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  • Apr 21, 2014
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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

BIO

As the writer of the South China Morning Post’s Monitor column, Tom Holland attempts each day to make sense of the latest developments in business, finance and economic affairs in Hong Kong and mainland China.
 

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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SpeakFreely
Not quite Tom. IPO only accounts for a small % of the overall GDP and even you look at the chart HK IPO has fallen sustantially from previous years. As RMb is moving toward free float and China determination to make sH as financial hub, the trend for Hk IPO will definely go south in the future.
Effective currency of Hk kept falling is because we are tied to USD. By your argument US is by far more competitive?
I don't quite agree with the communist cadre view, but Hk should not be complacent about what we have. Please take a look we don't even have a sizeable local IPo of local companies in the past 10 years? All blue chips are from Stone Age. There is virtually no VC investing in HK. Why? Because we have no innovation. Hk is overrated by many standards. Yes we can easily open a biz in Hk in few days but how can you grow the biz with rising rent and labor costs? HK unvisitites ranked high and highest in Asia but please tell me how many home grown IPo that are major in the past 10 years? If these universities are truly worth the rankings, there must be a big gap between biz and education as we see this is how Silicon Valley and Boston fueled by good schools in hi tech and medical.
Many still agrue our great legal system still ahead of china. Right. But investors are not just looking at legal and risk. Investors has been pouring money in china despite the worrying legal system. Therefore HK trying to use that as an edge is too complacent.
HK-Explorer
Why ignore the warning? Why not follow up on it an look at ways to improve competitiveness of Hong Kong?
Port industry is disappearing. this is a large part of HK and of peoples livelihoods. We need to look for another area.
If we keep on saying "well that is a sunset industry" but elsewhere we are good. then eventually everything we are good at will be sunset.
Lets not just blindly downplay mainland officials without looking at weather it has some truth to it.
johnrai7
Beijing should know HK ppl. are more sensitive about the freedom and rights, for us the economic and development is business as usual, so these dummies should less interfere in HK and focus about their own problems, coz I see China's FDI and GDP is not as expected.
wwong888
tom, good piece, although i would argue you are elevating zhang's jibberish by taking the time to respond... i think "f-ck off commie trash" would have been sufficient
XYZ
Zhang is just another Communist thug who can't keep his mouth off Hong Kong.
CatInAFlap
Nice one Tom. Your pay-off line is pure class. Decrepit state capitalist/communist apparatchik speak with forked tongue.

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