Hong Kong can benefit from changing mainland economy
Donna Kwok shows how the growing size and complexity of Hong Kong's economic links with the mainland can open up more opportunities for the SAR, provided risks are managed well
The economic relationship between Hong Kong and the mainland has advanced so much - and taken on so many new dimensions - that it's time to take another look at the way we assess the city's future.
While Hong Kong has long flourished as a gateway to China, what is changing is that the goods, services and currencies that move through this gateway in both directions have become more diverse, mobile and sophisticated. At the same time, the city is providing a controlled environment in which Beijing can test and fine-tune its plans to liberalise its own financial system.
All this will create a range of business opportunities, especially in finance, tourism, retail sales, trade and property. But, first, some numbers. We estimate that in less than three years, half of Hong Kong's economy will be supported by its links to mainland China, up from a third today. By 2020, as much as 70 per cent will be attributable to the mainland.
Tourist arrivals will also increase. For every mainland Chinese who visits Singapore or New York today, there are 20 or more who come to Hong Kong. In the first 11 months of 2012, 31 million mainlanders visited Hong Kong, up from 28 million in 2011. By 2015, we expect this number to rise to 50 million, generating spending of US$55 billion, equivalent to a third of the city's gross domestic product.
In the finance sector, Hong Kong is exceptionally well placed to benefit from China's financial reforms such as the internationalisation of the renminbi. The city has the world's largest offshore renminbi market thanks to a huge pool of renminbi liquidity in its banking system and financial market. This new market has created a whole new range of products (such as dim sum bonds), with Hong Kong dominating renminbi trade settlement flows and global offshore renminbi transactions.
A second area of opportunity lies in serving the growing needs of China's emerging middle class. This group is accumulating wealth fast and, at over 300 million and rising, is hungry for opportunities to diversify investments internationally, beyond the Hong Kong property market.
Meanwhile, mainland tourism is the hand that keeps on giving. Ever since the introduction of the individual visit scheme in 2003, Hong Kong has been the destination of choice for outbound mainland visitors. The numbers tell the story. Mainland Chinese accounted for 72 per cent of total visitors to Hong Kong in the first 11 months of 2012, up from 67 per cent in 2011 and 29 per cent in 2000. Globally, Hong Kong ranks 10th in international tourism receipts; in per capita terms, it ranks second.
Finally, Hong Kong's position as a prime Asian trading hub has always relied on China's status as a net exporter of goods to the West. But this is changing as the mainland imports ever more sophisticated products. As mainland incomes rise, Hong Kong's future as a trade hub lies in services, which is good news for the SAR's logistics service industry.
Mainland China accounts for over half of Hong Kong's merchandise exports but only around a quarter of its services exports. By 2020, the mainland is likely to account for three-quarters of both goods and services exports from Hong Kong. As the mainland becomes wealthier, demand for Hong Kong's expertise - everything from business logistics, wealth management and legal services, to marketing and urban planning - is set to boom.
Potential risks abound of course, including a disproportionate reliance on the mainland growth story, excessive strain on resources, and potential damage to Hong Kong's reputation. The Hong Kong public has already expressed concern about rising pressure on hospitals and schools, and the impact rising retail rents is having on small businesses.
Greater access means greater exposure, but that comes with the territory if Hong Kong is to gain a better understanding of how best to respond to a rapidly changing mainland market. In the long run, greater policy access to mainland China will remain more of an opportunity than a risk, provided the SAR government addresses any unexpected or unintended side effects of deepening economic integration, as well as other challenges such as a widening wealth gap and an ageing population.
If this relationship is to fulfil its potential, the benefits must be distributed more broadly. This means that Hong Kong must be more active in shaping the development of its links with the mainland. It must make more pre-emptive investments to prevent resource shortages and maintain a globally competitive workforce. Policymakers must also work closely with mainland authorities to set the best pace at which to deepen these links.
Hong Kong should not take its unique relationship with the mainland for granted, especially as the city's unparalleled market access to it is the envy of almost every economy, developed or developing.
As the SAR economy becomes ever more closely entwined with that of the mainland, it must ensure that it has the tools to stay relevant and the flexibility to meet Beijing's changing needs. A high level of innovation must be sustained in key service sectors and regulatory and tax systems will have to be continually adapted to maintain Hong Kong's first-mover advantage ahead of regional competitors.
This special relationship will last at least until the mainland establishes the same level of experience, pool of globally competitive talent and depth of market infrastructure that Hong Kong now possesses. That would appear to be some years away.
No city knows mainland China like Hong Kong, which has location, history, resilience and adaptability on its side. If it can keep adjusting to the changes in the mainland's increasingly complex economy, it will retain its role as an indispensable go-between.
Donna Kwok is HSBC's Greater China economist