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Hong
Kong and Shanghai vie to be China's financial center
Hong Kong and Shanghai are locked in an increasingly public struggle to
become the main Chinese financial center as a top-level committee in Beijing
prepares to meet this month to map out a national financial regulatory
strategy.
Hong Kong brought out its highest government leaders and its best-known
business tycoons to make the city's case at a series of televised
conferences and briefings here Monday. They called for Beijing to continue
letting the biggest state-owned companies make their initial public
offerings here, to allow China's currency to circulate more widely here and
to dismantle many of the remaining financial barriers between the mainland
and Hong Kong, a former British colony.
Shanghai's efforts have been less public and have
been harmed by a corruption scandal that has already led to the arrest of
the city's top Communist Party official and a growing number of business
leaders. But as the historic center of Chinese business life, Shanghai still
has many allies in Beijing and has emerged as the center of Chinese bond
trading and a favorite headquarters for Chinese and foreign companies.
The jostling between Hong Kong and Shanghai is
coming close to name-calling. Ronald Arculli, the chairman of the Hong Kong
stock exchange, said that just as New York was the main financial center for
the entire Americas even though Chicago or Toronto might not like it, Hong
Kong was poised to become the main international financial center for Asia.
Asked whether he was suggesting that Hong Kong was
like New York and Shanghai was like Chicago, Arculli said twice that that
was his goal, adding, "We stand a decent shot of making it."
City leaders and academics are happy to point out
their biggest advantage: the currency circulating in the streets and markets
of Shanghai is the yuan, which foreigners can buy and sell only with
difficulty. Hong Kong has its own currency, the Hong Kong dollar, which is
pegged to the U.S. dollar and is internationally convertible but cannot be
easily exchanged for yuan on the mainland because of China's capital
controls.
"The independent monetary system restricts
Hong Kong's ambition to become the financial capital of the country,"
said Pan Yingli, a finance professor in the School of Management at Shanghai
Jiaotong University.
Through four back-to-back ceremonies and briefings
Monday at the main government offices here and at the city's convention
center, Hong Kong officials tried to exploit Shanghai's temporary political
weakness and stampede Beijing into making Hong Kong the country's primary
financial center.
"If we do not act now, inertia will set in
and business will gravitate to established financial centers overseas,"
warned David Li, chairman of the Bank of East Asia, at a government
briefing.
Hong Kong and Shanghai are not just competing with
each other. They are also vying with Tokyo and Singapore to become the most
important financial center in Asia, the place to which investment banks,
hedge funds, insurance companies and other big investors send their best and
brightest to oversee trading after the sun sets in New York and before it
rises in London.
Each city has its strengths. Tokyo still has the
region's largest stock and bond markets, although they have attracted less
attention lately because they lack the sex appeal of the Chinese boom.
Singapore is the main center for trading oil and other energy products and
is an important hub for currency trading.
But the most intense rivalry is between Hong Kong
and Shanghai, as each strives to impress businesses and Beijing regulators
alike that it is also the best place for Chinese businesses to raise money.
It is one of the oldest rivalries in Asia, dating
back more than a century. Hongkong & Shanghai Banking, now known as HSBC,
started operations in Hong Kong on March 3, 1865, and in Shanghai exactly
one month later.
While Shanghai overshadowed Hong Kong in many ways
before World War II, Hong Kong took the lead following the Communist
takeover on the mainland, and benefited from the emigration of thousands of
Shanghai business people. The rise of the so-called Shanghai Faction of
politicians in China, including former President Jiang Zemin, resulted in
many policies that favored Shanghai through the 1990s and up until President
Hu Jintao gained power in late 2002 and early 2003.
But with Hu trying to limit Shanghai's influence,
and with Shanghai struggling with corruption scandals, Hong Kong is trying
to seize the initiative again. As Hong Kong's leaders repeated again and
again on Monday, Hong Kong has advantages now from the rule of law,
extensive financial expertise, a tradition of strong corporate governance,
widespread knowledge of English and close ties to global markets.
Thanks to a series of listings by big Chinese
banks and other Chinese institutions, Hong Kong's main stock exchange had a
greater volume of initial public offerings last year — $41.22 billion
— than any other single stock exchange, although more money was
raised in London over all.
But while Hong Kong aspires to be an international
financial center, it is sometimes derided in Asia as a one-legged stool —
a juggernaut in equities trading, including a doubling of trading in stocks
and derivative warrants last year, but without another leg to stand on.
Close to 200 bond issues are listed here, but
local banks and insurance companies tend to buy them when issued and then
sit on them for years, with minimal trading. The local government runs a
budget surplus, and while it has issued a small volume of bonds to help
create a market, these also trade in very low volumes.
While corporate bond trading is still in its
infancy in Shanghai as well, the trading of government debt securities there
has picked up. The People's Bank of China has been forced to issue tens of
billions of dollars worth of notes to sop up the enormous sums in yuan that
it is pushing into the market to prevent China's currency from appreciating
in value against other currencies.
Hong Kong business leaders are dismissive of
Shanghai's stock market. Paul Chow, the chief executive of Hong Kong's stock
exchange, said during an interview Friday that it "is predominantly a
retail market; Hong Kong is not."
But although Shanghai's stock market is still
considerably smaller than Hong Kong's, it is also rising faster and was the
world's top performer last year, soaring 130 percent.
Shanghai also is becoming an important center of
commodities trading, whereas Hong Kong has little.
Experts said Shanghai was likely to be an
increasingly formidable competitor in the years to come and voiced doubt
that Beijing would give Hong Kong precedence over its rival to the north.
Officials in Beijing are still more likely to think of Shanghai than Hong
Kong as a domestic financial market entitled to regulatory favors.
"Shanghai is where it's happening," said
Jack Lange, a partner in the Hong Kong office of the law firm Paul, Weiss.
"If there is going to be a domestic financial center that gives Hong
Kong a run for its money, it's going to be Shanghai." -
by Keith Bradsher reported from Hong Kong and David Barboza from Shanghai
INTERNATIONAL
HERALD TRIBUNE 15 January 2007
Hong
Kong Gets Chinese Boost
Great shopping and delicious food can go a long way toward lifting one's
spirits, but can they prevail over the perils of politics, a weak economy
and price competition from low-cost China? In Hong Kong, the answer is yes,
according to an uncharacteristically bullish investment call by one of
Asia's boldest contrarian economists.
Hong Kong's service industries -- ranging from retail,
restaurants and hospitality to banking, law and accounting -- put the city
in an ideal position to benefit from a structural shift going on in
neighboring China, says Jim Walker, chief economist at CLSA Emerging
Markets. During the past couple of years, China has attracted so much
capital it is practically bursting at the seams. Hong Kong, Mr. Walker
asserts, is where much of that excess capital will be spent -- on authentic
Louis Vuitton bags, pasta dinners and listings of Chinese companies on Hong
Kong's stock exchange, among other services.
"The beauty for Hong Kong is it's perfectly placed to
capture most of that capital outflow," Mr. Walker says, after marketing
his new report, "Boomtown: Re-enter the Dragon," in the U.S. and
Europe. "If anything, the biggest danger is that there might be so much
money coming into Hong Kong that it overwhelms the city a wee bit."
Although Hong Kong is emerging from some four years of deflation, a large
capital influx could lead to runaway inflation if it isn't managed
carefully. Mr. Walker adds, though, that he doesn't expect inflation to
stray beyond a manageable 1.5% to 3% for the next 15 years.
Some of the sectors to benefit will be retail, property,
banking, media, trading and hotels, as most of them provide services or
products that newly moneyed Chinese visitors are likely to buy. Mr. Walker's
investment recommendation, however, is relevant to the broader Hong Kong
stock market because he predicts strong, sustained growth for the city's
economy.
 WALL
STREET JOURNAL
Much of his call already has been reflected in the growth
of the benchmark Hang Seng Index, which has climbed more than 17% in the
past 12 months and 42% since April 25, 2003, the market's nadir amid the
outbreak of severe acute respiratory syndrome. Property prices are up about
40% from a year ago, and the government is projecting economic growth
between 2005 and 2008 of about 3.3%, adjusted for inflation.
What is contrarian is that Mr. Walker is betting the Hang
Seng Index will soar an additional 50% over the next three years, that
property-share prices will continue to strengthen, and that real gross
domestic product, the broadest measure of economic output, will average 6.5%
during the next 10 to 15 years. More importantly, Hong Kong gets a new lease
on life from a structural change in its economic relationship with China, as
opposed to merely a cyclical recovery boosted by an end to deflation, Mr.
Walker says.
Today, many investors are being drawn across the border to
China, encouraged by its efforts to improve its legal infrastructure and
corporate governance. Every day the streets of Beijing and Shanghai fill
with more shopping malls and high-end boutiques to help meet the demands of
China's nascent consumer society. But Hong Kong, with its wigged prosecutors
practicing British common law in place here for more than a century, and its
vast shopping and dining venues, will continue to be a world-class
preference for foreigners and Chinese alike, Mr. Walker says.
Core to Mr. Walker's "structural shift" story is
the growth of Chinese capital, which has been flowing in from foreign-direct
investment, foreign trade and earnings from the country's huge manufacturing
sector. China's central bank said Tuesday its reserves expanded to $470.6
billion at the end of June from $439.8 billion at the end of the first
quarter.
As the rest of the world tries to divine whether China's
economy will have a hard or soft landing, Mr. Walker says he fails to see
any evidence of a slowdown at all. And even if the effort was succeeding,
the economy would need to come to a screeching halt, or contract, to alter
the "boomtown" paradigm shift for Hong Kong, he says. "So
far, there's nothing I've seen in the Chinese economy that would suggest
we're anywhere near that point," he adds. Chinese consumption demands,
which are spilling over into Hong Kong, are helping to absorb China's strong
growth, he says. He expects China's economic growth will run at an average
clip of about 8% for at least the next 10 years.
Hong Kong has grown more closely tied to the Chinese
economy since the British handed it over in 1997, and these ties come
largely from the city's ability to continue retooling itself into a service
economy. While China has become the world's low-cost manufacturing behemoth,
Hong Kong has continued to ramp up its service industries. Services account
for 89% of the city's economy, while manufacturing makes up less than 5%.
That mix is similar to London's, where services make up 84% of the local
economy. For the U.S. economy, nearly 80% of GDP comes from services.
Mr. Walker argues that Chinese visitors, lacking at home
the variety, authenticity and availability of brand-name products and even
international cuisine found in abundance here in Hong Kong, will account for
at least 28% of the city's total retail sales this year. By 2010, that
proportion should reach at least 66%, he adds.
Politics are a potential bugbear for Mr. Walker's
"boomtown" scenario, but contrary again to the conventional
wisdom, he puts the onus on Hong Kong's politicians to shape up, not their
Communist counterparts in Beijing. His fear is less that the city's budding
pro-democracy movement will spook multinational or Chinese companies from
setting up in the city, but that the local government will fail to allow
more mainland Chinese talent to enter and help keep the Hong Kong economy
chugging along.
Hong Kong also will prevail over competition, including
Shanghai, as a regional headquarters for multinational and
financial-services companies such as investment banks, Mr. Walker contends.
And with at least 50 mainland Chinese companies having applied to list in
Hong Kong this year and more in the pipeline, "the much bigger story
will eventually be Chinese companies coming to list and set up" offices
in Hong Kong than the other way around, he adds. - by Karen
Richardson WALL
STREET JOURNAL 16 July 2004
HK more competitive than Shanghai, says survey
But the Chinese city will probably catch up
in six to eight years
Hong Kong is more competitive than Shanghai now, but both
Chinese cities will probably be on a par in about six to eight years, a
survey of top executives has found.
Respondents were asked to give scores of between one and
five to the two cities on 32 indicators such as the rule of law, market
openness, labour productivity and the administration of economic affairs.
The poll of 204 executives at multinational companies, professionals and
senior managers in Hong Kong and Shanghai, published on Friday, gave Hong
Kong a composite competitiveness score of 3.927 in 2002, while Shanghai came
in at 3.122. The two had scores of 3.75 and 2.96 in 2001, respectively.
Research leader Tuan Chyau said Shanghai was likely to
give Hong Kong a run for its money before too long. 'If we use price
adjustments, it is possible that Shanghai would be on a par (with Hong Kong)
in six to eight years,' said Mr Tuan, a professor with the Department of
Decision Sciences and Managerial Economics at the Chinese University in Hong
Kong. By price adjustments, Mr Tuan meant factors such as per capita gross
domestic product and consumer price indices.
Shackled by deep financial problems, Hong Kong has looked
on helplessly in recent years as Shanghai enjoyed rapid growth. Many in Hong
Kong are concerned it will sooner or later be overtaken by Chinese cities.
But for now, the survey, conducted by the Chinese
University and The Shanghai Academy of Social Sciences, still ranked Hong
Kong ahead of Shanghai. It was carried out between November 2001 and May
2002. - Reuters
6 January 2003
Hongkong may lose its comfortable lead over Shanghai if it
does not speed up economic integration with the thriving Pearl River Delta (PRD),
according to a joint study.
The study also identified trends that could help Shanghai
rob Hongkong of its competitive edge in the long run.
The survey involved more than 200 chief executive officers
(CEOs) of multinational corporations with operations in both cities.
It was carried out by the Shanghai Academy of Social
Sciences and the Chinese University of Hongkong.
Thirty-two parameters were used to measure the
competitiveness of both cities in the last two years.
CEOs ranked each parameter on a scale of one to five, the
highest score.
The findings showed that overall, Hongkong still fares far
better than Shanghai.
While Shanghai has double the population and six times the
land area of Hongkong, the size of its economy pales in comparison to its
southern rival.
In 2000, for example, Shanghai's gross domestic product
(GDP), foreign direct investment and foreign trade was only 18 per cent, 7
per cent and 11 per cent of Hongkong's, respectively.
Hongkong is in a class of its own when it comes to
business environment.
CEOs gave the territory a rating of 3.8 to 4.2, which puts
it in the middle-upper rank.
Shanghai received a rating of 2.7 to 2.9, a middle-lower
ranking.
In terms of international image and existing economic
base, Hongkong again is ahead of its rival.
Shanghai may be lagging for now, but the study said it was
improving quickly and making quantum leaps to catch up with Hongkong.
For example, Shanghai's bid to open up the city,
streamline its administration and improve its legal infrastructure had
resulted in marked improvements, said the CEOs.
The study found the seven following trends in Shanghai's
favour:
Favourable economic policies geared at enhancing
competitiveness;
- Close linkages among local universities and other
institutes involved in research and development (R&D);
- Commercialisation of local R&D;
- Local education system and policy more attuned to
increasing competition;
- Greater adaptability to economic fluctuation;
- Better inter-governmental coordination of policies;
and,
- Better prospects in developing local e-commerce and
information technology.
Given these trends, unless Hongkong steps up its economic
integration with the PRD, it has little hope of maintaining its lead in the
long run, the study concluded.
The integration is necessary not just because the PRD
provides a hinterland with a population and land size comparable to
Shanghai's.
It is necessary because the PRD, with its primary and
secondary industries, complements Hongkong, which is primarily a
service-oriented economy.
The fusion would thus make the Greater Hongkong economic
structure more balanced.
A government source said the report could not be more
timely, coming ahead of Chief Executive Tung Chee Hwa's policy address
today.
Mr Tung is expected to outline measures on how to achieve
greater integration with the PRD as suggested by the report.
Mr Peter Woo, chairman of the Hongkong Trade Development
Council, said that Hongkong should not be dispirited, but should try its
best to realise its potential.
'Many people like to compare the PRD area centred on
Hongkong and the Yangtze River Delta centred on Shanghai,' he said.
'The fact is that in 2001, the total exports of Shenzhen
and Dongguan in the PRD alone, not counting Hongkong, were more than double
Shanghai's.
'Shenzhen alone has 20 per cent of the total number of PhD
holders in China, something even Shanghai envies.
'The challenge is to find a way to transplant Hongkong's
success model into the PRD region.' -
by Ching Cheong Singapore
Straits Times 8 January 2003
Which
city, Hong Kong or Shanghai, will prosper most in the new century?
Coastal China's pre-eminent city, Hong Kong, has a great disadvantage. It is
more than 1,500km (940 miles) from the capital, Beijing, and itsleaders do
not belong to the Communist Party's ruling elite. This remoteness from
China's political pulse leads to a nagging, nervous question: will Shanghai,
1,200km away and much nearer to Beijing, recover its pre-communist status as
China's greatest city, and once again outshine Hong Kong as a business and
financial centre? Worse, isn't that what China's leaders, especially
President Jiang Zemin and his powerful "Shanghai clique", secretly
want?
As Hong Kong's economy struggles to recover from the battering it suffered
in the Asian financial slump of 1997 and the recent global slowdown, the
mood is glum. While the former British colony still teeters on the brink of
recession, the Chinese mainland's economy grew >by 7.3% last year, and
Shanghai' s by more than 10%. If average growth rates over the past decade
continue, Shanghai' s GDP will match Hong Kong's in 15 years. In 20 years,
its GDP per person will catch up too. China's growth figures are of course
exaggerated, and double-digit growth will be very hard for Shanghai to
sustain.
But that is not much comfort to Hong Kong. As the biggest outside investors
in Shanghai, Hong Kong's business community knows Shanghai' s swagger well.
Since the early 1990s, the city has built an expansive financial district of
towering skyscrapers, with its own international airport, on land that a
decade ago was farmland and factories. Pudong, as the area is known, is
about to see what Shanghai planners hope will be the world's tallest
building. Plans are under way to build a 30km bridge over the sea to a huge,
largely artificial, island on which a deep-water container terminal will be
built. The world's first commercial magnetically-levitated train service is
already under construction in Pudong. It is supposed to be ready for service
next year. Fuelling this growth is a surge of foreign investment. Now that
China has joined the World Trade Organisation (WTO), Shanghai is the obvious
focus for companies hoping to benefit from the opening of China's markets.
Hong Kong, of course, will benefit from that too. But many in the territory
worry that Hong Kong's once-unique role as an intermediary in China trade
will fast be eroded by Shanghai. Hong Kong's lack of dynamic,
forward-looking leadership does not help. At the end of February, the highly
unpopular chief executive, Tung Chee- hwa, was handed another five-year
term. This was not because he had done a great job, but because China's
leaders wanted him to stay in office. An electoral college packed with Hong
Kong business leaders and politicians fearful of opposing China's wishes
therefore re-elected him nem con. Replacing Mr. Tung would have been
tantamount to admitting that he had failed, and no Chinese leader could
admit that. This is unfortunate, because maintaining Hong Kong's
pre-eminence will require vision and political courage to stand up to vested
business interests.
The Taiwan wrinkle. China is not deliberately trying to hold Hong Kong back.
Shanghai' s recently deposed mayor, Xu Kuangdi, was fond of saying that Hong
Kong and Shanghai are "two strikers on the same team". Chinese
leaders would find it hard to suggest otherwise. A Hong Kong relegated to
the second division would do little to convince the world, and especially
Taiwan, that China's "one country, two systems" formula for
reunifying the country has much to commend it. But Hong Kong cannot lean on
this political crutch indefinitely. At present, Hong Kong is the entrepot
for much of Taiwan's China trade, and Shanghai' s growth as a shipping hub
is largely to meet the needs of the Yangtze River delta. But once direct
links are established between Taiwan and the mainland, this will change.
Shanghai, not Hong Kong, may become Taiwan's first port of call. Already
some 300,000 Taiwanese live in and around Shanghai, and Taiwan's bookshops
are full of books about how to settle and do business there. Increasingly it
will be that city's performance, not Hong Kong's, that determines Taiwan's
view of the mainland and its ideas of what its own political future may be.
Already, in the past year or two, Shanghai and its hinterland have become
the hot new favourite for Taiwan investors. This change will hurt not only
Hong Kong, but the whole Pearl River delta where much of Taiwan's $60
billion investment in China is based. Already, in the past year or two,
Shanghai and its hinterland have become the hot new favourite for Taiwan
investors, even though Taiwan's current ban on direct trade and transport
with the mainland makes getting to Shanghai a time-consuming chore. Hong
Kong officials play down the potential impact of direct cross- strait links
between China and Taiwan. They argue that this will boost the economies of
both parties and therefore increase the size of the cake for all, including
Hong Kong, to share.
But there is a danger that Taiwan's investment in high-tech industries will
make the Yangtze River delta, with its cheaper land and workforce, the hub
of China's IT economy, with Beijing providing much of the R&D. This
could leave less room for Hong Kong and its ambitious plans to turn itself
into a regional centre of IT development. Hong Kong's Cyberport project, a
science park for high-tech ventures due to be completed next year, may find
itself in the wrong part of China.
The trials of separateness. Despite his unpopularity, Mr. Tung should not be
made a scapegoat for all this. The Asian financial slump and the bursting of
the IT bubble in 2000 have battered the territory. Property prices have
plummeted to less than half their worth at the time of Hong Kong's transfer
from Britain to China in 1997. Unemployment has risen to 6.8%, its highest
level since the 1980s. Last year the stockmarket plunged 22%. Mr. Tung could
have done little to prevent this. The property-market slump is the natural
flip-side of soaring property prices in the 1990s caused by tightly
restricted land sales. For that, blame China, which insisted that the
colonial Hong Kong authorities keep government land sales to a minimum in
the run-up to the>territory's handover. China feared the squandering of a
valuable government asset. It ended up creating a bubble market, which has
now burst. Both the Hong Kong and mainland governments want to prevent the
territory from being deluged with mainlanders eager to settle.
Hong Kong is also fundamentally weakened by its physical separation from
mainland China. Although most of Hong Kong's manufacturing sector has
relocated in the past 20 years to its hinterland, the Pearl River delta, it
is cordoned off from it by one of the world's most closely guarded borders.
Many Chinese complain that it is more difficult now for a mainland Chinese
to get a job in the territory than a non-Chinese expatriate. This is because
both the Hong Kong and mainland governments want to prevent the territory
from being deluged with mainlanders eager to settle.
The trip from central Hong Kong to the Chinese border city of Shenzhen, only
20 miles away, can take longer than 1½ hours, with as much as half of that
time spent at immigration and customs. (This may improve next year, when the
territory introduces "smart" identity cards that can be checked by
machine.) The two border crossings for non-commercial traffic are closed
from midnight to 6.30am. "We have a very strong fortress
mentality," complains Shiu Sin-por, director of a Hong Kong think-tank
with links to the Chinese government. "Shanghai doesn't have this
problem of relating to its hinterland. They don't have this wrestling with
political reservations. They are moving ahead with leaps and bounds."
Hong Kong's immigration restrictions make it difficult for the>territory
to attract an educated elite from mainland China. Such people are needed,
however, if the territory is to become, as it hopes, a fund- raising and
R&D centre for China's high-tech industries. The government is loosening
restrictions for some mainland workers, but Shanghai will long remain a far
easier place for well-qualified job-seekers in China to launch their
careers. Shanghai also has the advantage of being culturally more familiar
to mainland Chinese. The government is working towards 24-hour
border-crossing arrangements, but these may not come for as long as five
years. Hong Kongers worry that a more open border will make it easier for
the territory's young people to get cheap (and often impure) mainland drugs.
It might also encourage the practice, already common among Hong Kong's men,
of having mistresses on the other side. More than anything, however, people
worry about the effect easier crossings might have on Hong Kong property
prices. If Shenzhen were to become an attractive place from which to commute
into Hong Kong, property prices in the territory could fall yet further.
The courage to integrate. Such worries are overblown. For one thing,
property prices in Hong Kong are not too low. If anything, they are still
too high, higher than in Singapore and much higher than in Shanghai. For
another, Hong Kong's increasing population will ensure sustained demand for
residential property, and many cities elsewhere in the world boast property
prices>much higher than those of their hinterlands. To stay competitive,
the territory needs to let property prices find a more natural equilibrium
with those of the mainland. That will take political courage on the part of
Mr Tung. Since the government draws 30% of its revenue from land sales,
shifting from that source of money would oblige it to look hard elsewhere.
Raising taxes would be the obvious answer, and Hong Kong may have to give up
the luxury of exempting nearly half of the population from income tax. But
in his budget speech this month Hong Kong's financial secretary, Antony
Leung, avoided committing himself to tax reform. Hong Kong at least knows it
has to change and integrate itself further with the economy of the Pearl
River delta. A big psychological barrier was removed in January last year
when the territory's chief secretary, Anson Chan, resigned, citing the
less-than-convincing reason that she wanted to spend more time with her
family. (The real reason: she did not get on with Mr. Tung.) Mrs. Chan was
an ardent promoter of the idea that, as she put it, "our strength lies
in the separation which is fundamental to the success of 'one country, two
systems'.
Mrs Chan's successor, Donald Tsang, says that since taking up his job he has
tried to develop much closer ties, and as quickly as possible, between the
city and the Pearl River delta. Hong Kong officials now say they want to
establish a "strategic relationship" with other cities there.
"Member cities should not think of themselves in isolation. In the old
days we did stop our planning at the boundary," says Kitty Choi, who
heads an office responsible for cross-border co-ordination set up by Mr
Tsang. The old mindset, at least, is beginning to change. Cross-border
co-operation is crucial, because Hong Kong does not have to look as far as
Shanghai to find competition. Shenzhen's ports are developing fast and are
far cheaper to use (though less efficient) than Hong Kong's. Shenzhen talks
of complementing Hong Kong's facilities, but cooperation is patchy. The
volume of cargo handled by Shenzhen ports now amounts to about a quarter of
that passing through Hong Kong. Five years ago, it was only 4%. Hong Kong
officials admit this is a challenge, even as they proceed with massive
port-expansion plans.
The shadows over Shanghai. But for all Hong Kong's floundering, Shanghai is
by no means certain to emerge the clear favourite for companies in search of
a regional or China headquarters-even in ten or 20 years' time. Shanghai's
great disadvantage is the mirror-image of Hong Kong's: it is an integral
part of China, but steeped in its political traditions and way of life. Its
property markets are ill-regulated and chaotic. It lacks the sound financial
structure that keeps Hong Kong afloat. Its legal system is arbitrary. A
senior western diplomat in Shanghai laments that some foreigners "are
seduced by the skyline, and tend to switch off important bits of their brain
when making business decisions." The unexpected departure of Mayor Xu
Kuangdai last December was a sobering reminder of the city's murky politics.
Mr Xu was ousted peremptorily and in secret, presumably at the instigation
of the city's shadowy Communist Party secretary, Huang Ju, who is the real
power in Shanghai and who did not get on with him. "That explains the
difference between Hong Kong and Shanghai - the system and the freedom of
speech and all that," says a senior Hong Kong official, reacting to the
news. "Don't be dazzled by the light." "Freedom of speech and
all that" does indeed remain Hong Kong's strong suit. Under the
mini-constitution, or Basic Law, by which Hong Kong has been administered
since 1997, the territory has its own legal system (based on Britain's) that
provides far better protection and a fairer environment for business than
that of mainland China. In general, despite some wobbly moments, Hong Kong's
courts have remained impressively independent. Even if Shanghai were to
fulfill its ambitions, Hong Kong would not necessarily suffer as a result.
China's external trade will produce enough business for several ports. And
until China's currency, the yuan, becomes fully convertible, which may take
as long as one or two decades, China will need Hong Kong to tap
international finance.
Hong Kong is beginning to take the right steps. On January 1st, it lifted
restrictions on the number of mainland tourists allowed to visit the
territory. Though fear of a tidal wave of illegal immigrants is still
pervasive, this decision could help to break down mental barriers. It is
certainly good news for Hong Kong's suffering retail and leisure sectors.
More dubious are Hong Kong's plans to attract mainland tourists with a
Disney theme park. This is due to open in 2005, despite the failure of many
theme parks in China. After much urging from businessmen, Hong Kong also
favours the establishment of a free-trade area embracing itself, the nearby
former Portuguese territory of Macao and the mainland. This might give Hong
Kong companies (which are currently given the same treatment as foreign
businesses) a head-start in the rush to exploit the markets being opened up
by China's entry into the WTO, especially in services. China has responded
to the idea with polite curiosity, but may not bite.
Hong Kong's quality of life-boosted by good education and health services,
while China's public services crumble-will help to ensure that it remains
China's first entrepot for several years to come. But the pace of change in
Shanghai, and the excitement the city generates among foreign investors,
could quickly narrow the gap. If Hong Kong is to remain superior to both
Shanghai and Shenzhen, it will have to reinforce both its strengths: its
legal independence, and its economic interdependence.
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