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.