A Greater Hong Kong?

The pressure is on for more integration with mainland China

Walk into one of Vincent W.S. Chow's 38 Hong Kong jewelry stores, and you'll likely bump into a customer from across the border. Mainland Chinese visitors to Hong Kong now account for about half of the $600 million in sales at Chow Sang Sang Holdings International Ltd., the family-owned chain run by Chow, 58. But sales are slowing as the Chinese economy weakens and the novelty of visiting the former British colony starts to fade. So Chow has decided that if mainlanders won't come to him, he'll take his jewelry to them--by opening shops in China. "We can't restrict ourselves to Hong Kong," he says. "We must look northward."

More and more Hong Kong businesspeople are expressing the same sentiment. Hong Kong has long looked to the mainland for economic opportunities. But most of the investment over the last 20 years went into factories making goods for export to the U.S. and Europe. Meanwhile, the service sector was content to concentrate on Hong Kong itself, since Beijing regulations prevented them from making inroads into China. And because leaders on both sides worried about managing the 1997 return to Chinese rule, they didn't focus on increasing economic integration between the former British colony and the adjoining Pearl River Delta.

Now, with the handover safely completed, China joining the World Trade Organization, and Hong Kong stuck in a deflationary spiral, desperate businessmen and policymakers say Hong Kong can no longer afford to wait. As a result, Hong Kong is finally embracing integration. In recent months, the Hong Kong corporate establishment has ratcheted up the pressure on the government to make it easier to live, work, and invest in China.

COMPLAINTS. Serious barriers remain. While the border crossing between Hong Kong and Shenzhen is one of the world's busiest (chart), with about 230,000 people crossing per day, there is just one checkpoint for commuters--and it's open only 17 hours a day. People taking a bus to or from Shenzhen need to disembark twice when crossing the border. Few can drive, since only a tiny number have permission to take their cars to China. Truckers are allowed to drive across more freely, but also have only one checkpoint--and it too closes during the night. That can lead to waits of up to four hours to get across.

With complaints growing louder, the Hong Kong government is pushing a host of measures to alleviate the congestion and make integration easier. It's planning new transportation links, liberalizing tourism and immigration policies, and extending operating hours at the border--with the stated goal of starting round-the-clock checkpoints.

Chief Executive Tung Chee-hwa also has installed a new team of bureaucrats who seem more committed to speeding up integration. "What we've achieved over the last five months [has] exceeded the achievement in the previous four years," declares Chief Secretary Donald Tsang, Tung's No. 2. Combine Hong Kong's financial and transportation experience with Guangdong's manufacturing prowess and increasingly wealthy consumers, says Tsang, and you have "a very powerful economic area."

And that's exactly why the business community wants the government to move even faster. "We know there has to be a border," says Eden Y. Woon, director of the Hong Kong General Chamber of Commerce. "But we're tying one hand behind our backs by not doing more economic integration." Shanghai no longer needs Hong Kong as a gateway to the world, says Woon, and he worries the same will happen in Hong Kong's backyard, as factories across the border start using local ports rather than Hong Kong's more expensive facilities. "We're barely hanging on as a model for Guangdong," he says.

So, as the government moves cautiously, the private sector is becoming increasingly aggressive. With Beijing relaxing rules on outsiders doing business on the mainland, everyone from Hong Kong retailers to financial-services companies to developers are plotting new beachheads in China. Even stodgy Swire Pacific, an old British conglomerate that was long skittish about the lack of legal protection in the mainland, is taking the plunge. With opportunities limited in Hong Kong, Swire expects to sign a deal next month to develop a glitzy $500 million retail and commercial complex in Guangzhou in a joint venture with a mainland partner.

ACCOMMODATIONS. Others are keen to turn Guangdong into a bedroom community. The semi-official Hong Kong Housing Society, for example, recently proposed building homes across the border for commuters. That could help bring down Hong Kongers' housing costs, which remain high despite 36 straight months of deflation. "If we can accommodate our working-class people in Shenzhen, they may be able to work in Hong Kong for one-third to one-half of what they [now make] without adjusting down their living standard," says S.C. Liu, managing director of Pearl River-Hang Cheung Real Estate Consultants Ltd., a Guangzhou company specializing in property in Guangdong. "We must utilize affordable land in China."

At the same time, the government has earmarked billions of dollars for new infrastructure projects that will make commuting a real possibility. One new train will be an express from the border to the financial district. Currently, riders must use a combination of commuter rail and subway, involving two transfers. Hong Kong officials also are working with their Chinese counterparts to make better use of airports, ports, and other regional infrastructure. Early this year, the government-run Airport Authority opened a marine cargo terminal to link Hong Kong's international airport with 20 ports in the Pearl River Delta. And the Tung government has pledged Hong Kong's help to troubled mainland projects such as a vastly underused airport in Zhuhai, bordering Macao.

While the Pearl River Delta remains Hong Kong's primary focus, the city's businesspeople aren't ignoring the rest of China. The Shui On Group has renovated a historic part of Shanghai and aims to seize opportunities presented by the WTO, says Vincent Lo, the group's chairman. "I'm going to be speeding up on all cylinders," he boasts.

Inevitably, integration will bring pain--which explains government's caution. Retailers, already caught in a downdraft, will suffer as more Hong Kongers cross the border to shop. And homeowners who bought during the 1990s real estate bubble will see the value of their investments fall further as Hong Kong residents move to Shenzhen. Moreover, the Tung administration worries it will be accused of undermining the "one country, two systems" formula laid out for Hong Kong. Chief Secretary Tsang doesn't even like to use the word "integration," preferring to talk instead of "building synergies." Call it what you will, it is clearer than ever that the future of Hong Kong lies with the motherland.

By Bruce Einhorn, with Mark L. Clifford, in Hong Kong

— With assistance by Mark L Clifford

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