HK economy rides on mainland wave

(HK Edition)
Updated: 2007-06-20 07:13

Doomsayers predicted Hong Kong's vibrant economy would be quickly sidelined by the mainland when the territory was reunified with the mainland a decade ago.

Instead, while Hong Kong is feeling the heat of competition from the mainland, its economy is thriving having just experienced its fastest three years of growth since the late 1980s.

Other trade-dependent economies, such as Singapore, are challenging Hong Kong by restructuring to attract some of the growing wealth from the world's fastest growing major economy, but analysts say Hong Kong remains the main international financial centre for China.

"People were saying Hong Kong would be marginalized by the mainland 10 years ago," said Barry Cheung, chief executive of Titan Petrochemicals Group Ltd.

"If anything, it is becoming increasingly entrenched," said Cheung, who is also head of Hong Kong's Urban Renewal Authority.

"It is a much more mature market than the mainland and has a big lead. When the barriers on Chinese investors are removed, Hong Kong will become a magnet for their money."

The bulk of Hong Kong's re-export business relies on the mainland. But when the mainland is the final destination for Hong Kong's goods, exports have more than doubled between 2006 and 1997.

In other ways, Hong Kong has much to thank the mainland for.

The central government's decision in 2003 to simplify the procedures for mainlanders travel to Hong Kong gave the city, struggling with a recession after the outbreak of Severe Acute Respiratory Syndrome (SARS), a much needed boost as mainlanders started spending their new found wealth.

Listings of mainland companies in Hong Kong's stock market made the territory second only to London last year for initial public offerings.

The mainland is also using Hong Kong as a test bed for the gradual liberalization of its closely managed currency. In recent years, it has allowed yuan banking services in Hong Kong and the first yuan-denominated bond is due to be sold from the territory soon.

Risk to status

Policy advisers in Hong Kong said earlier this year that the territory risked losing its status as China's international financial centre if it did not develop new financial services, such as commodities trading, and expand its bond market.

In other industries too, from trade to supply-chain services, Hong Kong is having to cede market share to mainland cities.

"The gap with the mainland is closing," said Paul Tang, senior economist at Bank of East Asia.

"Ten years ago, the mainland was growing rapidly but its infrastructure couldn't catch up. Now it is. In the next 10 years, Hong Kong will have to keep moving up the value chain."

But Hong Kong is not ready to be swallowed up yet.

For many multinational companies, doing mainland deals through Hong Kong is easier because the territory has a complete package of financial services within its central business district, Cheung said.

It also provides a reassurance to international firms that the mainland can't and won't be able to match for some time, says Bob Broadfoot, managing director of Hong Kong-based Political and Economic Risk Consultancy Ltd.

"Hong Kong is probably 20 years ahead of the mainland in terms of the quality of its judiciary and 20 years ahead in terms of the independence of its regulatory authorities eg. of financial markets.

"Those systematic advantages will remain even after mainland cities move up the wealth ladder."

Titan's Cheung says the biggest threats to Hong Kong's competitiveness are rising costs - office rents are among the highest in the world - and worsening pollution.

These make it harder to attract foreign professionals, exacerbating a shortage of talent as the financial sector expands.

A rising yuan could present a longer-term inflation threat since Hong Kong imports most of its food from its giant neighbour. The yuan, which rose above parity with the Hong Kong dollar in January for the first time in a decade, is expected to rise about 5-6 percent this year against the US dollar.

But the ability to change is Hong Kong's strength. The economy was struck by the Asian financial crisis in 1997-98 and later by SARS, but in the past three years has expanded on average 7.6 percent a year, its fastest rate since the late 1980s.

"Hong Kong has succeeded because it has been very willing to shed old businesses like manufacturing and move on to the next new thing," Cheung said.

Reuters

(HK Edition 06/20/2007 page6)