Offshore Finance Profile: Hong Kong

DAVID ELDON
2005-04-14 08:23

Much has been said about Hong Kong, both prior and subsequent to its return to China in 1997.

At one end of the spectrum are the perpetually pessimistic. Think the gloomy medical
prognostications such as Fortune magazine's infamous "The Death of Hong Kong" cover to morbid
biology lessons.

It is said, for example, that if you drop a frog into a pot of boiling water, it will immediately
jump out. However, if you put a frog in a pot of cold water and slowly turn up the heat, it will
continue to paddle around blissfully. As the heat intensifies, the frog will eventually become part
of the broth.

Some pessimists equate Hong Kong to such a frog. And, they say, the temperature is slowly rising.

The other extreme, of course, are those who are overly optimistic, those who believe Hong Kong
should and will automatically benefit from Chinese mainland rapid economic expansion.

I am neither a raving pessimist, nor a naive optimist. Rather, I'm a realist. I want to draw your
attention to four realities related to Hong Kong:

Hong Kong is no longer the gateway into or out of Chinese mainland.

Earlier, I referred to Fortune's erroneous prediction that Hong Kong was destined to become a global
backwater. In the 10 years since making that bold, but misguided forecast, Fortune has made other
pessimistic statements about Hong Kong's future.

A few years ago, for example, Fortune used a cover story to pose the rhetorical question: "Who needs
Hong Kong?"

The existential pondering in the article was straightforward sort of. The premise being if Chinese
mainland is opening under the World Trade Organization (WTO), barriers for foreign companies must be
coming down, and Hong Kong's exclusive franchise will no longer be exclusive.

If Hong Kong's franchise is no longer exclusive, more foreign companies will set up their shops in
Shanghai, and nobody really will need Hong Kong as a gateway.

Let me deal with the two key assertions Hong Kong's decline and Shanghai's rise in reverse order.

Certainly, Shanghai is well placed geographically to gain considerable momentum from China's
continued economic expansion. Shanghai is rapidly building on its physical infrastructure, and it is
also becoming increasingly international.

However, Shanghai faces a number of challenges in its efforts to become an international financial
and business centre.

The city must increase the flow of unfiltered information that is so vital to financial
decision-making and the confidence of international markets.

It must adopt international codes of conduct, develop a full range of qualified people in critical
areas such as legal, finance, accounting, trading, regulatory and support services and maintain the
appropriate pace of reform to allow markets to develop while minimizing the side effects.

It must also overcome at least for the foreseeable future the lack of convertibility of China's
currency, the renminbi.

Personally, I do not believe there are many advantages in Shanghai attempting to try to duplicate
Hong Kong. And I do not think officials in Shanghai, or elsewhere in Chinese mainland, do either.

What I do believe is in the longer term, Hong Kong and Shanghai will continue to build on their
respective strengths.

Some suggest and I share the view Shanghai is destined to be more like the "Tokyo of China," mainly
dedicated to serving the country's massive domestic economy.

Hong Kong, on the other hand, will be more akin to London. It too will continue to play a key role
in the domestic economy, but it will also maintain its status as an international and offshore
financial centre.

As a result, the relationship between the two centres will be more about mutual co-operation and
less about direct competition. In fact, Hong Kong and Shanghai represent a natural pairing of
financial centres, which together can make considerable contributions to the further growth of
China.

Hong Kong has multiple personalities.

Hong Kong has been described as a "congested, crazy, wall-to-wall skyscraper piece of capitalistic
ingenuity;" a "midwife to an economy of 1.3 billion people;" a place where East meets West; and a
blend of old and new akin to a "spice rack."

But the adjectives don't end there, as Hong Kong means different things to different people.

To numerous companies from Chinese mainland, and those who lead them, Hong Kong will always be,
first and foremost, a place to raise capital. This is not surprising given the Hong Kong stock
market was ranked first in Asia and third in the world in terms of capital raised last year.

To many other Chinese mainland firms, Hong Kong is more much more than a prime fund-raising centre.
It is also a source of talented managers with international experience; a place where Chinese
mainland companies can access market intelligence and access other markets; and a "window to the
world" to use the words of one Chinese business person.

Meanwhile, to an ever-increasing number of multinational companies, Hong Kong is still seen as the
ideal base for their regional headquarters and offices. The city, at last count, was home to more
than 3,600 such headquarters and offices.

Overseas, Hong Kong is, of course, still seen as a leading international financial centre and
regional trade hub. At the end of last year, there were 208 authorized banks and 84 representative
offices operating in Hong Kong.

Hong Kong remains home to the world's busiest airport, in terms of international air cargo, as well
as the world's busiest container port.

To many companies in many other parts of Asia, Hong Kong is also seen as a troubleshooter. As one
Japanese business person noted a while back: "When I've got a problem in Chinese mainland, I send my
Hong Kong managers." To many international companies just entering the Chinese mainland market, Hong
Kong is the ultimate tour guide.

Hong Kong is changing and staying the same.

Most people in business and in government in Hong Kong recognize the city must change to survive. We
must find ways to attract investment. We must also strengthen economic synergies with the Pearl
River Delta, in particular, and all of China in general.

By this, I am referring to enhancing transportation and other links to ensure the smooth flow of
goods and services, products and people, and, of course, capital.

The signing of the Closer Economic Partnership Arrangement (CEPA) is a case in point. The two phases
of CEPA grant tariff-free treatment on some 1,100 products.

In addition to opening doors for certain products, CEPA also provides a two-way street for business.
Hong Kong companies can promote their businesses in the Chinese mainland easier. Mainland companies
can identify suitable business partners in Hong Kong faster.

The latter, of course, makes it easier for Chinese mainland companies to expand their business
networks into overseas markets.

As for the other side of this third and paradoxical reality, Hong Kong also recognizes it has
certain strengths that must not change.

Those strengths include a strong, transparent and well-regulated financial system, a well-developed
transportation and telecommunications infrastructure, the rule of law, the free flow of trade,
capital and information, a level playing field for all companies, and low and predictable taxes.

Hong Kong is not just another Chinese city, nor is it about to become one.

Recently, a visitor to Hong Kong described the city as being "Chinese, but not very Chinese." This
is, as others observed, a welcomed, albeit somewhat backhanded, compliment.

After all, one of the things that make Hong Kong attractive is Westerners see it as having many
Chinese characteristics. Meanwhile, many Chinese find Hong Kong to be quite Western.

The author is chairman of The Hongkong and Shanghai Banking Corporation Ltd. The article is an
abbreviation of his speech delivered at a recent luncheon held by the Hong Kong Chamber of Commerce
in China.

(China Daily 04/13/2005 page18)
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