Hong Kong's Identity Crisis

Ten years after returning to Chinese rule, the former British colony is still grappling with issues of integration and direction

At the time, I was very afraid. People kept telling me that as soon as the People's Liberation Army entered the city, they would arrest the counter-revolutionaries. Someone said 3,000 arrests; someone else said 400; still someone else said 100 plus... I was thinking: even if only 20 or 30 people are arrested, I must be on that list."

As Apple Daily proprietor and democracy advocate Jimmy Lai goes on to say in an article published in May, 10 years after the return of Chinese sovereignty to Hong Kong, things have not turned out as badly as he and others feared.

China's first special administrative region (SAR) remains virtually the only place that has all the trappings of democracy - rule of law, freedom of speech, association and religion, a wealthy and educated population - without democracy itself. The economy has ridden out two slumps and one epidemic. Taxes are still low and governance levels high.

"We were always very confident that the transfer of sovereignty would not change the fact that Hong Kong is a great place to do business," said Christopher Pratt, chairman of both Hong Kong-based conglomerate Swire Pacific and Cathay Pacific Airways.

Hong Kong's total trade in goods has risen 85% from US$355.4 billion in 1998 to US$658.5 billion in 2006. Trade in services has doubled from US$54.5 billion to US$108.3 billion over the same period.

BILATERAL STORYMuch of this growth can be put down to increased economic interaction with the mainland. Hong Kong's trade in goods with the mainland increased from US$45.5 billion - 12.8% of the total - in 1998 to US$228.8 billion - 34.7% of the total - in 2006. For services, it went from US$14.9 billion (27.%) in 1998 to US$32.1 billion (29.6%) in 2006.

These figures illustrate the latter years of Hong Kong's economic ties with the mainland. The story started in the 1950s as low-skilled Chinese workers fleeing communism ended up in factories operated by Hong Kong's expatriate entrepreneurs. The opening up of the mainland at the end of the 1970s granted these manufacturers access to a larger and even cheaper labor pool and production moved inland. Hong Kong was left as the management and financial base.

There are now thought to be 60,000 Hong Kong-owned businesses in the Pearl River Delta (PRD), with 11 million people on the payroll.

Hong Kong imports cheap goods from the mainland for domestic consumption or resale, while the jump in services trade is down to management and financial activity related to this mainland business. Customers can be local operators or foreign firms using Hong Kong as their access point to China or Asia.

On the one hand, this growing dependence on China and China-related business places Hong Kong in a precarious position: any downturn in mainland growth - especially external trade growth - and Hong Kong would be hit hard.

But at the same time, the SAR is able to exploit cross-boundary ties to grab the lion's share of China's international business. Hong Kong's robust financial services sector has been boosted by multibillion dollar listings by mainland companies.

Over the next year or so, it can expect to increasingly serve as a conduit for mainland capital outflows, be it equity investments or overseas acquisitions.

"The next 10-15 years will be about money going from China to the rest of the world," said Tai Hui, a Hong Kong-based economist with Standard Chartered Bank. "Apart from the big state-owned enterprises, companies don't have a huge amount of overseas experience. They can also use Hong Kong as a springboard."

Yet the fact that mainland companies are now strong enough to look beyond their borders represents a challenge as well as an opportunity for Hong Kong. These enterprises represent a competitive challenge to the SAR's established players. Already, there are areas where pressure is being felt, notably in shipping where the rise of the lower cost Shenzhen ports appears unstoppable.

First quarter figures show that Shanghai port has already overtaken Hong Kong, processing 5.8 million 20-foot equivalent units (TEU) of container traffic to its rival's 5.5 million TEU.

It is feared that similar patterns may emerge in civil aviation.

Furthermore, the numbers suggest that the mainland is becoming less dependent on Hong Kong from a trade and investment perspective. The SAR's share of total mainland trade is slipping rapidly while, having accounted for 45.5% of the US$45.4 billion that entered China as foreign direct investment (FDI) in 1997, Hong Kong's proportion last year was 27.5% of US$69.5 billion.

"The value of Hong Kong to the international community is that Hong Kong is part of China and is able to take full advantage of its position in China," said Professor Anthony Cheung, who serves as a non-official member of the Executive Council.

To do this, the Hong Kong of the next 10 years has to reassess where it fits into the China story. Preserving its business-friendly qualities must fall into closer integration with the mainland and maintaining a global profile.

However, if Hong Kong is to position itself as a global city in China, then it must play an active role in China's development. Beijing, Tianjin and Shanghai, the key cities in the economic heartlands of the Bohai Rim area and Yangtze River Delta, are individually represented at Politburo level. Hong Kong, which is a focal point for the Pearl River Delta along with Guangdong and Shenzhen, is not.

"When the Basic Law was being drafted, the tycoons on the committee took this very seriously - they said we must ensure the chief executive is given a very high rank or he will have no bargaining power," said veteran Democratic Party legislative councilor Martin Lee.

"Because we are a SAR, we answer directly to Beijing. That is bad."

SLOW OFF THE BLOCKSIt is quite possible that this lack of specific political direction - as well as Hong Kong's then hands-off style of government - was responsible for the stuttering start to post-1997 mainland ties.

Considerable efforts have been made at cooperation in the past few years, culminating in the inclusion of Hong Kong in China's 11th Five-Year Plan in 2006. This in turn spawned an economic summit which included four focus groups - trade and business, financial services, logistics and infrastructure, and IT and tourism - tasked with exploring ways of boosting the territory's competitiveness.

According to research by Dr Peter Cheung, head of the politics and public administration department at the University of Hong Kong, little was achieved at the government level in the early years in terms of fostering cross-boundary ties. China's provinces, particularly those in the south, were keen to do business with Hong Kong but progress was held back by the perceived constraints of the "one country, two systems" model.

Hong Kong SAR didn't have an official representative on the mainland until an office was opened in Beijing in 1999. An economic and trade bureau followed three years later in Guangzhou and it wasn't until 2006 that mainland affairs liaison office was set up in Hong Kong.

In the latter years, the Hong Kong-Guangdong Cooperation Joint Conference - a forum for top level dialogue - has widened its scope; the Greater PRD Business Council has been set up as a dedicated investment promotion agency in InvestHK; and Hong Kong participates in the Pan PRD Cooperation Forum along with Macau and nine southern China provinces.

There is also the Closer Economic Partnership Agreement (CEPA), which started in 2004 and has seen tariffs removed from almost all manufactured products of Hong Kong origin. Other measures include preferential access for local firms to a China's service sectors.

Hong Kong has opened the door wider to mainland Chinese visitors - up from 2.3 million in 1997 to 13.7 million in 2006 - and started running 24-hour boundary checkpoints. Express rail links with Shenzhen and Guangzhou are planned as is a bridge connecting Hong Kong, Zhuhai and Macau.

PARADISE LOSTHowever, Cheung fears that, as far as seizing the PRD initiative is concerned, these efforts may be too late.

"If you look at Hong Kong's role as a hub for services, it faces a lot of competition, a lot of challenges," he said. "Guangdong expected Hong Kong to play a much larger role in upgrading the infrastructure but it hasn't really done this. It has not sustained its previous dominant role."

Guangdong proposed a package of cooperation deals in 1998 and Shenzhen wanted to collaborate on high-tech development in the mid-1990s. The overtures were not met with enthusiasm in Hong Kong. With Guangdong's GDP already greater than Hong Kong's on the back of a decade of 10% growth, provincial leaders have set their sights high.

"In the long run [Guangzhou and Shenzhen] will be much bigger and reliance on Hong Kong investment will fall," said Cheung. "Hong Kong offers a lot but its relative significance has declined."

Hong Kong's wealth, superior services and financial strength are not going to disappear any time soon. But the extent to which this wealth may grow in the future is largely dependent on how successfully it integrates with its neighbors and adapts to the changing role of China.

It remains to be seen what will happen to the plan drawn up for the PRD in 2003. It envisages a division of labor between Guangdong and Hong Kong - the low-skilled, low-wage workers naturally gravitating to the manufacturing centers of the PRD while Hong Kong provides a home for high-end services.

The obstacles stretch beyond convincing less-skilled Hong Kong residents to turn their backs on health and welfare systems - not to mention social freedoms - and pursue a future on the mainland.

"Both sides would say that there are benefits to be gained here," said Anthony Cheung. "It hinges on how you interpret the importance of the boundary. How do you retain sufficient control to show that Hong Kong is a separate system?"

"It's very much an ideal situation and it will take a long time to get there," added Hui. "But resolving the issues requires government coordination."

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