China economy

Will China’s free-trade port plan pose a threat to Hong Kong?

Competition between ports is becoming more visible as Beijing goes all out to lure trade and investment

PUBLISHED : Friday, 27 October, 2017, 9:24pm
UPDATED : Friday, 27 October, 2017, 11:07pm

China is working to create a series of free-trade ports along its coast led by Shanghai, a move that could potentially undermine Hong Kong’s position as a link between China and the rest of the world, analysts said.

In his speech to the party congress last week, Chinese President Xi Jinping said the country “will give more autonomy to the free-trade pilot zones to explore ways of building up free-trade ports”.

The commerce ministry meanwhile said on Thursday that it was working with the Shanghai government to design a free-trade port of “the highest international standard” and to implement “higher standards of regulation on trade”.

China is at the early stage of drafting rules that are consistent with international practice in finance, foreign exchange, investment and personnel, ministry spokesman Gao Feng said.

Zhu Min, deputy director of the Shanghai Development and Reform Commission, told a forum in September that the free-trade port aimed to better integrate manufacturing with trade.

“Our policies to facilitate trade should be deepened so that we end up with cutting-edge products,” he said.

While the details are yet to emerge, China has made clear it wants to attract more trade and investment, as well as technology and financial resources, to these ports, and it is ready to scrap the old rules to do so. Last week, Tesla reportedly reached a deal with the Shanghai government to set up a wholly owned factory in the city’s free-trade zone – a break with the practice that foreign investors can only set up operations through joint ventures.

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Competition between mainland ports and Hong Kong has become more visible in the past decade, since Hong Kong lost its status as the world’s No 1 container port in 2005 – that title is now held by Shanghai. Container turnover in Shanghai last year was 87 per cent higher than in Hong Kong. The ports of Ningbo and Shenzhen also handled more containers than Hong Kong did last year.

And if the government grants more freedom to the ports in Shanghai, Zhejiang and Guangdong, they could threaten Hong Kong’s traditional role as the entry point to the Chinese market. According to the Hong Kong government, around 40 per cent of China’s foreign trade goes through the city.

“It [the proposed free-trade port] could change the flow of cargo from one place to another,” said Huo Jianguo, deputy director of the China Society for WTO Studies, which is affiliated with the ministry. “But the idea of a free-trade port is about opening up service.”

Beijing has allowed foreign-flagged vessels to move cargo between some mainland ports, and a further relaxation could alone knock out 14 per cent of Hong Kong’s annual container throughput, Hong Kong-based Hang Seng Management College said in a report published last year.

“Mainland China’s cabotage relaxation is weakening Hong Kong’s status as a key transshipment hub in the region, and creating uncertainty for the local jobs market and economy,” Lawrence Leung, dean of the college’s decision sciences school, warned.

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William So, managing director of Hong Kong-based logistics company Risetech Shipping International, said container services in Hong Kong were already seeing a downward trend. But he added that free-trade ports in Shanghai and Hong Kong should not be mutually exclusive.

“Shanghai’s free-trade port mainly serves the Yangtze River Delta, while Hong Kong serves the Pearl River Delta,” So said.

Even if the mainland’s new free-trade ports can overtake Hong Kong, the process will be long and gradual. Mainland China’s closed capital account, the lack of rule of law and a shortage of professional intermediaries will also hold back cities such as Shanghai. Although its free-trade zone has been in place for four years, its transformation into an international finance and information hub has yet to happen.

Bai Ming, deputy director of the ministry’s think tank Chinese Academy of International Trade and Economic Cooperation, told the 21st Century Business Herald that the process of opening up would take time and involve systemic changes.

“Ports in mainland China have expanded fast in recent years, and their throughputs and infrastructure are no smaller than Singapore and Hong Kong’s,” Bai was quoted as saying. “But we still fall behind on management skills and systems, efficiency and international service.”

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Shen Jianguang, chief economist at Mizuho Securities Asia, said the development of ports along the coast would not necessarily pose a threat to Hong Kong.

“China is very large. More competition between these ports is healthy,” Shen said. “Shanghai can grow its finance and Zhejiang can grow its trade – but they don’t necessarily have to conflict with Hong Kong.”