Winning role required in economic numbers game

The value of Hong Kong to China goes beyond statistics because they fail to explain its true worth, analysts say

PUBLISHED : Tuesday, 27 June, 2017, 8:00am
UPDATED : Tuesday, 27 June, 2017, 8:00am

In just 20 years since their reunion, the change in the relative economic sizes of Hong Kong and the mainland has been so dramatic that many have questioned the value of Asia’s most dynamic financial and business hub to the motherland. Thanks to phenomenal mainland growth, Hong Kong’s share of Mainland China’s gross domestic product has plunged, from 16 per cent in 1997 to about 3 per cent now.

Last year, our per capita income reached US$43,368, up nearly 82 per cent from US$23,838 per cent in 1997, while that of the mainland was US$8,260, a leap of more than 750 per cent from US$972, during the same period. In other words, the comparative wealth of Hongkongers and their mainland cousins was drastically reduced. The change underlines the declining role of the city and its lesser importance to mainland economic development.

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Tim Condon, chief economist and head of research with ING Asia, says the pendulum has swung back and forth in relations with the mainland since the handover.

However Steve Tsang, director of the SOAS China Institute at the University of London, went further, saying Hong Kong was indispensable to China in the 1990s but not any more, with the size of the mainland economy and its standing in the world now fundamentally different.

Before the handover, the city played a crucial role in the reform and openness policy of late paramount leader, Deng Xiaoping.

The policy featured special economic zones, such as Shenzhen, to attract Hong Kong investors. “It is fair to say that without Hong Kong, Shenzhen would probably not have been as successful,” economist Professor Lawrence Lau Juen-yee at Chinese University says.

After the introduction of the openness policy, Hong Kong played a significant role as a bridge between Mainland China and the outside world, conveying trade and investment flows both ways, particularly before Beijing joined the World Trade Organisation in 2001.

Re-exports, the city’s main business with the mainland, grew from HK$182.8 billion in 1987 to a peak of HK$1.24 trillion in 1997. They accounted for 68 per cent of the city’s foreign trade in 1991, rising to 77 per cent six years later.

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Lau, a former CUHK vice chancellor, says Hong Kong showed particular strength then through its volumes of imports and exports, which exceeded those of the mainland and reflected its role as its most important trading centre.

Hong Kong also mostly topped the list for foreign direct investment (FDI) in China, accounting for more than half of what the country received. Massive investment put the city and the mainland on the map for the leading origins and destinations of FDI. China was second only to the United States for FDI in 1993, and by 1996 56.8 per cent of the ­US$175 billion received by the mainland came from Hong Kong. The investment community hailed cross-border cooperation as an outstanding example of globalisation.

Before the handover, politics had only a limited affect on interaction between the two economies despite the aftershocks of the 1989 Tiananmen Square crackdown and democratic reforms of the city’s last governor, Chris Patten.

Beijing continued to treat the city as its most important partner when it came to both reform and openness, and gave its full support to closer economic integration. As a result, Hong Kong investment in the Pearl River Delta nurtured the first generation of mainland entrepreneurs.

Soon to follow were cultural influences, with Canto-pop singers and movie stars winning legions of mainland fans.

But after 1997, the city’s importance declined dramatically in the wake of China’s rapid economic expansion, which saw its gross domestic product soar by nearly 13 times from US$965 billion in 1997 to US$12.4 trillion last year. In 2010 China overtook Japan as the world’s second largest economy. And since then many have asked who needs who the most: Hong Kong or China?

It cannot be doubted that Beijing played a significant role in helping Hong Kong overcome its two post-handover shocks, the Asian financial crisis of 1997 and 1998, and the deadly Sars outbreak in 2003. Help came in the form of the Individual Visit Scheme, which allowed more cash-rich mainlanders into the city, and the signing of the Mainland and Hong Kong Closer Economic Partnership Arrangement (Cepa).

“In 1997 Hong Kong could fashion itself as a rich big brother. A few years later Hong Kong people were grateful to Beijing for having thrown a lifeline – the Cepa – that helped rescue the economy at the deepest point of the Asian financial crisis and Sars downturn,” Condon says.

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Some analysts say Hong Kong still plays a significant role for the mainland. For instance, between 1979 and last year, it was behind 386,464 projects totalling US$913.7 billion, accounting for up to 51.8 per cent of overall foreign investment, according to official statistics.

Hong Kong continues to lead the world in investing in China. Last year, city enterprises backed 12,753 investment projects with utilised capital of US$81.5 billion. It also plays a crucial role for mainland firms raising funds elsewhere.

Hong Kong topped the world in the rankings for initial public offerings from 2009 to 2011 and in 2015, largely due to those by mainland firms. By the end of last year, the total market capitalisation of mainland firms, which comprise state-owned H-share companies, red chips and private enterprises, was HK$15.52 trillion, 63 per cent of the exchange’s total market value.

Despite its declining significance to the national economy, analysts say the value of Hong Kong to China goes beyond numbers because statistics fail to capture its unique role in connecting the mainland to the rest of the world.

The most important banking and financial centre in the Asia-Pacific region provides an invaluable platform from which foreign capital, both financial and human, may enter the mainland. It also offers the accounting, legal and other services that enable Chinese enterprises to invest overseas.

For Beijing policymakers, the city remains invaluable because its status as the country’s only internationally recognised trade and financial hub is unlikely to change for the foreseeable future. For international investors, Hong Kong can continue to fulfil its function as a bridge to the vast mainland market with its distinct advantage of “being part of China but different from China”, a quality upon which the confidence of foreign investors depends.

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In his recent book, The Role of Hong Kong in the Development of the Nation: Past, Present and Future, Lau listed several advantages the city still enjoyed over the mainland, such as an environment hospitable to entrepreneurs and potential entrepreneurs; the favourable commercial reputation of Hong Kong and its firms; academic freedom, freedom of speech and real-time full access to information everywhere; a well-educated and experienced professional labour force; and world-class, research-oriented universities.

In the face of growing trade protectionism and opposition to globalisation, the status of Hong Kong as the only international financial and trade hub in the country to have fully integrated into the global market will be further reinforced. This role will take on a deeper relevance amid any escalating trade disputes between Beijing and its main trading partners.

The city’s unique position under the “one country, two systems” formula has given foreign investors and entrepreneurs a sense of comfort and safety.

Currently, almost half of all FDI on the mainland comes through Hong Kong, with many investors basing themselves in the city. Conversely, about 60 per cent of mainland outbound investment is made through here.

Analysts believe Hong Kong can also play a crucial role in two critical areas of mainland development.

First, it can help promote the internationalisation of the Chinese currency, the yuan, having already developed into a world-leading hub of the offshore renminbi business.

Second, it can play a leading role in the “Belt and Road Initiative”, Beijing’s global trade development strategy.

Outgoing Chief Executive Leung Chun-ying has described the city as “a super-connector” under the initiative.

Symbolising increasing connectivity is the construction of a high-speed rail route linking the city with Shenzhen and Guangzhou. A bridge is also being built from the city to Macau and Zhuhai.

However, some experts believe the risk of further political disagreements under the “one country, two systems” formula may result in China giving its cities more important roles to play as it continues to open up.

Alicia Garcia Herrero, chief Asia and Pacific economist with Natixis, says Hong Kong must continue to find its niche within China. That niche so far has been arbitrage, the buying and selling of securities, currencies, or commodities, which may continue if the country does not open up any further.

“However, if it does, I wonder what kind of Plan B the city has for its comparative advantage,” she muses.