Can Hong Kong Maintain its Competitiveness?

June 8, 2007

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Whether Hong Kong will be able to maintain its competitive edge in the future is currently unclear. The key issue is how the government and society will face challenges, and how they will try to reduce factor costs and the cost of collaborations with government. The trading cost in Hong Kong is already fairly low, so as it gradually integrates with the mainland, Hong Kong must try to maintain the transparency of its political, social, legislative and administrative systems.

Through economic integration with South China and Shenzhen in particular, Hong Kong shows promise in decreasing factor costs, e.g. if people from Hong Kong choose to live in Shenzhen, their purchasing power will increase as much as three to five times. Under these circumstances, even if their incomes were cut to two thirds, the people in Hong Kong will still be able to maintain their present living standards. Hong Kong will also be attracting more business activity from both the mainland and other regions around the world once costs of labor and real estate begin to decrease. As a matter of fact, that is exactly what most Hong Kong people are doing, And it is probably the only way to enhance the overall competitiveness of Hong Kong and South China in the long run.

Many people are worried that integration will cause short-term shocks to Hong Kong’s real estate pricing and employment, and thus there will be an attempt to stop or withdraw the process of integrating Hong Kong and South China. Many believe that the slow integration will benefit Hong Kong people in the short term, which is impractical and an illusion. The price of real estate in Hong Kong depends more on the city’s future development in the long run rather than any short-term factors. New York, London, and Tokyo have no isolating borders with their neighboring cities, but their prices still run high as they are centers of large regions of global economic activity.

Thus, the challenge Hong Kong actually faces is how to help South China attract multi-national corporations (MNCs), such as Fortune Global 500 companies, and later itself grow into a region of large global economic activity. If it lacks industrial bases in South China and relies merely on the non-convertible currency and the lack of transparency of legislative systems in China, Hong Kong’s role as an international trade and financial center will be precarious. Once South China is integrated, MNCs will not likely move out in five to ten years, as some fear. On the contrary, the investment banks of Hong Kong even now are able to move easily to Shanghai within a few months, and already some of their bankers spend more time in Beijing or Shanghai than in Hong Kong. Just as New York, London, and Tokyo get along and develop with their suburbs, whether there is a border or not, Hong Kong and South China could be integrated and develop together.

The integration of Hong Kong and South China requires a number of elements: approval by Beijing, courage and wisdom from citizens of Hong Kong and from the Hong Kong SAR Government, and especially close cooperation with South China. The key points of this process are that Hong Kong should help South China reduce trading costs, and in return the region should help Hong Kong reduce its factor costs. The economic growth in China demands that there should be a big economic collaborative region, like the East China Region with the centre of Shanghai, in South China. Hong Kong could also play a leading role in the Pearl River Delta just as Shanghai does in the Yangtze River Delta.

Hong Kong will never lose its position as the most important regional economic body of China. The gross foreign trade (about half of which is re-exports) is equal to that of mainland. In the capital market, half of Hong Kong’s listed companies are located in mainland or overseas. With the exception of mainland China, Hong Kong has completely integrated with world economic bodies. On one hand, those “ahead of their time” advantages are the foundation of Hong Kong’s competitiveness; on the other hand, it shows the importance of rapid economic integration between Hong Kong and the mainland.

Some collaboration systems should be established both to promote development and economic integration in the Pearl River Delta, and to build this region, including Hong Kong, into a real regional economic body or urban economic region. The central government, the Hong Kong SAR Government, Shenzhen’s municipal government and the provincial government of Guangdong should make frequent and substantive contacts for regional economic development strategies and collaborations.

There is much good the market cannot do, as seen with Deng Xiaoping’s suggestion of establishing the Shenzhen Special Economic Zone, developing Putong in Shanghai, and the western development strategy, etc. Those government-guided, long-term, reasonable, and practical development projects, together with supporting policies and investments, provided the necessary directions and guidelines. If not for the Putong development project of Shanghai, and if not for the government-funded infrastructural construction, the investments from the non-governmental organizations would have substantially decreased. 

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