The curious thing about South Korean business activity in Hong Kong is that despite thriving trade, the number of Korean nationals residing in the SAR has fallen since the onset of the Asian financial crisis in 1997. In the past five years, the Korean expatriate population has dwindled in size from more than 10,000 to 5,700. But trade has recovered to US$9.5 billion, placing economic activity on a par with pre-crisis levels. The explanation is that Korean businessmen, weary of Hong Kong's high living costs, are bypassing the SAR and doing deals directly in the mainland. Lee Ho-cheol, chairman of the Korean Chamber of Commerce and a Hong Kong resident for more than 20 years, says a new generation of Korean entrepreneurs, weaned on the hard lessons of the financial crisis, are tackling the Chinese consumer head-on. 'Businessmen are mostly doing business with the mainland,' Mr Lee says. 'Before, there were many obstacles to doing business on the mainland, such as poor banking and communications services. But now it is a different story. China has very good infrastructure, the Chinese speak good English, and they have a good business mind.' Many Korean businesses that have pulled out of Hong Kong have opened offices in mainland cities, where they enjoy a cheaper operating environment. Others have retained offices in the SAR but with a trimmed staff, while shifting central operations to mainland cities. Mr Lee says it is no secret that dozens of formerly Hong Kong-based firms have moved their head offices to nearby Shenzhen and Dongguan but continue to remain members of the 250-strong Korean Chamber of Commerce in Hong Kong. There are about 700 Korean companies in Hong Kong, ranging from large trading firms to small grocery stores and travel agencies. Despite the shrinking Korean expatriate community, overall trade between South Korea and the SAR is increasing. The Korean economy grew by 6 per cent in the first half this year, mainly because of robust domestic demand. 'The business relationship between South Korea and Hong Kong is much bigger now than it was because of economic development on the mainland,' Mr Lee says. However, the global economic slowdown took its toll last year. Exports of goods and services from South Korea to Hong Kong plunged 11.7 per cent last year, down to US$9.5 billion, and exports from Hong Kong to South Korea for the same period fell by 2.6 per cent, at US$1.2 billion. Overall, the Korean economy grew by 6 per cent in the first half of this year, mainly due to strong growth in domestic consumption. Mr Lee expects a surge of Korean information technology exports to the mainland once supply overhangs are worked out of the system. A recovery in this sector is seen as vital. Despite China's growing manufacturing sophistication, Korean companies still have the edge in several areas. South Korea is ahead, but China, powered by large injections of foreign capital and technical expertise, is likely to close the gap within a few years. The threat is greatest in consumer electronics, where China is expected to snatch the lead in digital home appliances and telecommunications within five years. 'Generally speaking, mainland firms are competitive on price because of lower labour and production costs,' says Lee Jae-keol, consul for commerce, industry and energy at the Korean Consulate-General in Hong Kong. He says a step to fostering a better trade partnership starts in Hong Kong, where Korean firms are calling for faster customs clearance along the border. 'Unless there is a big improvement in the customs clearance system, companies will be compelled to move operations to China,' he says.