Why Hongkong exists: Neglect of the Hongkong advantage

SCMP September 23, 2003

Hong Kong seems to be between a rock and a hard place. Last week, Vice-President Zeng Qinghong called for ever closer integration with the mainland, while the rating agency Standard & Poor's warned of the dangers to Hong Kong's credit rating of losing its separate status with too-close association.
A clear view of where Hong Kong's advantage lies and how that should be reflected in specific policies is badly needed. Let us go back to first principles.

Now, as ever, two things are at the core of Hong Kong's ability to continue to be both different from, and more prosperous than, the most advanced cities on the mainland. One is historical: 400 years ago, the Chinese government set Macau, and by extension Hong Kong, apart for the purpose of trading with foreigners. The other is geographical: a superb port lying both at the mouth of the Pearl River, gateway to southern China, and close to the shipping lanes linking Northeast Asia to Southeast Asia, the Middle East and Europe.

The object must, therefore, be twofold. To supply services that cannot be provided on the mainland, to the rest of China - and the region - and to use its geographical position to provide transport and related services which are either cheaper, quicker or better.

Competition with Hong Kong has heated up not because of the 1997 handover but because of the huge strides made by the mainland. These explain why Hong Kong has struggled, while the Pearl River Delta has boomed. The competition from Shenzhen and other Guangdong neighbours are at least as important as that from Shanghai, especially as Shenzhen ports have recently overtaken Hong Kong in container handling.

Hong Kong cannot thrive by cutting itself off from its hinterland. But equally, it has to compete with its neighbours, as well as serving them. Yes, it must build road, bridge and rail links with the delta, improve its customs procedures to cut border waiting-times and the cost of using Hong Kong ports. But do not imagine this is a cosy, win-win situation. The neighbours are out to grab as much of this business as they can. The ability of Shenzhen to provide higher-grade, trade-related services is increasing all the time.

Hong Kong cannot just sit back and assume it will get the higher-value services, while neighbours do the heavy lifting. Regrettably, it is in a poor position to face the competition. It remains an unreformed economy, dominated by chaebol in much the same way as South Korea was before the financial crisis and foreign pressures destroyed their dominant and privileged position.

The excess profits made in Hong Kong have all flowed out. Hong Kong ports can maintain their huge margins because their opposition to new ports and new entrants here has created a shortage, enabling them to build up Shenzhen while keeping Hong Kong handling charges at astronomic levels. The relationship between government and a few players is cemented by advisory bodies, which largely represent the suppliers of services rather than users. The result: the users are going elsewhere.

The planned bridge linking Hong Kong, Zhuhai and Macau would make more sense if there were also a new port on Lantau, from which the existing players would be excluded.

At the time of the handover, there was concern that mainland firms would use their political muscle to grab market share. That has not happened, thanks to officials in Beijing. But perhaps the "hands-off" posture has been overdone. Hong Kong needs new entrants, whether from the mainland or elsewhere.

Instead, we have a chief executive going cap in hand to Beijing to try to get special favours through the Closer Economic Partnership Arrangement and priority for Hong Kong in gaining access to capital-account liberalisation. He dreams of reviving Hong Kong as a manufacturing centre rather than looking for ways to spur new services and make the existing ones more cost-competitive.

One result is an inability to tackle the immigration issue. We have a continued inflow of 60,000 mostly unskilled mainland migrants a year. Skilled mainlanders find it hard to get in. Why cannot Hong Kong control its own immigration policy, selecting people primarily on economic and social criteria?

Meanwhile, the foreigners who are the other vital part of Hong Kong's special position are increasingly being discouraged. Investment bankers from the US may have no trouble getting a work permit, but what about ship superintendents from India to support the ship-management business, or software experts to build the local industry? We need the leaders in the post-Disney world of entertainment, not yesterday's men. Encourage foreigners of all sorts, especially from Asia.

A world city requires a diversity that Hong Kong is losing, and with that loss goes part of its value to China and Asia.

Go on like we are, and Shenzhen will take much of Hong Kong's business, Guangzhou will regain its position as the main delta city - as well as of south China - and Standard & Poor's will be proved right. On their own, Hong Kong's reserves, fiscal position and monetary management may well be worth an AA rating. But a Hong Kong which does not put more effort into retaining its differences and competitiveness will lose them soon enough, and with it the lead it enjoys. The Hong Kong advantage badly needs nurturing.

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