
Shenzhen - Hong Kong’s new best friend Designed to take advantage of proximity to Hong Kong
Shenzhen, as a special economic zone, was created in 1980 to take advantage of its proximity to Hong Kong. It now has 12 million people, GDP of Rmb570bn in 2006 with an annual growth rate of 16.3% from 2001 to 2005. Its GDP is expected to grow to Rmb900bn by 2010 with an annual growth rate of 13%. It seems the HKSAR government is now interested to consider a muchenhanced relationship with Shenzhen. The Bauhinia Foundation’s (a progovernment thinktank) latest report, Building Hong Kong-Shenzhen Metropolis (August 2007), explored how the Hong Kong-Shenzhen area can continue to not only be the leading economic region in China, but also how it can challenge other powerful regions around the world. By 2017, the report noted that the combined GDP of Hong Kong-Shenzhen to be ahead of London.32 Shenzhen’s mayor is in favour of deeper collaboration with Hong Kong describing it as an “economic dream team”.33 This report is percolating among the political chattering classes in Hong Kong and some of the ideas are likely to find their way into Chief Executive Donald Tsang’s next policy address on 10 October 2007.
New Lok Ma Chau Spur Line to facilitate HK-Shenzhen traffic
Source: KCRC
22
Enhancing linkage Beijing is considering enhanced linkage between Hong Kong and Shenzhen. Hong Kong wants Shenzhen’s permanent residents (ie, not the migrant workers) to be able to visit Hong Kong more easily, something Shenzhen had suggested before. The current arrangements allow Hong Kong residents to travel across the border on a 10-year multiple travel permit, while Shenzhen residents need to apply for a single-visit visa under the Individual Visitors Scheme to travel to Hong Kong (although the application process has been much simplified). Zhuhai - the next new friend? Once a new travel arrangement is in place for Shenzhen’s permanent residents, there would be no reason not to extend it for those in Zhuhai as well. Could Zhuhai – adjoining Macao – be Hong Kong’s next best friend?
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Section 5: Transformation
Hong Kong strategy
Hong Kong’s new role
Hong Kong’s mission - Be international and help China integrate globally
The HKSAR government sees the city’s new role as ‘leveraging on the mainland while engaging the world at large’.34 In Beijing’s view, Hong Kong should focus on where it has undoubted comparative advantages, rather than dwelling on areas it has lost its lead. While the mainland is a competitor on many fronts, the 11th Five-Year Plan shows the Chinese government’s support for ‘the maintenance of Hong Kong’s status as an international centre for financial services, trade and shipping’. 35 Beijing expects Hong Kong to do what other cities cannot yet do - be international and help China integrate globally – an important role is to help the mainland to invest outside China.
It is not in China’s interest to discriminate against Hong Kong
It would be a mistake to interpret the mounting competitive pressure on Hong Kong as Beijing’s strategy to weaken the city. China’s overall push to upgrade its industries, boost energy efficiency and reduce pollution is the right path for an environmentally conscious developing country. Adaptation or fading of low-end, highly polluting operation is just a necessary step. Guangdong’s push to go up the quality ladder is entirely understandable. Below we examine Hong Kong’s response to the challenge from two angles: Public policy. For Hong Kong to continue to thrive, the HKSAR government needs to be clear-headed and forward-looking in its policy formulation. Focussing mainly on hardware infrastructure will not be sufficient. Building the software of human development, putting in place suitable market regulations, strengthening institutions, cultivating a convivial city and cleaning up the environment are key priorities. The city’s authorities must also resist special pleading from vested interests.
Individual choices will shape Hong Kong’s future
Private-sector actions. Millions of individuals, be they investors, business managers, professionals, parents or citizens, make choices every day. They will determine their influence on the nation and the world in the next decade. Hong Kong is, by far, the most developed city in China with the most established institutions, systems, global networks and substantial wealth, what choices will Hong Kong people make to help their city advance?
Soaring mainland visitors
Hong Kong also needs to prepare for a continuous stream of visitors as it has always been a top destination in Asia. In 2006, the city received 25 million visitors, of whom 13.6 million came from the mainland. Since Beijing introduced the Individual Visitors Scheme in 2003 to boost the Hong Kong economy after the end of the Sars outbreak, the number of mainland visitors has soared. Over time, Beijing has allowed mainlanders from more cities to visit Hong Kong under the scheme. Visitors need to first apply for a visa from their local Public Security Bureau, which is empowered to issue travel visas for seven days at a time. Upon return to their home city, a traveller can apply for another visa. Beginning 1 May 2004, residents of the whole of Guangdong could apply for visas under the scheme.
Figure 14
Individual Visitors Scheme implementation plan 28 Jul 2003 20 Aug 2003 1 Sep 2003 1 Jan 2004 1 May 2004 1 Jul 2004 1 Mar 2005 1 Nov 2005 1 May 2006 1 Jan 2007
Dongguan, Foshan, Zhongshan and Jiangmen (Guangdong) Guangzhou, Shenzhen, Zhuhai and Huizhou (Guangdong) Shanghai and Beijing Shantou, Chaozhou, Meizhou, Zhaoqing, Qingyuan and Yunfu (Guangdong) Shanwei, Maoming, Zhanjiang, Shaoguan, Jieyang, Heyuan and Yangjiang (Guangdong) Nanjing, Suzhou, Wuxi, Hangzhou, Ningbo, Taizhou, Fuzhou, Xiamen and Quanzhou (Jiangsu and Fujian) Tianjin and Chongqing Chengdu, Jinan, Dalian and Shenyang Nanchang, Changsha, Nanning, Haikou, Guiyang and Kunming Shijiazhuang, Zhengzhou, Changchun, Hefei and Wuhan
Source: Wikipedia
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Section 6: What’s next? (2008-17)
Hong Kong strategy
What’s next? (2008-17) This part of the report looks at the opportunities for Hong Kong to scale up and assess the possible fruits arising from Hong Kong-Guangdong collaboration to advance southern China’s development and competitiveness.
What is happening in the trading sector? Business is Hong Kong’s DNA but natural selection takes out the weak
There is no reason to be pessimistic. China is forcing the goods-trading sector to change. We should watch for the transformation of firms from low-end production to high-end merchandising services. Some have already made the transit and become highly profitable. Currently, the trading sector provides more jobs than any other business sectors in Hong Kong. According to the HKSAR government, the industry employs over 600,000 people, accounting for 18% of total employment and 22% of GDP.36 In employment terms, the demise of weaker firms does not rule out the emergence of new companies with new ideas to replace them.
There are new winners in retail that may become true giants
China’s demand for industrial upgrades, environmental protection, energy efficiency and improvement of mainland enterprises’ innovation capability provides a major push for Hong Kong SMEs to transform. In any event, lowend processing has seen its best days. The sector’s median profit margin has dropped from 18% five years ago to 10%.37 Companies that are doing well are those that have refocussed on design, distribution, marketing, retailing and brand-building. Some of them are already substantial in size. With China opening up its huge market further, these enterprises could grow further.
What is happening in the logistics sector? Logistics contributes to 5.4% of GDP
The logistics sector employs about 200,000 people in Hong Kong in land, sea and air transport. Related services include airport and terminal operations, warehousing and storage, as well as postal and courier services. Water and airfreight services make up 80% of total sector income, but specialised activities, such as ship broking, ship management, cargo inspection and terminal operation, produce the best margins. The logistics sector contributes to 5.4% of Hong Kong’s GDP. 38
Hong Kong is a regional procurement and distribution hub
The efficient movement of goods along the whole supply chain is critical to global sourcing. A complete logistics chain involves labelling, packaging, light assembling between pickup and delivery, reducing turnaround time, cargo tracking and tracing using electronic means, documentation handling and inventory management. Trucking lies at the low-end of the sector structure, while supply-chain management lies at the high-end, involving raw-materials sourcing, production coordination, products consolidation and distribution, and inventory management for overseas customers. The industry’s increasing sophistication has made it possible for a third party to provide one-stop supply-chain services to users in a highly specialised and efficient manner. Li & Fung is a good example. Research shows that as high as 67% of the Hong Kong-connected factories in the PRD export all their products via Hong Kong, while 15.2% export part of their products via the city. For imports to China for processing, 69.8% of their raw materials and components go into the country via Hong Kong, while 15.5% of them import part of the components via the city.39
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Section 6: What’s next? (2008-17)
Four categories of trade
Hong Kong strategy
These percentages will change as part of the transition away from low-end processing. To understand the impact on Hong Kong, we need to first understand that trade in goods is conducted in four ways: 1. Domestic exports. These are made and shipped from Hong Kong. They represent a relatively small part of the city (since little production takes place here), making up about US$17bn in 2006.40 2. Re-exports. These are merchandises that originate elsewhere but are brought to Hong Kong for some value-added functions before being sent abroad again. In 2006, the value of re-exports was nearly US$300bn.41 3. Transhipments. These are shipments originating elsewhere but passes through Hong Kong with through bills of lading. The values of transhipments are not included as part of Hong Kong’s external trade. For 2006, they made up about half of the tonnage (117.6 million tonnes) moving through the port.42 4. Direct shipments. These are exports by Hong Kong firms but the goods are shipped from the place of origin without passing through Hong Kong.
Offshore trades transhipment and direct shipments
Transhipment and direct shipment are referred to as “offshore trades”. In the case of transhipment, the goods pass through the port but never clear customs, which is why their values are not counted as part of external trade. In the case of direct shipment, the goods obviously do not pass through Hong Kong. These shipments are viewed as ‘services rendered’ and related earnings are treated as income from export of services.43
From production to design, brands and retail The real story of Hong Kong SMEs today is not their bleat about the many challenges arising from China’s transformation. China is opening up its domestic market and Hong Kong companies have geared up to become retailers of size and providers of sophisticated services. These firms have the potential to grow into corporate giants in the next decade on the backdrop of China’s growing consumer demand. A good story is that of the recently listed Belle International, the largest retailer of women’s footwear in China in terms of sales revenue. It has eight brands - six of its own. It is also one of the largest sportswear retailers, selling internationals brands such as Nike, Adidas, Reebok and Mizuno. Outside China, Belle has stores in Hong Kong, Macau and the US. Its business model integrates product design and development, production, marketing, distribution and retail. In other words, it designs and makes it own brands, and distribute and sell them in its own stores. Belle had 3,828 stores all over China, with over 200 stores each in Guangdong, Jiangsu, Shandong and Liaoning as of the end of 2006. Belle is a classic “rag to riches” story. Its founder started a small footwear-trading company in Hong Kong in 1981. In 1991, the company began manufacturing footwear in
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China, initially for the Hong Kong market. In 1998, it started to develop its own brand. It has since entered retailing and never looked back. Another story is Hong Kong-listed Embry, the number-one lingerie brand in China with 12.4% market share. It beats international labels, such as Triumph and Wacoal, in the domestic market. Embry was founded as a small family business in 1977. The company is now engaged in design, manufacturing, marketing, distribution and retailing. It has developed four brands and operates over 1,000 outlets in Hong Kong and the mainland, with over 250 stores in the Guangdong province. Ports Design is a luxury-goods manufacturer and retailer of fashion clothing. It operates under the brand PORTS International. The company started the brand in Canada in the 1960s, selling to the US, UK, Europe and Australia. Hong Kong entrepreneurs bought the original company in 1989 and sold their stakes in 1993. When Ports went into receivership in 1994, the previous Hong Kong owners repurchased the operation and eventually refocused the company on China’s high-end consumer market. Today, it has over 320 stores in China and several outlets in Hong Kong. Ports listed its stocks on the Hong Kong stock exchange in 2003.
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Section 6: What’s next? (2008-17)
Re-export and arbitrage opportunities
Hong Kong strategy
Re-exports usually do not involve any manufacturing components, but may include sorting, packaging, marketing or further forwarding overseas. Net of customs, insurance and freight charges, the goods are usually more expensive when they leave Hong Kong than when they enter. This remains a big business today because Hong Kong companies can take the informational advantage between China and export markets to add value. Re-exporting is also a way for traders to maximise their profits by deciding where to book and invoice the business in view of different tax rates and systems. As long as there are arbitrage opportunities, traders are going to take advantage of them. Figure 15 shows the four types of shipping arrangements. Figure 15
Port and trucking will suffer - the signs are already there
Shipping arrangements
Overseas/mainland Overseas/mainland buyers buyers
Offshore trade Direct shipments
Retained imports/ domestic exports
Transhipments via Hong Kong Hong Hong Kong Kong
Re-exports through Hong Kong
Overseas/ Overseas/ mainland mainland suppliers suppliers
Source: HKTDC
Hong Kong’s re-exports and offshore trades are nearly on par in terms of value, as Figure 16 shows. In 2005, re-exports of China-origin goods through Hong Kong accounted for 62.1% of the city’s total re-export value, while reexports to the mainland made up 45.8% of the total value of re-exports.44 Transhipment and reexports cargo through Hong Kong to diminish
According to Hong Kong Trade Development Council, re-exports will diminish with the relocation and dwindling of processing trade, so will transhipments via Hong Kong due to competition from other ports. While direct shipments trade of Hong Kong companies is likely to grow, this makes no difference to the local logistics sector. Mainland exports expanded by an average of 38% per annum between 2001 and 2006, while Hong Kong's re-exports grew only 15% per annum during the same period. In fact, Hong Kong's re-exports as a percentage of China’s total exports peaked at 120% in 1993 and gradually declined to only 30% in 2006. In 1Q07, while the mainland's exports expanded by 28% year-on-year, Hong Kong's re-export growth was only 12%.
Shanghai could be a transhipment competitor
26
As for transhipment, port expansion and growing vessel capacity in the region will provide more options for shippers and consignees. For example, direct cargo between Hong Kong and Shanghai currently faces no competition as the source of the latter is the Yangtze Delta. However, the expansion of ports will enable Shanghai to become a transhipment centre and threaten Hong Kong in time. Another development will be direct shipment across the Taiwan Strait rather than via Hong Kong. At present, transhipment cargo between the mainland and Taiwan going through Hong Kong accounts for 5% of total throughput.45 cloh@civic-exchange.org
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Hong Kong strategy
Section 6: What’s next? (2008-17)
Figure 16
Transhipment will suffer but direct shipments will not
Hong Kong’s offshore trade
2,200
(HK$bn)
Offshore trade
2,087
Re-exports
2,000
1,836
1,800
1,667
2,114
1,893
1,621
1,600 1,458
1,430
1,400 1,200 1,000 2002
2003
2004
2005
Source: CSD, HKSAR government
There is one aspect of the transhipment business that we should bear in mind. It is a highly price-sensitive sector, and not particularly profitable to the economy. You have to invest a lot of money in hardware (ie, terminals) to move more TEUs. However, throughput is like transit passengers sitting in the airport lounge, except that containers do not “spend” in their “transit lounge”. Hong Kong throughput growth drops, while Shenzhen’s rises
At Hong Kong's container ports, there has been a slowdown of throughput growth - from 8% in 2002 to just 2% in 1Q07. In contrast, container throughput in Shenzhen soared at an average annual rate of 25% between 2002 and 2006. It should also be noted that Hong Kong companies have built significant production facilities in the Yangtze Delta and exports are shipped directly from there to overseas markets. As already noted, some Hong Kong companies have shifted production to other countries altogether.
Surging air shipments . . . but things can change quickly
Yet, air-trade value soared by an annual average of 11.8% between 1995 and 2006. In 2006, 35% of the city's total export by value was transported by air, up from 20% in 1995. The shift was due to a changing product mix, with a sharp rise in electronics products, which made up about 50% of Hong Kong's total exports in 2006. Most electronics products have relatively short product lifecycles, with buyers keeping low inventory and demanding short delivery lead times. Hong Kong’s air hub is well connected to over 140 destinations worldwide by nearly 80 airlines, providing about 5,300 scheduled passenger and cargo flights each week (43% of the cargo is transported by passenger flights). With processing being challenged, there may be less air shipments.46 Mainland airports, in particular Guangzhou’s Baiyuan Airport, is keen to get a slice of Hong Kong’s current business and things can change quickly.
Job loss will happen relatively slowly, allowing Hong Kong time to adjust
Slowdown in growth for re-exports and transhipments through Hong Kong will negatively impact the local logistics sector, reducing the number of job openings for low-skilled workers.47 However, these jobs are going to be at the low-end, such as truck drivers and container-terminal workers. The decline in the number of jobs will be gradual. After all, we still expect cargo throughput to remain high in tonnage terms on China’s soaring demand, but the growth rate will continue to decline. Thus, there should be no immediate threat to jobs. Indeed, Hong Kong has generated new jobs in a variety of service sectors in the past couple of years, with the unemployment rate having dropped to 4.2% by June 2007. Older workers who cannot adapt to jobs in other sectors still have some years in their existing fields.
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Hong Kong strategy
Section 6: What’s next? (2008-17)
Is it time to shift away from container-terminal operation? In tonnage terms, Hong Kong ranks the second in the world . . .
Hong Kong’s nine terminals have 24 berths with a handling capacity of about 19 million TEUs per annum. The River Trade Terminal and public cargo working areas provide facilities for mid-stream operations. There are some 80 shipping lines operating about 500 calls per week to over 500 destinations globally. Despite having been the number-one container port in the world for most of the past 12 years, both Shanghai and Shenzhen are set to displacing Singapore and Hong Kong, perhaps in the next two to three years.
. . . but it is time to stop expansion as Shenzhen has the competitive lead
Hong Kong’s container terminals have fulfilled their historic mission in the city’s economic development. The question now is not whether it should stop thinking about expansion, but whether it should gradually cut back on the current space the Kwai Chung terminals occupy. Freed-up space can be put to more lucrative uses and benefit Hong Kong as an international financial, trade and shipping centre. There are two reasons to for this. Firstly, the Shenzhen terminals are expanding with Hong Kong investment and expertise48. They are also catching up in terms of operational efficiency49. Shenzhen already has 33 berths and, by 2010, it will add another 32. Despite Guangdong’s policies that drive Hong Kong costs up in trucking logistics, the indisputable fact is that the ports across the border are closer to the export production bases and Shenzhen has more land for terminal expansion. Secondly, Beijing is right - Hong Kong’s best role is going to be that of an international financial, trade and shipping centre. This means Hong Kong should focus on high-end services in finance, trade and maritime management rather than low-end physical cargo handling. This is in fact the second phase of the first transit that happened 25 years ago, when Hong Kong relocated its polluting manufacturing plants to the PRD. Now the city is relocating the lower-end of its services sector across the border. Shenzhen is the world’s number-four container port and is still growing. Figure 17 shows how fast it has grown over the past decade. Its throughput will most probably surpass that of Hong Kong soon. To cope with rising export volumes from southern China, terminal capacity will surge by more than 80% by 2010. Such rapid expansion may even lead to an oversupply of capacity.50
Figure 17
Throughput growth Rank 1996 1 Hong Kong 13,460 2 Singapore 12,944 3 Kaohsiung 5,063 4 Rotterdam 5,007 5 Busan 4,684 6 Hamburg 3,054 7 Long Beach 3,007 8 Los Angeles 2,683 9 Antwerp 2,620 10 Yokohama 2,400
1997 Hong Kong 14,567 Singapore 14,140 Kaohsiung 5,693 Rotterdam 5,340 Busan 5,234 Long Beach 3,505 Hamburg 3,337 Antwerp 2,969 Los Angeles 2,960 Yokohama 2,400
1998 Singapore 15,100 Hong Kong 14,582 Kaohsiung 6,271 Rotterdam 6,011 Busan 5,946 Long Beach 4,098 Hamburg 3,550 Los Angeles 3,378 Antwerp 3,266 Shanghai 3,066
1999 Hong Kong 16,211 Singapore 15,945 Kaohsiung 6,985 Busan 6,440 Rotterdam 6,400 Long Beach 4,408 Shanghai 4,210 Los Angeles 3,829 Hamburg 3,750 Antwerp 3,614
2000 Hong Kong 18,098 Singapore 17,087 Busan 7,540 Kaohsiung 7,426 Rotterdam 6,275 Shanghai 5,612 Los Angeles 4,879 Long Beach 4,601 Hamburg 4,248 Antwerp 4,082
2001 Hong Kong 17,826 Singapore 15,571 Busan 8,073 Kaohsiung 7,541 Shanghai 6,340 Rotterdam 6,096 Los Angeles 5,184 Shenzhen 5,043 Hamburg 4,689 Long Beach 4,463
2002 Hong Kong 19,144 Singapore 16,941 Busan 9,453 Shanghai 8,610 Kaohsiung 8,493 Shenzhen 7,614 Rotterdam 6,506 Los Angeles 6,106 Hamburg 5,374 Antwerp 4,777
2003 Hong Kong 20,449 Singapore 18,411 Shanghai 11,280 Shenzhen 10,650 Busan 10,408 Kaohsiung 8,843 Los Angeles 7,179 Rotterdam 7,107 Hamburg 6,138 Antwerp 5,445
2004 Hong Kong 21,984 Singapore 21,329 Shanghai 14,557 Shenzhen 13,626 Busan 11,442 Kaohsiung 9,714 Rotterdam 8,281 Los Angeles 7,321 Hamburg 7,003 Dubai 6,429
2005 Singapore 23,192 Hong Kong 22,602 Shanghai 18,084 Shenzhen 16,197 Busan 11,843 Kaohsiung 9,471 Rotterdam 9,287 Hamburg 8,088 Dubai 7,619 Los Angeles 7,485
2006 Singapore 24,792 Hong Kong 23,234 Shanghai 21,710 Shenzhen 18,469 Busan 12,039 Kaohsiung 9,775 Rotterdam 9,600 Hamburg 8,862 Dubai 8,783 Los Angeles 8,470
Source: Marine Department, HKSAR government
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Hong Kong strategy
Section 6: What’s next? (2008-17)
The HKSAR government forecasted in 2004 that Hong Kong would need a new three-berth terminal by the first half of the next decade, followed by three more in subsequent years51. However, in 2006, business voices advising the government highlighted the need to have newer and better port-cargo forecasts, as well as to ‘study the cost-effectiveness of further port expansion’ in Hong Kong52. In other words, they do not buy the strategy of Hong Kong competing with Shenzhen on port expansion.
Higher costs to ship via Hong Kong
Issue of port competitiveness Beyond a lack of physical space, another problem has resulted in Hong Kong’s market-share loss in cargo throughput - it costs more to ship via Hong Kong than Shenzhen. The difference comes from higher terminal handling charges (THC) and cross-border trucking costs in Hong Kong (ie, road-haulage costs in the mainland). Figure 18 shows the differentials as of 2004. Figure 18
Cost comparison - Hong Kong versus Shenzhen (2004) Dongguan to US west coast (US$)
Via HK
Via Yantian
Via Shekou Chiwan
20ft
40ft
20ft
40ft
20ft
40ft
2,000
2,700
2,000
2,700
2,000
2,700
Fees
599
1,014
579
994
579
994
Truck to terminal
308
333
128
154
141
167
THC
274
366
141
269
141
269
3,181
4,413
2,848
4,117
2,861
4,130
na
na
(333)
(296)
(320)
(283)
Freight
Total Versus via Hong Kong
Source: Economic summit on China’s 11th Five-Year Plan and the development of Hong Kong - Logistics and maritime services, 2006, p.9, HKSAR government
There is not much Hong Kong could do to lower THC because shipping lines charge shippers a uniform THC for the same port, the level of which is set at global shipping conferences. As for trucking fees, the difference is substantial because Hong Kong truck drivers have to pay a higher licensing fee to work on the mainland than Guangdong drivers. The licensing fee represents good revenue to the Guangdong government. Hong Kong lost cargo share due to Guangdong’s policies
Moreover, Guangdong has imposed numerous cross-boundary container dropand-pick arrangements that reduce the number of trips Hong Kong drivers can make, thereby making cross-border trucking inefficient. Attempts to take matters up with Guangdong since 2004 have led to some progress in relaxing container operation arrangements, with extended operation hours at various control points in 2005. However, they are not enough to significantly narrow the cost differences53.
The business is unlikely to come back . . .
The problem of price competitiveness between Shenzhen and Hong Kong ports cannot be resolved by Hong Kong accelerating investment in building more terminals locally when the cargo is generated across the border closer to Shenzhen. Shenzhen has more land for port expansion and cargo backup areas, whereas Hong Kong would have to carry out massive reclamation to create land. Moreover, cargo owners are increasingly key players in making port choices, taking total door-to-door costs and service quality into account.
. . . Hong Kong should look forward - do more with the terminal space
It is time to take a fresh look at what options Hong Kong has to play its role as an international shipping centre instead. That also fits with its aspiration to be an international finance and trade centre.
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Section 6: What’s next? (2008-17)
More profit in being a high-value maritimeservices centre
Hong Kong strategy
Hong Kong’s mission is to be an international maritime-services centre. The city starts from a strong base - it is already one of the world’s major maritime hubs, with about 900 experienced maritime-service providers in operation, providing a wide range of services, including ship ownership and management, registration, financing, insurance, broking, arbitration, surveying, repairs and replenishment. Although it is only the world’s fifth-largest shipping register, unlike many of the others in the top ranks, Hong Kong is not just a flag of convenience with different standards in shipping services and control. Some ship owners did not wish to register their ships here due to concerns about the 1997 handover. Now that Hong Kong is politically settled, the HKSAR government should devise new campaigns to lure ship owners, many of whom are closely connected to Hong Kong, to register their ships here. With China’s demand for sea transport soaring and its shipbuilding industry quickly expanding, there are opportunities for Hong Kong to grow in the provision of international maritime services. Figure 19
World’s top-10 shipping registers (2006)
1) 2) 3) 4) 5)
Panama Liberia Bahamas Greece Hong Kong
6) Singapore 7) Marshall Islands 8) Malta 9) China 10) Cyprus
Source: HKSAR government
Hong Kong should let Shenzhen and Guangdong expand and reap profits at the high end
It makes sense to better coordinate Hong Kong and the ports in the PRD, with Shenzhen as the main container port in the region. The terminal operators, with investments on both sides of the border, will be keen for the authorities to enable the best possible coordination since that can improve efficiency. Indeed, Shenzhen and Hong Kong can market their services together. Beijing is keen for Hong Kong, Shenzhen and Guangdong to work out a regional portdevelopment plan to complement each other.
Hong Kong’s changing view on port expansion Hong Kong chief executive Donald Tsang’s main policy focus during his election campaign in early 2007 was on ‘driving economic growth through infrastructure projects’, so as to maintain Hong Kong’s status as a transport and logistics hub54. Of the port-operation and logistics sectors, Tsang said: ‘ . . . [they are] facing competition from the nearby areas. For example, our port’s leading position is now being challenged and the cost differences among ports in the region have caused tremendous pressure for operators. To seize development opportunities, Hong Kong needs to prepare for challenges by further enhancing the competitiveness of our maritime and logistics industries and strengthening our position as the premier international transportation and logistics hub of Asia . . . 55.’
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The government had identified two sites for container terminal No.10 - northwest Lantau or southwest Tsing Yi. The Lantau site was considered the frontrunner due to the interest to place there the landing point of the Hong KongZhuhai-Macau Bridge. In January 2005, Tsang’s predecessor, Tung Chee-Hwa, said the government was ‘preparing for the construction of container terminal No.10 56 ’. In February 2007, Tsang pledged to ‘actively consider the planning and development of container terminal No.10 to strengthen the momentum of infrastructure development for Hong Kong’s maritime industry57.’ Yet, by June 2007, the government became more cautious about port expansion, while mainland NDRC officials called on Hong Kong to take a ‘regional perspective’ and focus on 58 high-end logistics rather than physical cargo handling.
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Section 6: What’s next? (2008-17)
Hong Kong strategy
Figure 20
PRD port development and coordination
Source: CLSA Asia-Pacific Markets
Competition among China’s three port regions
Look wider and see more opportunities Figure 21 shows China’s three port regions - Hong Kong-PRD (including Kaoshiung in Taiwan), Yangtze (Shanghai and Ningbo), and Bohai (Tianjin, Dalian and Qingdao). Each of them has enormous natural hinterlands. Provinces in central and southwest China can consider using both PRD and Yangtze ports. Likewise, there is also competition between Yangtze and Bohai ports to serve inland provinces. Port capacities are being added at a rapid pace in all three regions. It has already been noted above that Hong Kong should not try to outdo Shenzhen in port expansion. However, in terms of potential business opportunities for Hong Kong and international companies to provide logistics services in China, the picture is favourable. By taking an international view, the physical constraints of space melts away.
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Section 6: Whatâ&#x20AC;&#x2122;s next? (2008-17)
Hong Kong strategy
Figure 21
Chinaâ&#x20AC;&#x2122;s port regions
Source: CLSA Asia-Pacific Markets
Is it time to shrink the container terminals? Shrinking the container terminals will offer better opportunities
The short answer is shrinking it will not hold Hong Kong back. The two areas that have been identified for terminal expansion - northwest Lantau and southwest Tsing Yi - will become available for other uses. Hong Kong will most probably stop expanding its container terminals. Thus, container No. 10 will not happen. What will be most interesting is whether Hong Kong will start to consider the potential benefits from shrinking its current terminals as Shenzhen adds more capacity. This opens up enormous tracks of land in Kwai Chung for development, offering Hong Kong the chance to dramatically improve its cityscape, which could only enhance its position as a financial and services centre in the long term. A visual guide to what this means is worth a thousand words. We can start with west Kowloon. Imagine the potentials of turning the western side of Kowloon into a high-end commercial area and a second business hub to Central, which is already linked by the Airport Express to Chek Lap Kok and will be connected to the mainland by railways in the future. Beyond west
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Section 6: Whatâ&#x20AC;&#x2122;s next? (2008-17)
Hong Kong strategy
Kowloon are unattractive areas of highways and the start of the Kwai Chung container terminals. If Hong Kong could clean up those areas through sensitive and imaginative planning and scale down the terminals over a 20year period, they could add tremendous values to the city. Figure 22
West Kowloon is a prime site demanding the best urban design
New hub in west Kowloon
Figure 23
Imagine a cleaned-up area by the water
West Kowloon from another angle
Source: Civic Exchange
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Section 6: Whatâ&#x20AC;&#x2122;s next? (2008-17)
Hong Kong strategy
Figure 24
If this could be improved . . .
Further north along the coast
Source: Civic Exchange Figure 25
. . . if this too could be improved
Releasing this waterfront land for higher-value uses?
Source: China Photo Library, HKTDC
Victoria Harbour is a phenomenal asset, donâ&#x20AC;&#x2122;t keep ruining it
34
Victoria Harbour is a wonderful natural asset but it has been defaced by reclamation and insensitive planning over the past few decades. The time has come for a master plan for the harbour, which would involve massive new investments for long-term beautification. This would return the waterfront on
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Section 6: What’s next? (2008-17)
Hong Kong strategy
both sides of the harbour to the public for leisure activities rather than given over to roads and vehicles. Highways could be taken down and replaced by underground transport networks, while parks and lush-green areas could replace uninviting concrete slabs. Civil society is demanding sensitive planning of the waterfront
This vision requires HKSAR authorities to change its land policy and planning priorities. There is a growing debate about these matters, fuelled by demands of citizens, who have formed nongovernmental organisations (NGOs) and alliances to pressure the government. The public lament for the loss of Star Ferry represents a watershed in Hong Kong. The current generation of Hong Kong people has clearly moved from a focus on their rice bowl to a search for identity and meaning, where aesthetics, history, heritage, culture and the environment come to the fore. This trend will make Hong Kong an even more interesting city because, apart from speed and wealth-making, it will also generate a more diverse range of values for the territory and its people.
HK-Zhuhai-Macau Bridge: No decision still? At present, there are four road-crossings between Hong Kong and the mainland: Lok Ma Chau, Man Kam To and Sha Tau Kok and the newly opened Western Corridor. All road passages must go through Shenzhen. A bridge spanning 29km across the mouth of the Pearl River linking Hong Kong to the western side of the PRD has been under discussion for some 20 years. It was first proposed by Gordon Wu of Hopewell Holdings in 1983. Such a link would open up a second route that provides passage to the mainland via Zhuhai.
2)
Hong Kong versus Shenzhen. Hong Kong could benefit by having a second link to the mainland.
3)
Guangdong versus Hong Kong. More border points may affect Guangdong’s control of things like the issuance of cross-border vehicular licences, which would impact on its revenue.
4)
Hopewell versus Hutchison. Hopewell’s chairman, Gordon Wu, had been a strong promoter of the bridge and had proposed that it be part of a larger plan to build a new container port on Lantau Island. Hutchison objected to the new port because it would affect its terminal operations in Hong Kong and Shenzhen (Yantian).59 Things may have changed as it no longer makes sense to build terminals in Hong Kong.
5)
Beijing. The Chinese government sees the bridge as good for the development of southern China.
Figure 26
The planned Hong Kong-Zhuhai-Macau Bridge
Source: CLSA Asia-Pacific Markets
In the past, progress had been repeatedly bogged down by conflicts of interests among various parties, the enormous investment that is needed and how users should be charged. Those interests had included: 1)
Shenzhen versus Macau and Zhuhai. Shenzhen would lose its monopoly on the land link with Hong Kong, while Macau and Zhuhai stood to gain.
14 September 2007
Interest to get on with things revived in 2002. Beijing stepped in to show support for the bridge in 2003. Guangdong, Hong Kong and Macau formed the Hong KongZhuhai-Macau Bridge Advance Coordination Group in August 2003 to coordinate and take forward the initial work for the project. The China Highway Planning and Design Institute was commissioned to study and propose a design taking the views of Hong Kong, Zhuhai and Macau into account. A proposed option was put forward for consideration in 2005 and conceptual design studies begun. 60 One difficulty was over checkpoints. Instead of have one unified checkpoint for the three jurisdictions, the discussion revolved around three separate one. This would obviously have a severe impact on efficiency, making the bridge impossible to operate. In 2006, Hong Kong’s chief executive, Donald Tsang, said he expected the bridge to be given the go-ahead by mid-2007. However, in July this year, Tsang said he hoped it would be given the green light before his term of office expired in 2012. 61 It seems the various conflicts of interests still cannot be resolved.
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Hong Kong strategy
Section 6: What’s next? (2008-17)
Will Hong Kong make it as an international financial centre? Hong Kong is an important regional financial centre
Yes. It already is an international financial centre, albeit a regional one rather than on a global basis like London and New York, which are in a class of their own anyway.
The kind of robust institutions in Hong Kong is unavailable in China
Hong Kong has been and remains at a crossroad of business, finance, information and consumption. It has a long, unbroken history in facilitating China’s businesses and providing trade-finance services as a result of its entrepôt role. The city’s financial-intermediation function has always been about servicing savers’ investment needs by matching them with the financing needs of fundraisers through banking and markets. People continue to gravitate towards Hong Kong because it has well-established institutions unavailable in the mainland and elsewhere in Asia. These institutions are the most robust in the region. The challenge post-1997 is to ensure the city’s public institutions will continue to improve and strengthen. Beijing’s three rounds of interpretation of the Basic Law - Hong Kong’s constitution - in 1991, 2004 and 2005, driven by political considerations, did not help. While a trawl through various indices tracking economic competitiveness shows Hong Kong has been doing very well versus regional peers, scores for its public institutions did drop after those events.62 A second system within China Hong Kong is unique in that it operates as a second system within China. It is also special from the mainland’s perspective - China itself is exceptional in having two different financial systems within one country. The city’s contribution to China’s modernisation since 1980 has been significant in channelling a large part of trade and investment. In earlier sections, we have noted Hong Kong entrepreneurs’ role in developing China’s export-processing trade, which also helped to expand the city’s role in banking, trade finance, shipping, logistics and other types of supporting services.
Betting against HK is the result of its “uniqueness”
Figure 27
Development of Hong Kong’s mainland role
Since the 1980s, the Hong Kong securities market has played a key role as a bridge between China and the world
1960-80s
1980s
1993
2000
2005
2006
Mostly British hongs, utility and property companies
Many HKlisted companies opened manufacturing operations in Pearl River Delta
H shares launched
Non H share mainland private enterprises listed
Promote listing of foreigncontrolled companies with mainland operations
A and H shares simultaneously listed in the mainland and HK
HK- or foreignincorporated China enterprises listed in HK as red chips
Some H shares and red chips dually listed on HK and overseas markets
Very large mainland enterprises listed
Listings of mainland banks and insurance companies
Since 1993, US$190bn of equity capital has been raised by mainland enterprises listed in HK (55% of total) Source: HKEx
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Section 6: What’s next? (2008-17)
Hong Kong strategy
China’s financial development Renminbi convertibility - a long process
Next stage likely to involve more corporate-bond issues
Setup of China Financial Futures Exchange
The Chinese are massive savers, so is their government . . .
. . . it has to substantially invest in US-dollar assets
14 September 2007
Renminbi convertibility is a process - a long one. Beijing understands it has to prepare well for full convertibility by strengthening its internal monetary and financial framework to withstand the impact of free foreign-exchange flow. One major strategic element of China’s long-term plan is to gradually open up its financial market. Several major steps have been taken: WTO entry in 2001 that required the opening-up of the Middle Kingdom’s financial sector; launch of the Qualified Foreign Institutional Investors (QFII) pilot scheme in 2002 in Hong Kong, followed by the Qualified Domestic Institutional Investor (QDII) pilot programme in 2006. A strategic consideration underlying these steps is to increase foreign participation in China’s financial market to bring in funds and, just as importantly, experience and expertise. Domestic commercial banks have, therefore, been allowed to absorb foreign partners and list outside mainland bourses. Next, corporate bonds The next step is for China to issue bonds. Bank loans still meet the bulk of mainland corporate needs and there has been a longstanding discrimination against the private sector, which needs to be corrected. In 2006, stocks and bonds only make up about 20% of corporations’ funds, according The Economist. China had bad experience in bonds in the 1990s when it faced a wave of defaults, making political leaders wary. But times have changed. The next stage for China is likely to involve more corporate-bond issues now that the China Securities Regulatory Commission (CSRC) has published draft regulations governing issuance (June 2007). New futures exchange It should also be noted that a year ago, China set up the China Financial Futures Exchange (CFFEx). This dedicated exchange was jointly launched by the Shanghai Stock Exchange, Shenzhen Stock Exchange, Shanghai Futures Exchange, Dalian Commodity Exchange and the Zhengzhou Commodity Exchange. Thus, there is pressure to start stock-index futures very soon. Also, it will only be a matter of time before China takes a significant step in the development of commodities and futures trading. Its three commodities and futures markets - Shanghai, Dalian and Zhengzhou - trade only 16 commodities among them. They are keen to expand the number of products. Massive savers The Chinese are massive savers because they worry about that “rainy day” with undeveloped pension and public healthcare systems. They put their money in the bank even if interest rates are minimal. The savings rate in China is a staggering 45% of GDP. The Chinese government’s habit reflects this cultural phenomenon too. It prefers to hoard massive reserves just in case it needs to deal with crises. The country’s foreign-exchange reserves have now ballooned to US$1.3tn. To put it away, the government has had to invest a substantial chunk in US-dollar assets, as there aren’t enough good assets domestically. So, China is looking for things to buy in the world. Its stakes in Blackstone Group and Barclays are good examples. In the former case, a government entity paid US$3bn for a 10% stake in a US private-equity firm in May this year. More recently, negotiations are ongoing for China to buy a stake in Barclays to help the British bank finance the takeover of Dutch bank ABN63. Its investments in USdollar assets effectively help finance the budget and trade deficits of the US. The US Congress is up in arms over the China-US trade deficit and demands revaluation of the renminbi. A revaluation will result in a large paper loss for China. Even if this was politically acceptable, China will still accumulate large trade surpluses vis-à-vis the US because the Chinese will continue to put their money away, while Americans continue to spend. These cultural habits aren’t going to change any time soon.
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Section 6: What’s next? (2008-17)
Hong Kong strategy
The status of being a second financial system in a big country cuts both ways. The city is able to work as a well-functioning, separate system playing a critical financial-intermediation role to the fast-growing China. What Hong Kong lacked before - a large domestic economy - can now be overcome by serving China’s enormous needs. It is easy to be mesmerised by the size of mainland deals
In time, Shanghai will become another Hong Kong with the city’s help
The political landscape is complicated; it is unwise to bet against Hong Kong
It is unwise to write off Hong Kong. Indeed, what purpose does this serve?
Hong Kong has an important role to play - focus on quality
38
However, Hong Kong is not yet so familiar with the national system, so it has a lot to learn. Also, as a second system, there is a sense among some people that Hong Kong can be cast aside as soon as the larger national system gets up to speed, which is why there are sentiments that Shanghai will take over Hong Kong’s role as the premier financial centre one of these days. The sheer size of activities in China is so mind-boggling that people tend to overlook quality and institutional robustness. Hong Kong versus Shanghai Shanghai’s development needs to be set in the context of China’s long-term development. Cyclical up- and downswings fuel day-to-day sentiments, but we need to look deeper at the development of institutions across the border. These involve the sanctity of contract, judicial independence, protection of private property rights, market transparency, etc. Markets are rule-based structures. For them to function, there must be information flowing through in an unfettered manner. This is not yet happening in the mainland. Hong Kong remains the information hub for the China market as a whole. As China continues to liberalise, Shanghai will in time become another Hong Kong with steady help from Hong Kong investors and institutions. By then, Hong Kong will have transformed itself too. This is why Beijing knows there is an important role for the city to play for a long time to come. Nevertheless, even in Hong Kong, there is a sense that as mainland politics seem to direct so many aspects of corporate decision-making, Hong Kong and Shanghai are not competing on a level playing field. Thus, sentiments often assume that mainland politics will play out in Shanghai’s favour. History shows Shanghai has had to deal with its fair share of difficulties, the most recent being the replacement of its former party head and mayor, Chen Liangyu, which also resulted in the replacement of many city officials. Why bet against Hong Kong at all? From Beijing’s perspective, it has both Hong Kong and Shanghai. In the past, Hong Kong mainly served as a platform for China to obtain foreign capital, which focussed particularly on processing-trade investment in Guangdong. Hong Kong banks have over 80 branches in the mainland with more than a third of them located in the PRD. Many mainland enterprises borrowing and listing in Hong Kong are from Guangdong (about 50 listings). Owing to China’s foreign-exchange controls, the role Hong Kong can play in the country’s domestic financial intermediation has been limited to date. However, continuing liberalisation is changing things not just for Hong Kong, but also for financial markets worldwide. The city clearly has a critical role to play in financing the transformation of tens of thousands of Hong Kong-incorporated companies and enterprises in Guangdong, so they could upgrade their operations. Figure 9 on page 17 shows the potential percentage of SMEs preparing to upgrade and transform themselves into more competitive businesses. Hong Kong banks serve an important function of providing necessary capital.
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Section 6: What’s next? (2008-17)
Hong Kong strategy
Moreover, as mainland funds increasingly flow outside the country, Hong Kong is well placed to serve bridging needs. With the eventual full convertibility of the renminbi - though still some years away - Hong Kong can ease that path. Beyond business transactions, Hong Kong’s institutions are helping with capacity-building across the border on many aspects of financial governance. There is considerable mileage for Hong Kong to be the quality market for all kinds of financial services. The 11th Five-Year Plan supports Hong Kong as an international financial centre. This is entirely pragmatic. The city has advanced financial systems that allow effective operations internationally. Shanghai’s financial structure is growing with the mainland economy but it remains largely in a development stage. The challenge for Hong Kong is how fast it can become even more sophisticated and remain a place of choice for China and international parties.
HKMA’s ideas for Hong Kong are not without controversy
Long-term planning takes time but pays off
A gateway, also a testing ground The Hong Kong Monetary Authority (HKMA) sees local financial institutions expanding their mainland businesses and serving as a gateway for mainland fund outflow. The HKMA and the local ministers with financial-services responsibilities have various ideas to align mainland and Hong Kong securities markets but some of them may not be workable, such as setting up a special arbitrage mechanism to equalise the share prices of companies listed both in Hong Kong and Shanghai (see box below) and making Hong Kong financial instruments available in China. After all, the renminbi is not yet a convertible currency. The HKMA hopes the city will develop greater competence to handle renminbi-denominated transactions, and provide related risk-management instruments. It needs to be noted that the CSRC rejected Hong Kong’s attempt to launch renminbi futures this year. Its decision points to this still being a sensitive area. Local banks are expanding into China. Hong Kong banks, though small when compared to foreign giants, are well-managed and know mainland practices well. Many mainland enterprises need capital. As China’s financial markets are still unable to perform all intermediation functions, especially for China’s SMEs, Hong Kong financial-services providers can serve them well. The Bank of East Asia, for example, has the most number of branches in China among all the overseas banks and is deriving good profits from them. The bank’s mainland business is generating about 17% of its pre-tax profit and it is likely to grow further as the bank has plans to open more branches. Another example is Dah Sing Bank, which acquired a 19.99% stake in Chongqing Commercial Bank last year and another 2.99% stake this year, thus becoming the first Hong Kong bank to own part of a mainland commercial bank. Chongqing Commercial Bank is planning to list on the A-share market.
Hard to align mainland, Hong Kong securities markets There are major challenges to align mainland and Hong Kong securities markets due to very different systems:
Secondary markets also differ greatly in areas such as settlement period, trading mechanism, trading hours, price and issuer-news dissemination, etc.
Different statutory regulators and regime. Capital controls/restrictions on renminbi convertibility.
Investors within and outside China are not allowed to trade in each other’s market with the exception of under QDII and QFII.
Dual A/H-share listing highlights the differences between the two primary markets: pre-prospectus information, bookbuilding and IPO-subscription methods, as well as suspension and resumption policy.
14 September 2007
As such, the best information flow.
cloh@civic-exchange.org
solution
for
now is
to
improve
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Section 6: What’s next? (2008-17)
Hong Kong’s role as a testing ground for renminbi will be gradual
HKEx has competition but it is a strong competitor
Hong Kong is serving as a testing ground as the renminbi evolves into an international currency. Currently, banks in Hong Kong are allowed to conduct personal renminbi business on a trial basis, providing such services as exchange, remittance, saving and cards. In June 2007, China Development Bank became the first to issue renminbi bonds in Hong Kong. We can expect gradual development within strict limits. The stock exchange A central piece of a financial centre is its stock exchange. Hong Kong was the hottest market for mainland enterprises’ overseas investments in 2005 and 2006. It arranged a slew of mega-sized IPOs, including ICBC, Bank of China, China Construction Bank, Bank of Communications and China Merchants Bank. During those two years, the total amount raised for China-related companies amounted to about US$58bn by IPO and US$106bn altogether, including post-listing equity fundraising. The early waves of listings of the best Chinese companies have all come to Hong Kong. Figure 28
Trending up
Number of listed mainland companies in Hong Kong
400
(No.)
350 300 250 200 150 100 50 0 93
94
95
96
97
98
99
00
01
02
03
04
05
06
Figure 29
China enterprises account for most of the IPOs in Hong Kong
Equity funds raised by mainland companies in Hong Kong
450
Total IPOs by mainland enterprises % of all IPOs (RHS)
(No.)
400
(%)
100 90
350
80
300
70
250
60
200
50
150
40
100
30
50
20
0 93
94
95
96
97
98
99
00
01
02
03
04
05
06
Source: HKEx
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Section 6: What’s next? (2008-17)
Hong Kong strategy
The Hong Kong Exchanges and Clearing (HKEx) is the operator of the local mainboard and Growth Enterprise Market (GEM). HKEx is also involved in clearing and settlement, depository and nominee services, and information services. Average daily turnover in the cash market increased from HK$18.3bn in 2005 to HK$33.2bn in 2006, and US$59.2bn through the end of June 2007. Average daily futures and options turnover surged from over 103,000 contracts in 2005 to 173,000 in 2006, and surpassed 276,000 through the end of June 2007. Turnover in the warrants market is now often more than 20% of total cash-market turnover. HKEx is seeking to list overseas companies
HKEx’s new mission for 2007-09 is ‘to be a leading international marketplace for securities and derivative products focussed on Hong Kong, mainland China and the rest of Asia’. It is seeking to position itself vis-à-vis the mainland as China’s international exchange, complementing the mainland bourses and partnering with mainland institutions in its overall financial development. This year, HKEx has clarified the listing arrangements for issuers outside the former recognised jurisdictions of Hong Kong, China, Bermuda and Cayman Islands. The HKEx’s view is that overseas companies that have significant business with China could find it useful to list in Hong Kong. Marketing efforts have been made in Vietnam, Thailand, Malaysia, Kazakhstan, Russia, South Korea and Taiwan. The HKEx is also going to establish a framework for the admission of overseas issuers to listing by way of depository receipts (DRs), rather than ordinary shares. DRs in foreign listings is widespread globally, such as in the US and London.
Pushing for mandatory quarterly reporting
A consultation has been launched on the introduction of mandatory quarterly reporting for mainboard issuers, a longstanding matter that good corporate governance demands but has been rejected by powerful local interests. It would auger well for Hong Kong if these interests can be resisted this time. HKEx’s decided edge used to be its regulatory framework that is on par with international standards and practices. However, after several years of reforms, the Shanghai Stock Exchange has shaped up considerably over the past few years and it is now in a position to provide capital-formation services for mainland companies. Its daily turnover is huge and after a one-year freeze, IPOs have resumed in 2007.
What to do with GEM? GEM was created in 1999 and has listed some 220 companies raising over HK$40 billion of equity capital. With the burst of the dot.com bubble, many of the GEM listed stocks did poorly, which has affected confidence in GEM as a whole. In 2005, HKEx commenced a review of this market with three options in mind - to position GEM as a stepping stone to the Main Board, merge the two, or merge the two and then create a new alternative market. After consulting the market, a consultation paper was published in July 2007 recommending the first approach. The consultation will end in October.64 While respondents favoured the idea of creating an AIM market similar to London’s, that option was considered inappropriate because Hong Kong is considered ‘unready’ for such a market. The London market is seen as dominated by institutional investors, while the Hong Kong market is seen
14 September 2007
as having a large retail component, which in the view of the authorities required more active regulatory supervision. Other reasons relate to the performance of sponsors, the weakness of ex post facto enforcement, and the lack of investor remedies in Hong Kong. While it does not serve Hong Kong’s interest to have an alternative market that allows the listing of virtually any company, the authorities’ reasoning nevertheless demonstrates an overly protective nanny-view even though Hong Kong retail investors have become very much more sophisticated, have an appetite for risk and arguably do not need to be so coddled. It would be more helpful if the authorities stop using the immaturity of the Hong Kong investing public as the reason for resisting change but to make it clear that it is not in the interest of Hong Kong to enabling the listing of poor quality companies.
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Section 6: What’s next? (2008-17)
Revival of Shanghai Stock Exchange caused anxiety
Some in Hong Kong are nervous about Beijing’s informal instructions that mainland companies raising less than US$1bn should list in the A-share market rather than in Hong Kong, so as to soak up some of the enormous amount of liquidity arising from savings at home 65 . This makes sense for Beijing, and Shanghai would be the beneficiary. There have been numerous news reports in August 2007 about the HKSAR authorities’ effort in lobbying Beijing not to “marginalise” Hong Kong. On 15 August, when the HKEx announced its interim results, it stated it had 32 listing applications in hand, of which 23 were from mainland companies. If there is to be a lull in listings on the Hong Kong bourse, this will give the exchange a chance to catch up on further improving its operation and efficiency. Figure 30
Mainland market revival 2007 January January 2007 2007 onwards onwards Mainland Mainland stock stock indices indices at at record record highs highs Daily Daily turnover turnover exceeds exceeds Rmb100bn Rmb100bn Share-structure Share-structure reform reform largely largely completed completed IPOs IPOs resume resume
January January 2006 2006 Mainland Mainland markets markets in in decline decline for for four four years years Share-structure Share-structure reform reform still still in in progress progress IPO IPO freeze freeze for for aa year year
China China Life Life raised raised Rmb28bn Rmb28bn Ping Ping On On Insurance Insurance raised raised Rmb38bn Rmb38bn
Increasing Increasing domestic domestic listings listings Renminbi Renminbi appreciates appreciates –– HK$ HK$ less less attractive attractive Financial Financial futures futures exchange exchange to to commence commence operations operations Possible Possible development development of of CDR CDR
Securities Securities firms firms insolvent insolvent or or being being restructured restructured
Expansion Expansion of of QFII QFII and and QDII QDII
Figure 31
Up sharply
Hong Kong turnover
140,000
HK total HSCEI & HSCCI
120,000 100,000 80,000 60,000 40,000 20,000 0 01/02/2007
02/08/2007
03/21/2007
05/03/2007
06/12/2007
Source: HKEx
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Chinese firms also list overseas but regulatory enforcement is a problem
Competition for HKEx’s business is not only coming from Shanghai. Other exchanges are also keen to compete for mainland business (some China companies have already listed in New York, Nasdaq, London, Singapore, Australia, Tokyo and Toronto and Frankfurt). However, one problem that every jurisdiction faces is the regulatory enforcement of mainland companies, which is not about to be resolved soon.
QDII could add US$180 billion to the HK market
A word needs to be said about the latest move in the QDII scheme. In May and June 2007, the China Banking Regulatory Commission (CBRC) announced it would allow domestic commercial banks to allocate up to 50% of their QDII quota for equity investments in overseas stock markets that have MOUs with the CBRC and then expanded it to include fund-management and securities companies. Hong Kong is currently the only one with a signed MOU. CLSA estimates that as much as US$180bn could find its way from the mainland into Hong Kong. It should also be noted that the news caused a 5% jump in the H-share index, which represented a value increase of US$80bn. Mainland risk exposure will lead to demand for derivative products that HKEx can provide. The market will have to be positioned to trade even more mainland products, particularly mainland-related derivatives and renminbidenominated products.
Soon-to-be-implemented pilot scheme provides another boost
The announcement on 20 August 2007 by the State Administration for Foreign Exchange (SAFE) of a pilot scheme was yet another positive boost. The programme would work alongside the QDII scheme to allow mainlanders to invest directly in Hong Kong securities using their foreign-exchange holdings. When the scheme was initially announced, no limit was mentioned on the amount of stock purchased via the Bank of China’s Tianjin branch and its Hong Kong-based securities arm. Hong Kong Economic Times reported the next day that investors would need about Rmb100,000 to open an account and they would be able to place orders to trade Hong Kong stocks by phone or via the internet. Subsequently, news reports noted that there could be a cash cap imposed.66 As this report went to press, details of the scheme and its start date had not been announced. Internal concerns had been raised on what impact the scheme might have on the A-share market and the need to prevent capital flight. 67 When the scheme is implemented, it should push HKEx’s trading volumes up. Furthermore, these investments provide a much better way to help narrow the price gap between Hong Kong-listed H shares and mainland-listed A shares, which seemingly concerns senior Hong Kong officials, prompting them to suggest some kind of special (and controversial) arbitrage mechanism that will be hard to implement.
HKEx is dealing with problems with renewed energy
HKEx faces other barriers to market expansion. It is constrained by a set of regulatory hurdles in the conduct of its business arising from history compared to other exchanges. The HKSAR government had put in place, as a result of the Asian Financial Crisis in 1998, numerous constraining measures that affect cash-market and derivatives-market trading: a restrictive position limits regime, an uptick rule that bars short sales below the best current ask price, and various onerous reporting requirements (such as those related to disclosure of interests, short-selling, and stock borrowing and lending).
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Section 6: What’s next? (2008-17)
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Figure 32
HKEx’s broadening range of mainland-related products
Since 1993, US$190bn of equity capital has been raised by mainland enterprises listed in HK (55% of total)
1994
2003
2004
2005
2007
Stock options, futures and warrants for individual mainland enterprises developed
H-share index futures
H-share index options
FTSE/Xinhua China 25 futures and options
Derivative warrants with iShares FTSE/Xinhua A50 China Tracker as underlying
iShares FTSE/Xinhua A50 China Tracker
To increase position limits of H-share Index futures and options To launch Hang Seng China HFinancials Index futures To launch renminbi futures (suspended for now)
Source: HKEx
Since 2006, there has been greater energy to redress these outdated measures as the concerned parties consider how to facilitate Hong Kong’s expansion of its financial-services sector. In March 2007, an increase in the position limits of futures and options was made and further relaxation in derivatives trading is likely. While change in the uptick rule for short-selling in cash market trading had been expected in November this year, recent statements from the Hong Kong Securities and Futures Commission (HKSFC) indicated there could be some delay due to recent market volatility but the change remains likely in the foreseeable future. Moreover, the HKSAR government imposes stamp duty (0.1%) on securities trade, which the financial-services sector is lobbying to reduce or abolish, alternatively to broaden exemptions or relieves.
44
Surprising market intervention on 7 September
What was a shock was that the HKSAR government’s announcement on 7 September that, through the HKMA, it had acquired 5.88% of HKEx. The government issued a press release that day stating that: ‘The holdings in HKEx will be retained by the Exchange Fund as a strategic asset in support of the maintenance of Hong Kong as an international financial centre’.68
HKMA stepped outside what it said it would do
This acquisition needs to be seen against the background of the government’s massive and controversial intervention in the stock market in August 1998, when it used HK$118bn to buy some 15% of the free float of Hang Seng Index companies. In March 1999, the HKMA announced a long-term asset strategy in which the benchmark weighting would be 20% in global equities, of which 5% would be in local stocks. The government then set-up the Tracker Fund to gradually sell its large portfolio back to the market. By September 2002, the HKMA announced it had reduced holdings to 5.3%. However, by the end of 2003, the HKMA had in fact increased acquisition of
cloh@civic-exchange.org
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Section 6: What’s next? (2008-17)
Hong Kong strategy
local equities again to 7%, and by 2006 to 10.4%. Thus, the authorities now hold significant shareholdings not only in HKEx but in Hong Kong’s major companies. Raising questions about the government’s conflicts of interest
Shareholder activist, David Webb, pointed out the various conflicts of interest: ‘First, it puts the government in a position of conflict of interest in relation to the companies it invests in at the same time as dealing with them, taxing them and regulating them, and second, it also means that in the event of a financial crisis in HK, the Exchange Fund will be piling up investment losses at the same time . . . As for investment risk, in the 2007 budget speech, the government said that it would adopt “let's pretend” accounting by taking the average of the actual gains or losses on its investments (in the Exchange Fund) over a six-year period (in the fiscal reserves), subject to a minimum guaranteed return. This is just accounting trickery. In effect, the Exchange Fund becomes an off-balance-sheet buffer to the real world of gains and losses, and any loss it suffers will take six years to trickle through to the reported budget deficit of the government. They probably made this change this with an eye to the increasing equity exposure of the Exchange Fund, which will increase volatility of returns.’
An unhealthy development unfortunately
Government officials denied the move was an intervention. They have not explained why they see HKEx as ‘strategic’ and how they plan to ‘play a positive role in the stock exchange’s development’.69 The market believes the HKSAR government likely wants to have greater control to prepare for future integration with mainland exchanges. Hong Kong officials may well believe this is the best way to ensure mainland authorities will not stop mainland companies to list in Hong Kong if HKEx was not an independent entity. Although the government can already by law nominate six out of 13 of HKEx’s directors, officials may believe that by holding a large stake, they can also influence who gets voted in by shareholders so as to minimize any objection to their decisions on how HKEx should evolve.
New products: Emissions, commodities CLSA U Blue Book - The emissions game
Beyond the launching of more familiar types of new products, HKEx is considering new types of products. It has embarked on initial studies to look at the potentials for emissions-related products and commodities. It should complete the studies by the end of 2007. With clean air in short supply and climate change a threat, emissions and carbon credits will become a new asset class. The development of emissions trading in the US and the European Unions has sparked global interest in exploring how trading mechanisms can enhance environmental protection. This being a new business area, HKEx has the potential to innovate with China in mind and explore collaboration with mainland exchanges. As for commodities, HKEx will not be able to fight the positions of dominant exchanges like the New York Mercantile Exchange (NYMEX) and the London Metal Exchange (LME). However, there may be opportunities along the trading chain to identify competing and/or complementing position with OTC trading in key commodities derivatives.
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Section 6: Whatâ&#x20AC;&#x2122;s next? (2008-17)
Hong Kong strategy
What makes an international financial centre? Hong Kong is an impressive financial centre
Hong Kong sees the development of financial services as the most important among all major sectors. The financial-services industryâ&#x20AC;&#x2122;s direct contribution to GDP was 12.2% in 2004, engaging about 180,000 people. In comparison, the figure was 16.5% for London and 26.8% for New York in 2003. In London the sector employed 214,000 people and in New York 318,700. 70 So, what will make Hong Kong an even stronger international financial centre?
Stop intervention from becoming a habit International deal-making often involves more than two jurisdictions
An important aspect is for the government to break the habit of intervention. Beyond that, an international financial centre by definition has a wide range of businesses and transactions worldwide. The key characteristic is a large concentration of resources and talent to enable critical and complex financial operations. This is because deal-making today often involves more than two jurisdictions. Many transactions are offshore in nature. Indeed, an international financial centre handles more cross-border than domestic deals. Rules of engagement in Hong Kong are on par with international practice. Beyond international financial centres are global financial centres with London and New York being in a league of their own. They have an overwhelming concentration of resources and talent to handle the biggest and the most complex financial arrangements and the greatest ability to innovate. They are able to conduct business among parties from all over the world using financial instruments from different countries. London has the advantage of straddling Asian- and US-market trading hours, while New York is proximate to the largest and the most liquid domestic economy in the world.
Competitiveness factor
There is a history to London and New Yorkâ&#x20AC;&#x2122;s being giants in financial services. London served the dealings of the former British Empire, which gave it a long history in international transactions. New York had the rise of the large US economy to establish itself as a financial centre on the other side of the Atlantic. Both cities can access large liquid markets. As English common law remains the foundation of contract in former British colonies and English the lingua franca of international business, the rules of engagement in international deal-making have strong Anglo roots. Thus, the actors in a multi-jurisdiction transaction, including their legal and accounting teams, share the same cultural understanding of deal-making. The Corporation of London surveyed the performance of London, New York, Frankfurt and Paris and arrived at the 14 most important competitive factors for financial markets. They are clearly interrelated and mutually reinforcing.71 Figure 33
Specific competitive factors
Competitive factors for financial centres Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Factors of competitiveness Availability of skilled personnel Regulatory environment Access to international financial markets Availability of business infrastructure Access to customers A fair and just business environment Government responsiveness Corporate tax regime Operational costs Access to supporting professional services Quality of life Culture and language Quality and availability of commercial property Personal tax regime
Average score 5.37 5.16 5.08 5.01 4.90 4.67 4.61 4.47 4.38 4.33 4.30 4.28 4.04 3.89
Source: Corporation of London, 2005
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Section 6: What’s next? (2008-17)
Hong Kong strategy
How does Hong Kong rank? Hong Kong ranks well by comparison
In 2006, the Hong Kong Securities and Futures Commission (HKSFC) selected 12 other economies in Asia for comparison, taking into account the Corporation of London’s competitiveness factors. It batched the 14 factors into six categories for assessment: Availability of skilled personnel and supply of quality professional services Regulatory environmental and government responsiveness Access to international financial markets and customers Availability of sound business structure and fair business environment Favourable tax regime Quality of life and operational costs
Hong Kong and Singapore rank well
The HKSFC compared scores for the chosen economies referencing numerous indicators related to the six categories in the International Institute for Management Development’s (IMD) World competitiveness yearbook, the World Economic Forum’s (WEF) Global competitiveness report and various other indices. On the most important issue of availability of talent and supporting professionals - ranked first and 10th in importance in the Corporation of London’s study, Hong Kong and Singapore, not surprisingly were the leading cities. Figure 34 shows the rankings. Hong Kong ranked ahead of the others in terms of having a critical mass of expertise that is readily available and that senior management has international experience. For instance, the number of chartered financial analysts (CFAs) increased from about 200 in 1995 to more than 3,000 today. Hong Kong has the fourth-largest number of CFAs in the world after the US, Canada and the UK. The number of certified public accounts (CPAs) has grown from about 11,500 in 1995 to over 25,000. Hong Kong has more than 5,000 solicitors and 1,000 barristers practising. Figure 34
Availability of skilled personnel and professional services Countries Australia China Hong Kong India Indonesia Japan South Korea Malaysia New Zealand Philippines Singapore Taiwan Thailand
2004 ranking 5 12 1 3 13 9 11 4 9 8 1 6 7
2006 ranking 4 11 1 5 13 8 11 3 9 10 2 6 7
Source: HKSFC, 200672
Hong Kong’s score was only dented by its environmental conditions
14 September 2007
In terms of the category of regulatory environment and government responsiveness, Hong Kong co-ranked with Singapore in top position. In terms of access to international financial markets, Hong Kong also ranked the first in 2006, with Singapore ranking second, Australia third and China 11th. With Hong Kong’s ability to launch huge IPOs for mainland companies over the past few years, in 2006 it ranked fourth in equity funds raised and third in IPO funds raised. Again, Hong Kong and Singapore topped the rankings in terms of availability of business infrastructure and fair business environment, as well as favourable corporate- and personal-tax regimes. cloh@civic-exchange.org
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Hong Kong strategy
Hong Kong did badly in quality of life as related to pollution, and its language skill was also seen as deficient. Among the 13 places, Hong Kong was ranked ninth in 2004 as regards pollution and 11th in 2006. China was ranked 12th in 2004 and 13th in 2006. Singapore ranked first in both 2004 and 2006. Shanghai has no advantage over Hong Kong on pollution
Air quality has been deteriorating since the 1990s; 2004 ended as the worst year on record to date. A key problem is the proximity of Hong Kong to the rapidly industrialising PRD with tens of thousands of highly polluting industries. Another serious public-health problem within the city’s own control comes from the high pollution levels at roadside and marine emissions. The financial-services sector has already made clear that they are having problem retaining and attracting global talent due to Hong Kong’s air pollution. This problem is most acute for people with young families. As far as pollution goes, Shanghai has no advantage and even more problems but Singapore does.
New Global Financial Centres Index 2007 The new index ranked Hong Kong third behind London and New York
The good news for Hong Kong is that the City of London ranks Hong Kong’s overall in third place, after London and New York, in a new financial centres index. Shanghai is in the 24th place. The issues for Hong Kong to ponder over are the areas it needs to improve on. In terms of talent, London, New York, San Francisco and Chicago are ahead but Hong Kong is a close fifth to Chicago. Figure 35 shows the top 10 and how they compare73. Hong Kong authorities have put in place various schemes to allow more mainlanders to study and work in Hong Kong. Also, they are supposedly making the hiring of overseas employees easier, although employers continue to complain that the process is still overly bureaucratic and lengthy. Singapore’s immigrant arrangements are much more flexible and there is no reason why Hong Kong cannot do better.
Figure 35
Top-10 financial centres Rank City
Rating
Details
1
London
765
Most key success areas are excellent – London is in the top quartile in over 80% of its instrumental factors. Especially strong on people, market access and regulation. The main negative comments concern corporate tax rates, transport infrastructure and operational costs.
2
New York
760
Most areas are very strong – New York is also in the top quartile in over 80% of its instrumental factors. People and market access are particular strength. GFCI respondents cited regulation (particularly Sarbanes-Oxley) as the main negative factor.
3
Hong Kong
684
Hong Kong is a thriving regional centre. It performs well in all of the key competitiveness areas, especially in regulation. Headline costs are high but this does not detract from overall competitiveness. Hong Kong is a real contender to become a genuinely global finance centre.
4
Singapore
660
Most areas are very good and banking regulation is often cited as being excellent. It performs well in four of the key competitiveness areas but falls to the ninth place on general competitiveness factors alone. Definitely the second Asian centre just behind Hong Kong.
5
Zurich
656
A very strong niche centre. Private banking and asset management provide a focus. Zurich performs well in three of the key competitiveness areas but loses out slightly in people factors and in general competitiveness.
6
Frankfurt
647
Despite a strong banking focus, suffers from inflexible labour laws and skilled staff shortages. Market access, infrastructure and business environment are strong but Frankfurt falls outside the top 10 GFCI rankings for people and general competitiveness.
7
Sydney
639
A strong national centre with good regulation, offering a particularly good quality of life. Sydney is strong in four of the key competitiveness areas but falls outside the top 10 for people – many financial professionals leave for larger English-speaking countries.
8
Chicago
636
Number-two centre in the US. Hampered by the same regulatory regime as New York. It scores highly for people but is let down by its infrastructure and market access rankings. Unlikely to overtake New York, it remains a powerful regional and specialist centre.
9
Tokyo
632
Does not fare well in terms of regulation and business environment, but the size of the Japanese economy means Tokyo has good liquidity. It fares poorly on people but has good infrastructure and market access.
10
Geneva
628
A strong niche centre similar to Zurich. Private banking and asset management continue to thrive. Geneva is strong in business environment and general competitiveness but let down by infrastructure.
Source: The Global Financial Centres Index (GFCI)
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Hong Kong strategy
How important is it to clean up the environment? A clean environment is now a competitive factor
Very important. Environmental conditions directly impact people’s health. And as they are now recognised as an element of economic competitiveness, a poor environment is likely to keep global talents away, especially those with young families.
Some improvements since 1997 but more needed to be done
However, we have seen some improvements since 1997. For example, the completion of parts of a massive sewage-treatment plan has bettered Victoria Harbour’s marine water quality; there has been a reduction in polluting emissions from diesel vehicles; the relocation of the airport to Chek Lap Kok has significantly cut the number of people affected by noise pollution; there has been an increase in the amount of solid waste recycled. Additional ecological sites, a new country park and a new marine park have all been designated.74
Air pollution is a major problem and has given Hong Kong a bad name
Generally though, there is much more to be done. Air pollution has become the signature problem for Hong Kong. Clean air is now a competitive factor. Singapore is taking advantage to emphasise its better air quality to lure global talents to relocate there, especially those in the financial-services sector. For those who are concerned about environmental quality, cities in China, including Shanghai, present even more problems than Hong Kong.
A lot is known about the problem and it is time to act
Much is now known about Hong Kong’s air quality. A study released in March 2007 identified six modes of air-pollution characteristics that may be said to be dominant on any one day: Regional west
Local vehicle/power plants
Regional all
Local vehicle/marine sources
Regional east
Low pollution
Figure 36 shows how many days out of 2006 were most affected by which mode. It shows regional sources were the dominant influence on Hong Kong’s air on 132 days (36% of the time), while local sources dominated on 192 days (53% of the time).
Opening up to more and faster Immigration has always been the source of Hong Kong’s working population. The headaches of the 1960s and 1970s in having to offer public housing and basic facilities for the last large wave of refugees from China provided Hong Kong with a younger workforce that is now aging fast. By 2020, that wave will be in their 60s. With a very low fertility rate and fewer immigrants, the city’s talent pool is at risk of stagnating. Hong Kong must attract diverse talent from the mainland and the world. Moreover, it must increase the percentage of population that are well-educated. Investment in local education alone will not produce enough skilled manpower given current demographic trends. It should be sobering for Hong Kong to note that over 30% of New York’s population are university graduates, whereas only 21.3% of the Hong Kong population will be made up of graduates by 2031.
14 September 2007
Enabling easier travel for Shenzhen residents to Hong Kong will represent a positive first step to relaxing rules in the future. China’s urbanised residents will find it relatively easy to integrate in Hong Kong, and they represent a group of resourceful talent that can help Hong Kong spread its network deeper into the mainland. Meanwhile, Hong Kong people are working across the border too. Thus, in time, the border with Shenzhen will become fuzzier. In demographic terms, this trend can only be good for both Hong Kong and Shenzhen. Another group of potential immigrants for Hong Kong is the large pool of talent in Asia. In the past, Hong Kong looked to the mainland and the West for its workforce and has only looked to the poor countries of Southeast Asia for migrant domestic helpers. This attitude needs to change as Asia at large has changed. With the economic rise of the region, Hong Kong should welcome this dynamic talent reservoir as well to help make itself a truly global city.
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Hong Kong strategy
Section 6: What’s next? (2008-17)
Figure 36
Hong Kong needs to clean up its own emissions
Percentage of total days in 2006 and dominant modes Low pollution 11%
Regional west 17%
Regional all 7% Vehicle/marine 33%
Regional east 12%
Vehicle/power 20% Source: HKUST and Civic Exchange study, 2007
Summer months are less affected by regional emissions
When the data is grouped by month as well as mode, they show pollution arising from the PRD affecting Hong Kong’s air quality the most in winter (November-March). However, Hong Kong’s own pollution played the biggest part from April to August. Low pollution days were less common in winter. Figure 37 shows this graphically. In 2006, the pollution in June and July were dominated by Hong Kong’s own pollution, and in August, there were relatively few days when Hong Kong was affected by regional sources of pollution. This helps to explain the clear days Hong Kong has enjoyed in the summer of 2007. However, the level of visibility will decrease as summer turns to fall. Figure 37
Percentage of month grouped by mode (2006) (%) 100 80 Low Vehicle/Marine Vehicle/Power Reg East Reg All Reg West
60 40 20 0 Jan
Feb Mar Apr May Jun
Jul
Aug Sep Oct Nov Dec
Source: HKUST and Civic Exchange, 2007
Hong Kong needs to adopt a two-pronged approach
50
It is also clear that the PRD plays a significant role in Hong Kong’s pollution problems. Total emissions from across the boundary outweigh those from local sources. On days when Hong Kong’s air is under the dominant influence of the PRD (Regional West, Regional East and Regional All modes), the air quality is usually worse than when the dominant influence is from local sources.75
cloh@civic-exchange.org
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Section 6: What’s next? (2008-17)
Even on clear days, Hong Kong’s roadside pollution is terrible
Hong Kong strategy
Nevertheless, on the days when visibility is good, it does not mean there is no pollution. Hong Kong’s roadside pollution is high all year round, and marine pollution also needs to be dealt with because marine fuel is highly polluting. These sources of pollution have a big impact on public health. Thus, by reducing pollution from vehicles, ships and power plants in Hong Kong it will improve the city’s overall air quality. A two-pronged approach is required to clean up Hong Kong’s air: Clean up local emissions - which is under Hong Kong’s direct control, and Deepen joint effort with Guangdong - vital to regional pollution reduction
Tighten AQO is essential
A key problem for Hong Kong to fight local pollution is the lack of powerful policy tools to drive an aggressive reduction programme. Hong Kong’s airquality objectives (AQO) do not reflect known health risks. The AQO were set in 1987 and are outdated. In fact, they represent a licence to pollute. The HKSAR government has recently embarked on an 18-month study to consider how to revise the AQO.
Cleaning up transport and port-operation emissions is vital to public health
Hong Kong has reacted slowly over the years because there is a political tradition of putting the interests of trade and industry groups ahead of the general public’s. While economic interest groups’ (such as the transport lobby) capture of the law-making process is known as “legislative failure” in other jurisdictions, in Hong Kong this is “business as usual”. Reducing vehicular and marine pollution requires sustained policy focus that must cut across different government departments and sectors - road transport, marine transport, transport financing, economic development, energy and environmental protection.76 If Hong Kong is smart, it can ride on the pull factor Long Beach/Los Angeles exert. It can use the occasion to clean up port operations and logistics activities locally. In fact, Hong Kong has an interest in cleaning up the Shenzhen ports in Shekou and Yantian because the pollution arising from there is part of the regional pollution mix. With the same port owners/operators on both sides of the border, Hong Kong has the opportunity to play an important role to bring the stakeholders together to map out a clean-up programme mirroring the Californian examples.
Cleaning up port and logistics operations Government studies show the Kwai Chung container terminals and other areas affected by marine-related transport activities are heavy-pollution spots. There are serious public-health impacts with these activities being so close to dense population areas. Thus, there is a need to clean these up quickly, which requires the cooperation of the terminal operators and the trucking sector. A world leading example of how to manage these activities to fight pollution is Long Beach/Los Angeles, whose “green port” policy has attracted worldwide attention. Indeed, it has now set a new standard of port management. Other ports around the world are beginning to follow. Thus, container-vessels docking there will have to meet much higher standards over the next few years. These vessels,
14 September 2007
when they come across the Pacific to ports in Shenzhen and Hong Kong, can do the same provided the terminals at this end require higher standards too. The ship owners, ship liners and terminal operators can only go so far on a voluntary basis. The HKSAR government and the Shenzhen authorities must tighten regulations if they want to improve their environment. The trucking sector will not follow unless they are forced to. As the sun gradually sets over Hong Kong’s containerterminal business with capacity shifting to Shenzhen, Hong Kong must ensure the ports across the border adopt the best environmental practices as they continue to grow, otherwise the pollution generated there will only flow back to affect Hong Kong.
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Section 6: What’s next? (2008-17)
Hong Kong strategy
Potential collaboration with Guangdong over the next five years
Hong Kong and Guangdong need to collaborate to deal with regional airquality problems. A useful first step was taken in 1999 when the two agreed to conduct joint study of regional air quality. In 2002, they agreed to achieve joint reduction targets on a best-effort basis by 2010. Although Guangdong’s runaway growth will make it hard to meet the targets in full, the fact that specific targets were set represented an important step in the right direction.
Hong Kong needs to sign up as a full partner of Project 863
In 2005, a joint regional air-monitoring network was set up, which resulted in Guangdong releasing much fuller air-pollution data for 2006. The network and the data release represent one of the best air-quality management examples in China, which has received national attention. The data are critical for understanding how best to design control strategies. China’s Ministry of Science and Technology has allocated Rmb150m to Guangdong to conduct air-quality studies over the next five years (referred to as Program 863), and Guangdong has pledged another Rmb150m. It has invited Hong Kong to participate in the project although, surprisingly, the HKSAR government has yet to give a firm positive response. Hong Kong should take a high interest in Guangdong’s push to improve energy efficiency because that will have a direct impact on regional air quality. Hong Kong can also become more energy-efficient through taking part in the programme, although this cannot be achieved effectively without the HKSAR government adopting a comprehensive energy policy. In terms of other unresolved environmental problems: Large proportions of the population (for a city of such wealth) remain unsewered or receive only primary treatment; Lack of a comprehensive conservation policy and effective mechanisms for protection of biodiversity; Lack of a sustainable energy policy or targets for greenhouse-gas emissions;and Failure to fully implement the “polluter pays” principle, so transport, energy, water, and waste and sewage services remain underpriced. The result is that, on a per-capita basis, Hong Kong residents use more resources and create more pollution in 2007 than they did in 1997. The city still suffers from poor water quality in several areas, particularly Deep Bay (near Shenzhen) and a number of rivers; high levels of exposure to severe traffic noise; and rapidly diminishing landfill space. Areas rich in biodiversity are being squandered for housing, roads, and other infrastructure.
What are the most interesting social trends? Civic responsibility is the emerging social trend
52
The most interesting social trend in Hong Kong in the past decade is the development of a strong and diverse civil society, which is prepared to take action and fund activities. Despite a widening income inequality gap, those who have accumulated wealth are showing a different spending pattern than before. Indeed, they have enough wealth to create new schools because they are dissatisfied with public education, take the authorities to court when they see something wrong with official decision-making, create family foundations to give back to society (including on the mainland) and fund NGO advocacy activities that seeks to change government policies in Hong Kong.
cloh@civic-exchange.org
14 September 2007
Section 6: What’s next? (2008-17)
Hong Kong strategy
Much can be explained by looking at Hong Kong’s demographics:
Demographics explain why Hong Kong people are more civic minded
An expanding civil society A government-funded study of the civil society sector (2004) noted that Hong Kong people became increasingly interested in social issues from the 1980s. The 1980s was a watershed period “in which Hong Kong people changed their attitude toward Hong Kong and themselves. This was because of a demographic shift, with a Hong Kong-born generation growing up whose members identified with Hong Kong more than their parents”. The study found more than 10,000 NGOs in Hong Kong, employing possibly around 260,000 people. This sector generated in 2002 1.5% to 2.1% of GDP77 Today, 60% of the population was born in Hong Kong. With the median age being 39, it means that the experience of the past 25 years have had the greatest impact on this group, as well as those up to about 55 years old. This group makes up about 35% of the population. If we include those between 25-34 years old as well, since they grew up in the past 25 years, it shows that 50.9% of the total population essentially shared the same experience.
There has been a generational change
0-14 years: 13.7% (male 482,500; female 452,100) 15-24 years: 13.2% (male 445,400; female 459,300) 25-34 years: 15.3% (male 462,000; female 592,000) 35-44 years: 18.2% (male 547,000; female 698,400) 45-54 years: 17.4% (male 594,200; female 613,400) 55-64 years: 9.7% (male 353,500; female 337,400) 65 and over: 12.4% (male 339,500; female 464,800)
This generation believes in self-help action
The dominant experience for the past two and a half decades is that of the political transition from British to Chinese rule. That was a time when the people of Hong Kong had to do serious soul-searching about what they want for themselves and their children. They had to think more about politics and whether they would engage or disengage. Many chose to engage, especially at critical times when they felt their lifestyle was under threat. The massive demonstrations in 1989 (over a million people) in response to the events of 4 June, and the march on 1 July 2003 (over 500,000) to protest the HKSAR Government’s national security bill (referred to as the Article 23 bill), are evidence of engagement by large numbers of ordinary people. Voting at elections is now also accepted as a matter of civic responsibility.
Mr & Mrs Hong Kong want democracy . . .
The rest of the time, Hong Kong people go about their own affairs, which now includes participating in social action. Those in the 25-55 age band is wellresourced to take on many issues that their parents were unable to do. This is after all the best educated band. Those at the upper age range of this group include the owners of SMEs who accumulated considerable wealth through China’s opening up in the past 25 years. CLSA’s Mr & Mrs Hong Kong report (Summer 2007), part of its Mr & Mrs Asia series that feature surveys on middle class in 11 countries, provides some useful insights. So, what do they think? Forty six percent of the respondents to a survey believe governance in the past 10 years has deteriorated (vs. 18% who thinks it has improved); and 88% feel Hong Kong should have universal suffrage for the chief executive by 2012. While improving the economy is almost a standard mantra for people in all countries, what is interesting about the results is that there is large support for the government to do more to reduce income inequality, provide better
14 September 2007
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53
Hong Kong strategy
Section 6: Whatâ&#x20AC;&#x2122;s next? (2008-17)
public housing, increasing democracy, fighting pollution and improving education. Mr & Mrs Hong Kong are far from being politically apathetic. The following chart shows what they think should be the HKSAR governmentâ&#x20AC;&#x2122;s top priorities. Figure 38
. . . and they are far from being politically apathetic
Top priority for government to address Improving the economy Reducing income inequality Better public housing Increasing democracy Pollution Improving education
(No. of respondents) 0
100
200
300
400
500
600
Source: CLSA Asia-Pacific Markets
It becomes easier to understand why we are seeing the following trends emerging:
Expect more independent schools
The people will fight in court for publicinterest issues
Urban planning and design has galvanised a movement
54
Independent schools The quality of Hong Kong education is a longstanding concern among parents. Beyond the established international schools, a number of new independent schools have been set-up in recent years to provide high quality bilingual education with strong Chinese language emphasis and a global outlook. Hong Kong may see a boarding school set-up in the not too distant future. These are efforts of Hong Kong people who are creating a wider diversity of educational experience in Hong Kong from pre-school to high school. Unlike previous generations who donated to set-up basic schooling for the poor, this generation of school founders is not only raising funds for education but they are introducing new learning experience to Hong Kong. Public-interest court challenges It can be very expensive to fight public-interest cases in Hong Kong because there is no provision to allow class action and the losing side may well have to pay for the cost of the winning side. However, the past decade has seen a plethora of judicial review cases against the government and public bodies by citizens. The first case that went as high as the Court of Final Appeal was over harbour reclamation (2004), which also set the precedent that the party suing in a public-interest case may be awarded costs. Just in the last year, new civic groups had sued the government over failure to fight air pollution vigorously, as well as over building design approval. Although these cases failed, they represent a growing trend of citizens using the law to fight public-interest causes. City planning and design punch-ups Over the past 15 years, the fight to protect Victoria Harbour from further reclamation mentioned above has morphed into a much wider civic movement embracing professionals, business and NGOs. The dispute is over how the cloh@civic-exchange.org
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Section 6: What’s next? (2008-17)
Hong Kong strategy
HKSAR government is planning the city vs. the vision and aspirations of civil society. The government wants to carry on with existing plans. Civic groups want new designs to produce a cityscape that provide pedestrian access to the harbour-front, parks, a cleaner environment, and much improved aesthetics.
They want meaning too
Many existing government plans are being challenged
14 September 2007
Heritage and culture preservation The latest episode by students and young people to save Queen’s Pier is an example of a generation that shows passion for non-material things. The lost of the old Star Ferry earlier this year seems to have ignited a groundswell of emotions to preserve Hong Kong’s collective memory ranging from calls for an archival law to govern the handling and keeping of public records to oral history to saving neighbourhoods. What it means for the HKSAR government is that it is facing a much more active, well-informed and well-resourced civil society, a sizable section of whom have a different vision about how the city should develop. Research shows they want a city that is economic dynamic but also one that is socially just and politically more democratic. Moreover, they want more sensitive city planning that enhances Hong Kong’s natural environment, especially Victoria Harbour, and they are helping themselves by investing in private education. These are all signs that point to a mature society.
cloh@civic-exchange.org
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Footnotes
Hong Kong strategy
Footnotes 1 Denise Tsang, “HK government offers s fund for jittery firms”, South China Morning Post, 27 July 2007; and Enoch Yiu and Denise Tsang, “Low-end delta factories gain reprieve on deposits”, South China Morning Post, 6 September 2007. 2
Research shows the disparities may be due to government policies in favour of coastal regions and urban development in the 1990s, see DT Yang and H Zhou, “Rural-urban disparities and sectoral labour allocation in China”, Journal of Development Studies 35(3), (1999), p.105-133. 3
This division is adapted from CW Kenneth Keng, “China’s unbalanced economic growth”, Journal of Contemporary China 15(46), (February 2006), p.182-214. 4
National Bureau of Statistics, China Statistical Year Book 2005, China Statistics Press, Beijing 2005. 5 For a summary of Zhu Rongji’s statement, see “Premier on Western Development Strategy”, People’s Daily, 19 October 2000, http://english.peopledaily.com.cn/english/200010/19/eng20001019_53039.html. 6
For a useful discussion of processing trade, see research report, Implication of mainland processing trade policy on Hong Kong, Hong Kong Trade Development Council, based on a study led by the Task Group on the Impact of Mainland Processing Trade Policy to Hong Kong, the Greater Pearl River Delta Business Council, June 2007, p.1-4. 7
Li Cui and Mrutaza Syed, The Shifting Structure of China’s Trade and Production, IMF Working Paper WP/07/214, International Monetary Fund, September 2007. 8
Zhuang Pinghui, “10b yuan more goes for energy”, South China Morning Post, 28 July 2007. The report noted that after failing to reach its energy-saving goals, Beijing was injecting Rmb10bn to projects to cut power use and pollution. The annual reduction rate of energy consumption per unit GDP in 2006 was 1.33%, whereas it needs to be on average 4% to reach the goal set in the 11th Five-Year Plan. 9
Implication of mainland processing trade policy on Hong Kong, p.27-31.
10
National Bureau of Statistics, 2Q07 data release on 19 July 2007.
11
Denise Tsang, “HK firms hit as more cheap exports cut”, South China Morning Post, 26 July 2007; and Enoch Yiu and Denise Tsang, “Low-end delta factories gain reprieve on deposits”, South China Morning Post, 6 September 2007.
12
The Pan-PRD Cooperation Frame Agreement covers a range of areas including infrastructure, enterprises and investment, trade and commerce, tourism, agriculture, labour, science, education and culture, information development, environmental protection, sanitation and disease prevention. The signatories agreed to develop a high-level coordination mechanism.
13
“New thoughts and moves of 11th five-year guidelines viewed from 11 key words (1)”, People’s Daily,10 October 2005, http://china.org.cn/english/features/guidelines/157524.htm.
14
Research Department, Hong Kong Trade Development Council, “Guangzhou Development Zone applies for designation as pilot for national comprehensive reform”, Business Alert China, April 2007, p.7.
15 HKSAR Government, Economic summit on China’s 11th Five-Year Plan and the development of Hong Kong - Transport infrastructure development, 2006, p.6-7, paragraphs 10-11.
16
Implication of mainland processing trade policy on Hong Kong, Executive Summary, p.i.
17
For a summary of Guangdong’s effort, see Rigas Arvanitis and Eglantine Jastrabsky, “A regional innovation system of gestation: Guangdong”, China perspectives No.63, January-February 2006, p.13-26.
18
56
Implication of mainland processing trade policy on Hong Kong, pp. 4 and 6.
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14 September 2007
Footnotes
19
Ibid, p.26.
20
Ibid, Executive Summary, p.v.
Hong Kong strategy
21
Binan Liu, “Guangdong-Hong Kong-Macau economic cooperation and development during the 11th FYP”, Mainland-Hong Kong Academic Exchange No 69, March 2006, p.24.
22
Implication of mainland processing trade policy on Hong Kong, Executive Summary, p.7.
23
Data from Made in the PRD study: Challenges and opportunities for HK industry, Federation of Hong Kong Industries, 2007. See also Implication of mainland processing trade policy on Hong Kong, Executive Summary, p.ii, and p.34-35. 24
Implication of mainland processing trade policy on Hong Kong , Executive Summary, p.v.
25
Denise Tsang, “HK firms hit as more cheap exports cut”, South China Morning Post, 26 July 2007.
26
Research Department, Hong Kong Trade Development Council, “Hong Kong enterprises move into Guangdong industry relocation parks”, Business Alert China, March 2007, p 7.
27
Implication of mainland processing trade policy on Hong Kong, p.42-43.
28
Ibid, p.51-52.
29
Minnie Chan, “Guangdong urged to attract small businesses”, South China Morning Post, 1 September 2007. 30
Implication of mainland processing trade policy on Hong Kong, p.9.
31
Ibid, p.7.
32
Bauhinia Foundation Research Centre, Building a Hong Kong-Shenzhen metropolis, Executive Summary, August 2007, http://www.bauhinia.org/publications/BFRC-HKSZ-ES-ENG.pdf. 33
Una So, “Shenzhen mayor backs metropolis”, The Standard, 14 August 2007.
34
HKSAR Government, Economic summit on China’s 11th Five-Year Plan and the development of Hong Kong: The opportunities and challenges presented by the 11th Five-Year Plan and the outlook for Hong Kong, Executive Summary, 2006, p.2. 35
China’s National 11th Five-Year Plan.
36
HKSAR Government, Economic summit on China’s 11th Five-Year Plan and the development of Hong Kong: The opportunities and challenges presented by the 11th Five-Year Plan and the outlook for Hong Kong, 2006, p.8, paragraph 20. 37
Implication of mainland processing trade policy on Hong Kong, p.42.
38
HKSAR Government, Economic summit on China’s 11th Five-Year Plan and the development of Hong Kong - Trade and business, 2006, p.2, paragraph 3. 39
Ibid, p.36.
40
Implication of mainland processing trade policy on Hong Kong, p.9.
41
Ibid, p.8.
42
Ibid, p.9.
43
For a useful study of re-export trade, see Gordon H Hanson and Robert C Freestra, “Intermediaries in entrepôt trade: Hong Kong Re-exports of Chinese Goods”, Working Paper 8088, National Bureau of Economic Research, January 2001.
44
HKSAR Government, Economic Summit on China’s 11th Five-Year Plan and the Development of Hong Kong: The Opportunities and Challenges Presented by the 11th Five-Year Plan and the Outlook for Hong Kong, 2006, p.8 paragraph 20.
45
HKSAR Government, Economic Summit on China’s 11th Five-Year Plan and the Development of Hong Kong - Logistics and Maritime Services, 2006, pp. 7-8, paragraphs 22-25.
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57
Footnotes
46
Hong Kong strategy
Implication of mainland processing trade policy on Hong Kong, p.55-56.
47
Economic Forum, Hong Kong as a Trading Hub: Entrepot and Beyond, Hong Kong Trade Development Council, April 2007, http://www.tdctrade.com/econforum/hsb/hsb070401.htm.
48
The shareholders of Shekou container terminal include China Merchants (International); P&O Ports; Swire Pacific and Modern Terminals [Wharf; China Merchants (International); and Jebsen Securities]. The terminals at Yantian are developed by Hutchison Ports, a subsidiary of Hutchison Whampoa. The shareholders and operators of Hong Kong’s Kwai Tsing container terminals include Modern Terminals, HIT [Hutchison], Asia Container Terminals [P&O Ports and PSA International of Singapore], Cosco, and Dubai Ports International (Hong Kong).
49
McKinsey & Company, Restoring Hong Kong’s competitiveness as a sea-trade logistics hub, commissioned by The Better Hong Kong Foundation, 29 July 2004.
50
For the HKSAR Government’s 2004 position, see Legislative Council Paper CB(1)230/04-05(04), Hong Kong Port - Master Plan 2020, Legislative Council Panel on Economic Services, 22 November 2004, http://www.legco.gov.hk/yr0405/english/panels/es/papers/es1122cb1-230-4e.pdf. For a recent update, see Jamie Simpson and Jonathan Beard, Trade, container traffic and Asian ports: Profitable growth or chase to the bottom?, GHK Group power point presentation, 25 May 2006.
51
Legislative Council Paper CB(1)230/04-05(04), Hong Kong Port - Master Plan 2020, Legislative Council Panel on Economic Services, 22 November 2004, http://www.legco.gov.hk/yr04-05/english/panels/es/papers/es1122cb1-2304e.pdf.
52
HKSAR Government, Maritime, Logistics and Infrastructure Focus Group, see Our way forward, report on economic summit on China’s 11th Five-Year Plan and the development of Hong Kong, January 2007, Chapter 3.
53
Ibid, p.8-11 and 21, paragraphs 26-31 and 62. See also McKinsey & Company, Restoring Hong Kong’s competitiveness as a sea-trade logistics hub, commissioned by The Better Hong Kong Foundation, 29 July 2004, noting that a Hong Kong truck ran on average 1.2 round trips a day due to long waiting times, the “4-up-4-down rule” - where a trucker, truck, trailer and a container must enter and leave China as one piece - and the “1-truck-1-driver rule” - where each cross-border truck could be driven only by the designated driver. These rules have been relaxed since 2005. The validity period of the cross-boundary trucking business has been extended from three to six years, which lowers the cost of licence renewal but does not have a large impact on the overall haulage costs.
54
Donald Tsang, “Chapter 1, A progressive view of development”, Donald Tsang: Election platform, policy blueprint, February 2007.
55
Donald Tsang, “Chapter 1, A progressive view of development”, Donald Tsang: Election platform, policy blueprint, February 2007.
56
Tung Chee Hwa, 2003 Policy Address, paragraph 37, 2004 Policy Address, paragraphs 23-24, and 2005 Policy Address, paragraph 8. See also Legislative Council Paper CB(1)288/05-06(09), Background Brief on Concept Plan for Lantau, Panel for Planning, Lands and Works and Panel for Environmental Affairs, 22 November 2006, http://www.legco.gov.hk/yr0506/english/panels/plw/papers/eaplw1122cb1-288-9e.pdf.
57
Donald Tsang, “Chapter 1, A progressive view of development”, Donald Tsang: Election platform, policy blueprint, February 2007.
58
Kristine Kwok and Dennis Eng, “HK urged to rethink role as shipping hub”, South China Morning Post, 22 June 2007.
59
Doris Leung, Business leaders voice their concerns, University of Hong Kong, http://jmsc.hku.hk/jmsc6030/bridgestory/viewpoints/tycoons/. 60
Legislative Council Paper for discussion at the Panel on Transport, Hong KongZhuhai-Macau Bridge and North Lantau Highway Connection, LC Paper No.
58
cloh@civic-exchange.org
14 September 2007
Footnotes
Hong Kong strategy
CB(1)1605/04-05(03), for discussion 27 May 2005, http://legco.gov.hk/yr0405/english/panels/tp/papers/tp0527cb1-1605-3e.prd. 61
Anita Lam, “Longer wait for bridge approval”, South China Morning Post, 6 July 2007. 62
For a comparison of various indices, see Enright, Scott & Associates, Hong Kong’s competitiveness: A multidimensional approach, 26 September 2005, commissioned by the Bauhinia Foundation.
63
“China buys US$3bn Blackstone stake”, BBC News, 21 May 2007, http://www.bbc.co.uk/2/hi/business/6675453.stm; “China could buy a stake in Barclays”, BBC News, 23 July 2007. http://www.bbc.co.uk/2/hi/business/6911138.stm 64
The consultation paper is available at http://www.hkex.com.hk/consul/paper/consultpaper.htm.
65
For a reference about the “unwritten” policy that the securities regulator’s that only companies seeking to raise more than HK$1bn were allowed to list in Hong Kong, see China Daily, 2 August 2007.
66
Daniel Ren, “Beijing may set higher cash cap for stock scheme”, South China Morning Post, 5 September 2007. 67 Al Guo and Denise Tsang, “Devil’s in the details of stock ‘through train’”, South China Morning Post, 9 September 2007. 68
HKSAR government press release, “Government increases shareholding in Hong Kong Exchange and Clearing Limited to 5.88%”, 7 September 2007. 69
Benjamin Scent, “Exchange face-off”, The Standard, 11 September 2007.
70
HKSAR Government, Economic summit on China’s 11th Five-Year Plan and the development of Hong Kong - The opportunities and challenges presented by the 11th Fiver Year Plan and the outlook for Hong Kong. Executive Summary, 2006, p.1, paragraph 2, and Annex 3. 71
Z/Yen Limited, The competitive position of London as a global financial centre, Corporation of London, November 2005, http://www.cityoflondon.gov.uk/economicresearch. 72
Securities and Futures Commission, research Paper 33, Hong Kong as a leading financial centre in Asia, August 2006. In the area of availability of skilled personnel and access to supply of professional services, in 2004, Hong Kong and Singapore were co-ranked 1st and thus there was no 2nd place noted.
73
The Global Financial Centres Index, City of London, March 2007, http:///www.cityoflondon.gov.uk/GFCI.
74
For a full review, see Bill Leverett, Lisa Hopkinson, Christine Loh and Kate Trumbull, Idling engine: Hong Kong’s environmental policy in a ten year stall 1997-2007, Civic Exchange, June 2007.
75
For the full study, see Alexis Lau, Andrew Lo, Joe Gray, Zibing Yuan and Christine Loh, Relative significance of local vs regional sources: Hong Kong’s air pollution, Institute for the Environment, Hong Kong University of Science and Technology and Civic Exchange, March 2007, http://www.civicexchange.org/publications/2007/airmarch.pd.
76
For a full discussion, see Kate Trumbull, Still holding our breath: A review of air quality policy in Hong Kong 1997-2007, Civic Exchange, June 2007.
77 Study of the third sector landscape in Hong Kong. Executive Summary, Central Policy Unit, HKSAR Government, http://www.cpu.gov.hk/english/documents/new/press/3rd_content.pdf, 27 August 2004.
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Key to CLSA investment rankings: BUY = Expected to outperform the local market by >10%; O-PF = Expected to outperform the local market by 0-10%; U-PF = Expected to underperform the local market by 0-10%; SELL = Expected to underperform the local market by >10%. Performance is defined as 12-month total return (including dividends). ©2007 CLSA Asia-Pacific Markets (“CLSA”). This publication/communication is subject to and incorporates the terms and conditions of use set out on the www.clsa.com website. Neither the publication/ communication nor any portion hereof may be reprinted, sold or redistributed without the written consent of CLSA. MICA (P) 232/11/2005. V. 061213. CLSA has produced this publication/communication for private circulation to professional and institutional clients only. The information, opinions and estimates herein are not directed at, or intended for distribution to or use by, any person or entity in any jurisdiction where doing so would be contrary to law or regulation or which would subject CLSA to any additional registration or licensing requirement within such jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable. Such information has not been independently verified and we make no representation or warranty as to its accuracy, completeness or correctness. Any opinions or estimates herein reflect the judgment of CLSA at the date of this publication/ communication and are subject to change at any time without notice. Where any part of the information, opinions or estimates contained herein reflects the views and opinions of a sales person or a non-analyst, such views and opinions may not correspond to the published view of the CLSA research group. This is not a solicitation or any offer to buy or sell. This publication/communication is for information purposes only and is not intended to provide professional, investment or any other type of advice or recommendation and does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any information in this publication/ communication, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice, including tax advice. CLSA does not accept any responsibility and cannot be held liable for any person’s use of or reliance on the information and opinions contained herein. To the extent permitted by applicable securities laws and regulations, CLSA accepts no liability whatsoever for any direct or consequential loss arising from the use of this publication/communication or its contents. Subject to any applicable laws and regulations at any given time CLSA, its affiliates or companies or individuals connected with CLSA may have used the information contained herein before publication and may have positions in, may from time to time purchase or sell or have a material interest in any of the securities mentioned or related securities or may currently or in future have or have had a relationship with, or
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