Hong Kong, Shanghai and the PRD

1. Hong Kong, Shanghai and the PRD Howard Davies

2. Objectives • to identify the different roles which Hong Kong plays in the economic activities of the mainland • to speculate on the extent to which these roles may be eroded in the next century as Shanghai develops as a rival centre • To examine Hong Kong’s role in the Pearl River Delta

3. Hong Kong’s Different Roles • Trading Partner - HK as final customer and as supplier buying from and selling to China • Middleman - organising transactions between China and third countries • Investor/Financier - providing and organising funds for China • Facilitator - point of contact, source of learning

4. HK is rapidly becoming a less significant final buyer of Chinese goods and provider of China’s inputs HK is a very significant source of visitors to China China is rapidly becoming HK’s most important source of visitors (with per capita spending at least as high as average) Current Position as Trading Partner?

5. What of the Future as Trading Partner? • As a FINAL MARKET: HK will grow absolutely but decline relatively as China’s trade with other countries grows faster • As a SOURCE OF SUPPLY: HK will decline, both absolutely and relatively as a source of manufactures, but grow absolutely as source of services

6. Hong Kong as Middleman • GOODS • entrepot - HK firms buy from China, find buyers, set prices, take risk of ownership, make contracts • trans-shipment - goods pass through HK • brokerage - goods shipped directly from China to third countries – up from 15.8% of HK-managed exports in 1997 to 23.5% in 2001 -HK firms provide services • SERVICES • tourism - HK firms arrange inbound and outbound China travel

7. How Important is the Middleman Role? • For HK today, it is the centre of the economy: 90,000 Import/Export firms employ around 600,000 people • For China today, entrepot, trans-shipment and brokerage provided by HK is very important • HK trade-related profits growing 5% p.a.with a 20% margin holding steady

8. What About the Future of the Middleman Role? • HK has a permanent geographical advantage and infrastructure development is well ahead of China • There are AGGLOMERATION ECONOMIES, SCALE ECONOMIES and LEARNING EFFECTS which give advantages to a ‘first-comer’

9. HK’s Advantages as Middleman • Well-established legal system • Pool of commercial information not available in China • TDC provides information and promotional infrastructure • Network of small firms allows pooling of risks - buying and selling offset each other • Trading skills in abundance • Attractive posting for expatriate personnel

10. What of the Future? • Some have argued that HK will be “overtaken” by Shanghai • In the long run, many of the middleman functions for the Yangtze delta and basin may shift to Shanghai • BUT that leaves a major role for HK in servicing South China, where there are no obvious rivals

11. What of the Future? • The Pearl River Delta is becoming the ‘Light Industry Workshop of the World’ • Rapid structural shifts from garments to electronics • 24% export growth in 2001 • Still only half-developed – the Western PRD will open up if/when the bridge is built

12. Hong Kong as Financier • HK as a SOURCE OF LOANS for China • HK as a source of FOREIGN DIRECT INVESTMENT

13. PROVIDER OF LOANS China has become increasingly self-sufficient in capital More reliance on domestic bond financing Move to current account surpluses has reduced demand for external loans But HK Banks have an advantage in handling RMB business outside China FOR THE FUTURE HK as a Source of Loans for China

14. Hong Kong as a Source of Foreign Direct Investment • By 1993 108,914 Hong Kong joint ventures (64%) of the total • Hong Kong accounts for around 73% of the total foreign direct investment • Guangdong alone had 44,000 foreign-invested enterprises in 1993 with around 6.3m employees

15. The Importance of HK FDI Into China • Responsible for large proportion of exports • Productivity higher and its growth much faster in FIEs • Responsible for introduction of ‘factory culture’ • ‘Low-tech’, low-skill, labour-intensive assembly operations, mass-producing mature products for low-price segments

16. The Argument over HK FDI in China? • AGAINST:little technological up-grading, ‘sweat-shop’ exploitation of migrant workers, social tensions, little commercial knowledge transmitted • FOR: low-tech fits the pattern of comparative advantage, output, incomes, jobs and exports have all boomed

17. What is the Future for HK Manufacturing in China? • MIT Report in 1997 recommended aiming for high-tech development based on innovative products • But HK firms are not equipped for that, nor is the Hong Kong system • In any case, its the market for low-price goods which is growing most quickly • current approach will probably serve well for some time

18. What Are the Options for HK Firms Manufacturing in China? • CARRY ON AS BEFORE • ACQUIRE THE SKILLS NEEDED TO DEVELOP THE CHINA MARKET • UP-GRADE TECHNOLOGICALLY - THE MIT SOLUTION • LEAVE MANUFACTURING AND FOCUS ON TRADING AND PROPERTY

19. Contact Point with the Outside World exhibitions representative offices for provinces, cities, enterprises Provision of Consultancy Services legal technological construction and property development market research accountancy academia? Hong Kong as Facilitator

20. The Future of Hong Kong as Facilitator? • Beijing and Shanghai are increasingly developed and will take larger shares of the total activity • But, Hong Kong’s proximity to the PRD and continuing advantages in terms of legal system and ‘soft’ infrastructure guarantee significant growth

21. The Overall Conclusions? • Hong Kong has very sound fundamentals in respect of continued trade-related service and tourism growth • Other major cities in China will undoubtedly close the gap in terms of per capita income and most other indicators • That is to our benefit! Remember that it is a mistake to think in terms of places competing with each other in a zero-sum game.