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  • Jul 27, 2014
  • Updated: 12:46am
Monitor
PUBLISHED : Monday, 29 April, 2013, 12:00am
UPDATED : Monday, 29 April, 2013, 4:11am

Far from losing its edge, Hong Kong is more competitive than ever

The chairman of the standing committee of the National People's Congress is talking out of his hat on Hong Kong's competitiveness

Hong Kong, we are told, is losing its competitive edge.

This grim warning was issued on Saturday by a certain Zhang Dejiang. Zhang, in case you're wondering, is chairman of the standing committee of the National People's Congress, which makes him the most important Communist Party official you've never heard of.

According to yesterday's Sunday Morning Post, he told a delegation from Hong Kong that the city will be "swept downstream if it does not forge ahead".

I'm going to be charitable here and assume it was whoever translated his warning rather than Zhang himself who was responsible for the mixed metaphor.

So suppress any mental image you may have of soggy blacksmiths, and let us examine Zhang's contention that "Hong Kong's competitive edge is weakening and will fade away if the city does not put its focus on economic development".

Unfortunately, measuring competitiveness is tricky. Economists talk about things like total factor productivity and unit labour costs, but the data for Asia is lousy.

One alternative is to look at real effective exchange rates. Widely considered a proxy for economy-wide competitiveness, these measure the performance of a country's currency against a basket of its competitors' currencies, adjusted for inflation.

An appreciating real effective exchange rate reflects a rise in relative costs and signals a decline in competitiveness. Depreciation indicates a sharper competitive edge.

In these terms, Hong Kong has nothing to worry about. As the first chart shows, since the start of the financial crisis - the baseline cited by Zhang - Hong Kong's real effective exchange rate has fallen by 2 per cent.

In contrast the real effective exchange rates of most of Hong Kong's Asian neighbours have risen. Both China and Singapore, to take two examples, have appreciated by 28 per cent. In other words, far from losing its competitive edge since the crisis, Hong Kong's has got considerably sharper.

Still, a cheaper real effective exchange rate will not stop people fretting that Hong Kong faces a growing threat from mainland efforts to promote Shanghai as China's main financial centre.

But again it does not look as if Hong Kong has much to worry about. Companies in search of a stock market listing will choose the most attractive market for their initial public offering. As the second chart shows, since the start of the financial crisis, companies have raised almost as much IPO capital in Hong Kong as in Shanghai and Shenzhen put together.

And there is no sign Hong Kong is losing ground. So far this year there have been no IPOs at all in either Shanghai or Shenzhen, while new listings have raised more than HK$8 billion in Hong Kong.

Of course, gloomsters can point to Hong Kong's continuing dock strike as evidence that the city's port is losing its competitive edge.

But the port is a sunset industry. These days, an economy's ability to compete depends more on abstract qualities such as institutional strength and the ability to innovate than on how cheaply it can shift boxes around.

Assessing these objectively is tough, but that does not stop people trying. The World Economic Forum, for example, puts enormous resources into its annual competitiveness survey in an attempt to compare things like business sophistication and "efficiency enhancers" like higher education.

Here, again, according to the WEF, Hong Kong is getting more, not less, competitive. Since the crisis, the city has edged up from 12th place in the WEF's overall ranking, to 9th last year. China, in contrast, came 29th.

So once more, far from losing its edge, Hong Kong is actually sharper than ever.

Zhang doesn't know what he's talking about.

tom.holland@scmp.com

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This article is now closed to comments

captam
@”Zhang doesn’t know what he’s talking about”
And neither does Tom Holland.
The fact that Hong Kong has still been able to attract IPO listings in Hong Kong but not in Singapore or Shanghai has nothing to do with Hong Kong’s competitiveness.
It is solely because we have a lax listing regime which permits companies, incorporated in dodgy offshore tax havens, to make a huge pot of gold for only the price of a glossy IPO brochure.
Even if directors get caught out for faking their sales figures and accounts they receive only a slap on their wrists and are, at worst, told by courts to hand the money back........ This rarely happens because the money has already fled.
whymak
Mr. Holland, by addressing the competitiveness issue outside the entire context of welfare economics, you have unnecessarily aroused the dark passions of both pro and hate China crowds.
First, change in real exchange rate is defined by combining the ratio of price level change (after adjusting for purchasing power parity) to nominal exchange rate change. How could you talk about competitiveness without bringing in total factor productivity growth when you compare Hong Kong to Shanghai and other Chinese cities? I know for a fact those numbers are not easily available.
The most damning in your piece is encouraging readers to think that competitiveness is an end in itself. Everyone knows about the imbalances in China's economy. The real exchange rate increase of yuan will actually help to redress such imbalances. One immediate result is the shift to consumption from excessive infrastructure building and investments. So will higher wages.
While wage improvement pulls down China's competitiveness in the short run, it encourages more China's industries move to a high level on the value chain and to brand building. As Hong Kong manufacturers in Pearl River Delta found out long ago, survival threats will separate the men from the boys.
You misinterpret the Chinese aphorism, 逆水行舟不進則退. It is an exhortation I heard constantly from my father in childhood. You make it sound as if it's an insult to Hong Kong banana morons who totally lack self-esteem.
xiaoblueleaf
Sheer non-sense!!! HK's economy is closely linked to that of China whose currency and costs continue rising while its currency is pegged to the US Dollar which tends to continue its weakening such that HK continues to be under inflationary pressure of rising costs in everything from rental, material to labour while there has been little or no innovation. So where is the competitiveness??? Ask any businessmen; especially those in SMEs.
dunndavid
Hong Kong is certainly not competitive in many things, they have moved on from such as manufacturing as shipping services. Rather than try to bail out these industries they have moved on to other more productive pursuits. With China's emergence Hong Kong can do well with an economy supporting China. After all, Hong Kong has to only create good productive jobs to support its small population of 7 Million or so to be quite successful. It's not always so easy to say for sure what countries are losing in competitiveness, but the following seem pretty clear: Argentina, Venezuela and Southern Europe, to allege uncompetitiveness on many more countries than these is conjectural.
yeemayee
terrible article not even worth commenting on. Hong Kong is less and less competitive and people like Tom live in a dream world. If it was not for China we would be in more trouble. In Singapore they are more diversified and are not depending on the mainland hands out. We should be thank full of our advantages being part of China and the infrastructure, law of the land, education that we had a significant head start from our competitors. However, we are now unfortunately not realizing our opportunities and advantages. When was the last time the government did anything that was positive, the strike is another example where some direction and intervention from the government would be appreciated.
JC
another absolute piece of thrash from HongKongphile Tom. Without mainland China. HK would have been toast by now. Down on its knees with SARs, the mainland opened the tap for a flood of tourists to boost HK's shopping and tourism profile, precipating the likes of Prada and Coach to list on the HKse to boost their own profile.Exactly the same for the financial markets. Would HK be the world's biggest IPO centre for three years without the blockbuster IPOs from the mainland? Even when it comes to comparison, Tom chooses to be selective. He compares the strong Singdollar, yet fails to recognise that even with the strong Singdollar, Singapore is still way more competitive than HK, according to the WEF - ranging between 1-3 position overall. How diverse is the HK financial markets compared to Singapore's? Constantly harping on one main activity, and that is IPOs. Or as yuan hub, which in case Tom has forgotten, was given a 3-year headstart over Taiwan, Singapore and the rest. Does Tom know how much capital Singapore has raised for international corporations via debt offerings? How diverse is the HK economy compared to Singapore's? How diverse is HK's tax evenue base compared to Singapore? Dream on I say. Delude yourself even more. As I've said before, without the mainland's special favours for HK, HK would be toast by now. Simple as that .. hence the so-called commies have every right to comment on their spoilt brat wasting away resources and opportunities.
SpeakFreely
iPo of non local companies would not be take in the same level of economy as IPO local companies. Hk stocks are mostly mainland plus few European companies. Example Silicon Valley VC put in almost same amount of money into startups comparing to Hk IPO raised capital. Those money are pure money directly invested for jobs and technology.In comparison, HK startups raised almost zero ( i meant very very small) by comparison. Hk IpO mainly raising money for chinese and European companies, like parda, but those capitals are not injected directly to the Hk economy. We only benefits from the fees and trading commission.
twelve98
How does this get passed editors? Especially the last statement. You can disagree but to say someone doesn't know what he's talking about is downright disrespectful.
I tend to agree that HK is indeed losing its edge. As the dispute at the docks will highlight - why pay more when next door there is a cheaper option which is just as good. As someone who deals in the import export industry we are exporting more and more through China directly. So many foreign companies are dealing direct with china, where as previously they would go through HK....
Perhaps the writer of this article "doesn't know what he's talking about"
taihang
So based on a pegged exchange rate with a bombed out weak currency, and inflation figures that probably don't include the factor inputs important to a competitive financial services industry (office rent, for example), Hong Kong is still competitive. Great analysis.</P>
Hong Kong's FS industry (like that of most financial centres) is an import/export business. International talent is imported, services are exported. As with all undervalued currencies, the imbalance eventually shows up in local prices, in HK primarily the cost of property.
For a while, businesses enjoy an artifical competitive edge, and adjust accordingly, but then the costs catch up: office space, household accommodation and education costs for employees children, all eat into margins.
Whether the edge goes because you can no longer afford to import/retain international talent, or can no longer afford to keep all your operations in Hong Kong, or some other unforseen deterioration in margins or level of service, is not important: It will go, swept downstream or otherwise.
SpeakFreely
Not quite agree just citing IPO and exchange rate to support HK competitiveness. From your chart IPo has been falling substantially. Once RMB floated it will go further south for sure. Also IPo only accounts for a portion of local growth and most IPo are not from local companies. Our exchanged rate is tied to USD.
Rather if you look at the HS index stocks and take away the property index but mostly the export stocks such as Li & Fung, Esprit, Cathy Pacific alike that are export oriented, the price has been flat in the past 10 years. And in the past 10 years or maybe even 20 years, we have almost zero local IPO of substainable size except property related listing. Despite our universities are highly ranked in Asia and even worldwide, we have virtaually zero, zero, VC investing locally that's why we have almost zero local IPO on innovation related listings.

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