Special Report: Inside China - The jewel in the crown

With the handover to China, Hong Kong's prospects looked grim - but its historical strengths have kept it on top.

by Emilie Filou, World Business
Last Updated: 23 Jul 2013

A 1995 article in Fortune magazine painted a bleak future for Hong Kong. The handover was looming, China looked threatening, the Asian economy was a bubble waiting to burst. "I think that Hong Kong, perhaps a lot sooner than many people expect, will become just another city in China," predicted an investment adviser. Eleven years on, the outlook could not be more different. Sure, Hong Kong has weathered a few storms - the Asian financial crisis, 9/11 and the slump in air traffic, Sars - and it is facing stiff competition from booming mainland cities such as Shanghai, but, generally, the future looks bright.

Tony Tyler, Cathay Pacific's COO, recalls: "In the mid-90s, when property prices and inflation peaked in Hong Kong, Cathay Pacific moved various parts of its operation out of Hong Kong to trim its costs. However, deflation over the past eight years has made Hong Kong a much more cost-competitive city."

The economy is still the stalwart of south-east Asia. Its growth rates (7.3% in 2005, projected 6% for 2006) are the envy of the Western world. Its GDP - $163 billion - dwarfs that of its most immediate competitors (Shanghai's GDP is $90 billion and Beijing's $51.8 billion) and its stock exchange is now the seventh largest in the world. All this with a population of 9 million people in a city two-thirds the size of London. Those who predicted Hong Kong's demise and Shanghai's rise to power are eating their words. "The truth is that Hong Kong is still the jewel in China's crown and the rest of China is looking to emulate what is happening in Hong Kong," says Philip Tissot, trade commissioner at the British Consulate General in Hong Kong.

Under the handover agreement of 1997, Hong Kong retains its pre-1997 social, economic and legal systems until 2047 and is subject to the direction of Beijing only in the areas of foreign affairs and defence. This arrangement is referred to as 'one country, two systems'; Hong Kong keeps everything that made it attractive in the first place and with the added bonus of having China as its 'official' backyard.

This hasn't been lost on investors. Foreign companies, wary of venturing into unfamiliar territories, have long used Hong Kong as their launch pad into China and many still use the city as their regional headquarters. "Hong Kong is not the cheapest way into China, but your assets will be protected. In mainland China, you're very exposed should your joint venture go belly up," says Tissot.

More recently, mainland Chinese companies have also started to use Hong Kong as their international platform. "In the UK, when a company first looks at international expansion, they go to Ireland. In China, companies go to Hong Kong," observes Tissot. The figures speak for themselves: China accounted for 44% of Hong Kong's trade value in 2004, and Hong Kong is by far the largest contributor of foreign direct investment in China (a third of the $60 billion in 2004).

Pansy Yau, assistant chief economist at Hong Kong Trade Development Council, says that Hong Kong should bank on this long-standing tradition of a business service platform. "Mainland companies have become more mature. Why don't we serve them?" she says. "Hong Kong is already a major trade, financial and logistics centre. But with an increasingly sophisticated context, this role will deepen." Beijing included Hong Kong in its strategic five-year plan for the first time last year, proof that China intends to make good use of its new asset.

Yau says that integration has happened quite quickly and much has been done to facilitate the movement of people, goods and capital between Hong Kong and the mainland. Most importantly, however, Hong Kong has become the first offshore centre to launch banking services in renminbi. Deposits have now reached Rmb22.6 billion ($2.83 billion).

Hong Kong is therefore emerging as a favourite facilitator between China and the rest of the world. But Christopher Hammerbeck, CEO of the British Chamber of Commerce, points out that Hong Kong itself is a market, sophisticated and with a very high spending power. "All major IPOs in China come here; it is free of corruption; it has ranked first on the Heritage Foundation Index of Economic Freedom for 12 years in a row. Places such as Shanghai are just not there."

Shanghai is going through one of China's biggest corruption scandals and these words will resonate with companies considering a move to China. "Hong Kong and China are two separate systems, but one country," says Hammerbeck. "This togetherness and separateness is very important. That's what makes Hong Kong unique."

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