• Tue
  • Dec 23, 2014
  • Updated: 2:20am

Study shows global connections crucial to Hong Kong's future

City will have to work doubly hard to maintain connections in China trade, says McKinsey

PUBLISHED : Thursday, 15 May, 2014, 1:43am
UPDATED : Thursday, 15 May, 2014, 4:22am

Hong Kong is Asia's most globally connected economy and its trade and finance linkages must be constantly reinforced if the city is to retain the pivotal role it has played in driving the mainland's integration into the international system, experts at McKinsey say.

A six-month study into the importance of connections to global economic activity by the McKinsey Global Institute shows that cross-border flows of goods, services and capital were worth US$25.9 trillion in 2012 and that while the mainland generated 20 per cent of that at a headline level, Hong Kong's role in facilitating it was vital.

"It is clearly very important for [mainland] China to be connected to Hong Kong," said Joe Ngai, a managing partner at McKinsey & Co. "Our study underscores Hong Kong's pivotal role in the global economy."

The MGI research team found that economies best plugged into flows saw a 40 per cent benefit to growth against those that were not.

The analysis of goods, services, finance, people and data flows covered 131 economies between 1995 and 2012 to build a "Connectedness Index" that derives an overall measure of the importance of key flows to economic activity.

Hong Kong is second only to Germany in that ranking. The United States was third, Singapore came in fourth and Britain ranked fifth. Mainland China took the 25th spot.

In pure goods flow terms, Hong Kong is the world's most connected economy and ranks third in terms of global financial flows - a combination of inbound and outbound foreign direct investment, equity and bond investments and cross-border lending and deposits.

Hong Kong's global significance as a generator of flows is even clearer when calculated on a per capita basis.

The city produces about 4 per cent of global financial flows with 0.1 per cent of the world's population. Mainland China has a share of about 10 per cent of financial flows, but it has 18 per cent of the world's population to generate them with.

It is clearer still in terms of the total value of flows generated in each economy. Hong Kong generates global economic flows of about US$180,000 per person, against US$4,000 on the mainland.

The implication is that without Hong Kong's reach into the global economy, the mainland's muscular bound on to the global economic stage since entering the World Trade Organisation in 2001 would have been much harder to achieve.

McKinsey's data - crunched from sources including the International Monetary Fund, the World Bank, the World Trade Organisation and reviewed by leading international economists, including Nobel laureate Michael Spence - also highlights the importance of the mainland's economic development to the city.

The mainland's share of total trade in the city rose to 57 per cent in 2012 from 40 per cent in 2001, during which time the value of Hong Kong's trade leapt 142 per cent to US$947 billion from US$391 billion.

"The flow to Hong Kong from China comes because Hong Kong is so connected to the rest of the world, and so maintaining those connections is clearly very important to Hong Kong's future," Ngai said, adding that to retain relevance, "Hong Kong will have to work doubly hard in future to maintain these connections."

The city will also have to consider how to exploit cross-border knowledge flows, an area Ngai says it has struggled with so far.

Knowledge-intensive goods trade is worth about US$12 trillion of the total US$25.9 trillion in flows MGI indentified, but is growing 1.3 times as fast than the labour-intensive goods trade that has driven economic activity in Hong Kong and the mainland.


For unlimited access to:

SCMP.com SCMP Tablet Edition SCMP Mobile Edition 10-year news archive



This article is now closed to comments

The idea that the government or the city should incur no internal or external debt, both now and in the future, is simple and naive.
With insufficent fund to undertake the useful infrastructure, educational and housing investments, and the like, we would have burdened our future generation much more than the higher future interest payments that otherwise would have been incurred.
The bond issuance also helps the city to further develop her bond market, which should be one main component of any global financial centre in the world.
In short, facing such low market interest rates worldwide, the Chinese and Hong Kong government simply can't afford NOT to borrow.
If the Hong Kong government only starts to borrow when her budget deficit problem becomes much more acute in the future, her credit rating will no longer be as high as it is now, and the interest rate demanded by the bond market will be much higher than it is right now.
Here the bonds issued is denominated in US dollar (unlike the RQFII schemes).
The borrowed US dollar can be converted back to yuan to repay the loans denominated in yuan.
If the borrowed amount is massive enough, the world’s interest rate will be bid up, while the local interest rate will be bid down, thereby reducing the interest differential and hence the pressure of yuan appreciation through hot-money carry-trade capital inflow into China.
It’s even better that the yuan devaluate massively first, and let it gradually revaluate, before the start of bond issuance in Hongkong --- the real debt in US dollar will be much lower when the long term bonds mature.
China now needs an excuse to devaluate the yuan massively --- perhaps through the dispute in the South China Sea.
Any potential capital flight out of China, because of the massive yuan devaluation, can be accommodated through the relaxation of RRR in the country.
The massive yuan devaluation may lure the factories located in Vietnam to go back to China.
This is one economic way to weaken Vietnam, instead of using military force.
According to the table shown in the following article, Hong Kong ranks relatively high on Goods, Services and Financial, but quite low on people:
United States: 1 ; Hong Kong: 14 ; Singapore: 18 .
From "Global Flows and Global Growth", Project Syndicate.
Hong Kong's human capital still has much room for improvement.
Russia is the first runner-up in the People ranking, only second to the United States.
It’s well known that Korea’s Samsung has made its recent fortune partly from Russia’s technology.
Similarly for China’s recent moon-going space missions.
I think, as a financial centre Hong Kong can benefit more from other countries, like Britain, the United States, and other financial centres.
In 2013, the total Federal Debt of the U.S. is 16.7 trillion, while the total Federal revenue is only 2.78 trillion, implying a ratio of 6 to 1.
People use the comparison to GDP (US GDP in 2013 is 16.8 trillion) partly as a way of making the debt look smaller and more manageable than it really is.
Problem is, they don't pay their government debt with GDP; they pay it with taxes.
The US interest cost is very low right now. If they rise, their interest costs can quickly consume over half of their tax income.
The White House expects to bring in only about 3 trillion dollars in taxes in 2014.
(From ****www.usgovernmentrevenue.com/fed_revenue_2013US)
If interest rates go back to where they were in the early 1980s, almost all of their taxes would go just to pay interest cost alone !
The country is increasingly vulnerable to rising inflation and hence rising interest rates, just like the homeowner who has an adjustable-rate mortgage.
(From ‘Aftershock’)
It goes without saying that the U.S. would strive to keep the interest rate from reaching too high a level as long as possible in the foreseeable future.
China should always bear this in mind, because, as was said by Sun Tzu,
“If you know neither the enemy nor yourself, you will succumb in every battle.
If you know yourself but not the enemy, for every victory gained you will also suffer a defeat.
If you know the enemy and know yourself, you can fight a hundred battles without disaster.”
No people in their right mind will claim that, without further money printing to inflate away most of their old debt, and without defaulting of the little remaining debt, the U.S. will ever be able to repay that total amount of debt.
Indeed there is no Repayment Plan for the National Debt whatsoever.
The credit card has no credit limit.
Borrow all the money they want, and they don’t need a repayment plan --- what a wonderful world !
I always suspect that only the phenomenon of money, the one and only thing under the sun, is able to refute the no-free-lunch postulate.
Can China do the same, I mean printing money, to solve her own debt problem ?
My feeling is that, don’t try it at home.
Like it or not, in the kingdom of the paralysed, a walking zombie is King (or Queen).
“I am still struggling to find a concrete case where the (Shanghai) FTZ has specifically helped one of our clients.”
This was said by one adviser to a foreign fund looking to bring money into China from abroad.
From 'Benefits of Shanghai free-trade zone still shrouded in mystery' by the Financial Times.
At such low interest rate, the debt market worldwide (except inside China) is screaming and begging us to borrow.
The Hong Kong government should also utilize the present low-interest-rate world environment, and her triple-A rating, to issue US-dollar-denominated debts to help finance her infrastructure investment to raise the city’s future competitiveness.
Imitating China’s local governments, the Hong Kong government can set up financing vehicles to raise the necessary funds through bond issuance, to evade the restriction of the Basic Law.
Whether Hong Kong’s finance officials have the guts to do so is anyone’s guess, but China should understand the city’s future budget deficit problems, which are partly caused by her ageing population.
Say 10-year loans can be issued.
Those infrastructure investments benefit Hong Kong’s future generation much more than the present generation, so the future generation should bear the responsibility of repaying the loans through higher taxes in the future, not higher taxes now which are to be borne by the present generation.
Indeed government debts are seldom repaid --- of course the government can choose to do so, but usually they are simply rolled over, and so future tax rates need not be greatly raised.
Years later, there may be no more linked exchange rate system in the city.
Hong Kong dollar should appreciate (quite massively) against the US dollar. This will reduce the government's real debts denominated in US dollar.
An ideal state for China is to let her low-tech labour-intensive industries located originally in the coastal areas to gradually move to the middle and western part of the country, while upgrading the coastal-area manufacturing industries and developing the service industries there at the same time.
Instead, what's happening is that many labour-intensive industries leave the country and settle in the South-East Asian countries and elsewhere, like Vietnam, to the detriment of China's middle and western provinces.
This relocation is partly caused by the rising yuan and the rising real wage rates in the country (with no commensurate growth in real labour productivity).
Without the strong backup of the manufacturing industries, the urbanization effort in the middle and western part is greatly hurt --- the average income level of the residents is not high enough to support the fast-rising property prices there.
And without getting rich first by earning money from the rich foreigners (through exporting the labour-intensive manufacturing products), developing the service industries there only means relatively poor people earning money from relatively poor people.
Hence, unlike those in the richer eastern regions, many government infrastructure projects in the middle and especially western part of the country are not self-liquidating --- the rate of return is most probably less than the high interest cost, leading potentially to much more future bad debts incurred by the banks.




SCMP.com Account