Hong Kong-Zhuhai-Macau bridge

HK should leave the logistics mega-projects to Shenzhen

PUBLISHED : Wednesday, 11 January, 2012, 12:00am
UPDATED : Wednesday, 11 January, 2012, 12:00am

Government officials do love big projects; the bigger and more expensive the better as far as they are concerned.

Shenzhen's officials certainly think so. They are planning to spend an eye-popping 285 billion yuan on a giant new logistics centre at Qianhai on the Pearl River estuary.

In Hong Kong dollar terms, that's a price ticket of HK$348 billion.

To put that into perspective, HK$348 billion is enough money to build three third runways at Chek Lap Kok as well as an underground high speed rail link from West Kowloon to Shenzhen, and still have enough change left over to build the Hong Kong government a new headquarters at Tamar.

You might wonder just how Shenzhen is hoping to pay for this monster investment project, especially given that the city runs a hefty budget deficit - 16 billion yuan in 2010, according to official figures - and that revenues from land sales have evaporated recently as property prices have fallen.

But Shenzhen officials appear to have come up with an answer to the problem: Hong Kong should help foot the bill.

'We should work together,' one Qu Jian, deputy director of the Shenzhen-based China Development Institute, was quoted as saying in yesterday's South China Morning Post. 'Hong Kong and Shenzhen can pool their resources.'

There's just one problem: it's hard to see how participating in Shenzhen's mega-project, especially with public money, could benefit Hong Kong.

Shenzhen officials want to build their new logistics park because they want to overtake Shanghai as the world's busiest port. But that's a silly ambition. Shenzhen's port doesn't compete with Shanghai in any meaningful sense. No one is going to decide to export their goods through Shenzhen instead of Shanghai just because Shenzhen boasts some new facilities. The two ports serve different markets.

But Shenzhen does compete with Hong Kong's port for business, so if Hong Kong were to help fund a vast new logistics centre in Shenzhen it would merely be undermining the competitive position of its own port facilities.

No doubt Shenzhen will present the investment as a winning proposition for both cities, arguing that the new centre will generate significant increases in traffic through the ports of both cities.

But that's doubtful. Hong Kong's port has done remarkably well to maintain its traffic volumes in the face of intense competition, thanks largely to its efficiency as a trans-shipment centre.

But as the first chart below shows, loading containers onto ships is hardly a growth business for Hong Kong.

If Shenzhen now goes ahead and invests 285 billion yuan on a vast new logistics centre of its own, it will certainly threaten some of Hong Kong's trans-shipment business, making it even more difficult for Hong Kong's port to maintain its volumes.

As a result, it is hard to see why Hong Kong should invest any money in the project.

But Hong Kong should still welcome Shenzhen's plans.

Loading and unloading boxes may no longer be a growth industry for Hong Kong but providing services to the other people who do load boxes certainly is.

As the second chart below shows, Hong Kong's service exports - financing, marketing, supply chain management and the like - have grown at an average pace of around 12 per cent a year over the past few years, even factoring in the downturn during the global financial crisis.

Clearly Hong Kong's greatest comparative advantage these days lies not in humping boxes around but in providing lucrative services to businesses in other places like Shenzhen where they do the humping.

So a big new logistics centre in Shenzhen will mean more business for Hong Kong's service exporters.

However, that doesn't mean Hong Kong should invest in the centre. Port logistics is a twilight industry as far as Hong Kong is concerned. If the city is going to invest, it should be investing instead in growth industries where it boasts a competitive advantage, like service exporters.

And the best way the Hong Kong government can do that is not by throwing public money at Shenzhen's pet projects but by reducing administrative and taxation costs for local companies and letting them get on with expanding their own businesses.

Leave the mega-projects to others.