Hong Kong and China: The Future
Michael Enright knows a thing or two about the Pearl River Delta (PRD). He and Edith Scott published The Greater Pearl River Delta, a study of the region, in 2003. He has been a professor at Harvard Business School and is currently the Sun Hung Kai Professor of Business Administration at the University of Hong Kong. He is known for his optimistic view of the mainland's economic rise. CHINA ECONOMIC REVIEW spoke to him exclusively at the Australian Institute of Company Directors' annual conference in Shanghai.
What impact has the Closer Economic Partnership Agreement (CEPA) had on Hong Kong, nearly four years after it was first signed?
The effects vary by industry. Of course Hong Kong is not a major manufacturing center anymore, so there has been an impact there, but that's somewhat limited. There has been a greater impact in the service sector sector; things like logistics and transportation companies, and also on the financial sector.
Has CEPA had any intangible impact on business?
I think the biggest impact of CEPA has is on mindsets. It sends a very clear signal about the increasing integration of Hong Kong's economy with the Chinese mainland. It is a signal to business in Hong Kong to look for market opportunities in the mainland. It's also a signal to foreign companies that Hong Kong should be dealt with as part of the China strategy.
What about the charge that Hong Kong firms are doing well, but not Hong Kong as a whole?
The answer is undoubtedly no. If one looks over the last 10 years, since 1997, the growth rates in the Hong Kong economy have been strong. For a mature economy, that has gone through the Asian [financial] crisis, SARS, the aftermath of 9/11, the aftermath of the Asian tsunami, real growth in Hong Kong since 1997 has averaged a little over 4% and in the last five years has averaged 5% or 6%.
How have individual sectors been doing?
The financial sector has been booming in 2006. It was the leading equity capital raiser worldwide, and that's of course almost exclusively due to listings of mainland companies on the Hong Kong Stock Exchange. If you look at the professional service sectors, they're expanding rapidly, mostly either serving businesses in China or those interested in China. Also, increasingly, the sector is also serving mainland companies who are seeking international markets on their own. Hong Kong is a source of linkages to the global economy and also a source of expertise.
So most sectors have fared well?
In virtually every sector, there's been a strong positive impact, even areas where people raise concerns, [such as] whether Hong Kong will lose its port sector to Shenzhen. [In that sector], we've seen Hong Kong lose market share, but in the context of still healthy growth in volume. Even in a sector like that, what's happened is the high-end, managerial, financial, communication and coordination services have been growing rapidly in Hong Kong. From an economic standpoint, I think almost across the board, in terms of sectors and the economy as a whole, there is a clear benefit.
What is the downside?
Adjustment. There is a segment of the workforce that finds it difficult to adjust, as it becomes more efficient [for companies] to carry out their jobs in China. I think the adjustment issue is a concern, but not the overall integration - that is clearly good.
What about labor movement issues, like immigration, taxation and so on?
I see them as friction. Are they obstacles to doing even more business back and forth? The answer is yes. Are they obstacles that are high enough to prevent business being done? The answer's obviously no. I think that both the Hong Kong side and the central and provincial leadership have for the most part been moving cautiously, which makes sense.
What's the trend in terms of labor movement issues?
We see the frictions gradually reducing. Connectivity is better, processes are becoming more streamlined, tax authorities are starting to share information.
What we see is what you'd expect: A gradual process of identifying and trying to remove the barriers that do exist, while retaining the "one country, two systems" framework, which I think in Hong Kong and in the mainland is considered quite successful.
What's your view on democracy in Hong Kong?
I think that the majority of people understand that it's a matter not only of what Hong Kong is comfortable with but also what the central government is comfortable with, because it's the ultimate arbiter of the Basic Law. I believe the argument that Hong Kong people are not ready for democracy is untrue; it's demonstrably false. Hong Kong is an advanced society, its people would make prudent choices if given that option. I think the disagreement is not about the end-goal, it's about the mechanism and the timetable to get there. One of the
critical things is that this is a discussion that goes on in the context of a society that continues to work well together, that continues to take care of people's daily needs, and [doesn't disrupt] people's ability to lead their lives.
What about the democracy issue's effect on business?
The question of where it becomes an economic issue is much more a sense of whether or not local professionals, who are the heart of Hong Kong's economy today, feel disenfranchised. That is the economic risk in Hong Kong. The economic risk associated with non-democratization is disillusionment of the professional middle and upper-middle class.
Is Hong Kong overshadowed by the mainland's more glamorous cities?
It's quite natural that China's emergence, since it's been cut off for so long, has been the dominant focus of attention. But we still have to remember that Hong Kong does have an enormous international connectivity, it has enormous strength in terms of its ability to attract and retain international financial firms and it is by far the leading center for Asia Pacific headquarters for multinationals. So in that regard Hong Kong does need to make sure it stays plugged in to the rest of the world and it needs to ensure that people locally have knowledge, not just of China but also of the rest of the world. But I think Hong Kong is such a market-driven place that all this will happen naturally.
Given Hong Kong's increasing closeness to the mainland economy, what would happen in the event of a mainland economic correction?
Obviously, if Chinese companies stop listing on [Hong Kong's] stock exchanges, that will hurt the financial sector. If South China stops exporting, that will hurt the trade and transport sector. So there would clearly [also] be an adjustment in Hong Kong. But again Hong Kong does not just belong to China, it does have regional and global roles. That was shown during the Asian [financial] crisis where, even though China's growth remained strong, because Hong Kong was so plugged into the other economies in Asia, it suffered. Anytime there's an adjustment or correction, in China or the rest of Asia, Hong Kong will be affected. It's a small open economy, but people there understand that. But if one looks at the prognosis for the medium to long term, it's not a bad prognosis.
Singapore is attracting a lot of buzz these days. Is it a threat to Hong Kong's regional dominance?
Singapore is a very good business center for Southeast Asia; it links the region to the global economy. Hong Kong is not the only city that links China to the global economy but it's an important link, and it's the major link for the PRD. That's a much bigger market than Singapore. So in terms of the regional roles, Hong Kong is playing a similar role to Singapore but serving a much bigger region. The weight of business in general is now in the north rather than south Asia Pacific region, so Hong Kong is extending its lead over Singapore.
What about the upcoming Iskandar Development Region in Johor?
People in Malaysia talk about trying to make Johor like Shenzhen [with Singapore playing Hong Kong's role], but one of the problems is that Singapore doesn't have the tens of thousands of small and medium-sized companies to go in and invest in Johor the way Hong Kong companies did in the early days of Shenzhen. Hong Kong is still the only place in Asia where you have large and small foreign and local firms all interacting and no one segment really dominating. Singapore's got most of the foreign firms, and they're mostly large firms. But it doesn't have the natural advantage of that hinterland, and that critical mass of indigenous companies.
What's the competitive relationship like among cities in the PRD?
There is more direct competition [among cities] when you go into the PRD itself, because it's physically easier to move certain jobs. The idea there is that the PRD's economy is very large, very vibrant, and there's enough business to go around. The key thing is to ensure that the governments in the region understand that there's going to be a division of labor, that no single city can do everything.
With this in mind, how are PRD economies specializing?
We're starting to see some specialization around the region. Shenzhen is taking on more of a service role, more of a research and development role, and a high-tech manufacturing role that's really not that appropriate for Hong Kong. Guangzhou has an administrative role, but also quite a sizable software sector, and now an auto sector. Even around Macau things are taking off, and Zhuhai is emerging as a center to serve the western part of the PRD. So we're starting to see that as prices shift, as wages shift, markets are sorting things out. Eventually there will be a single ring, an urban ring, that runs from Hong Kong to Guangzhou all the way to Macau, then back across the Macau-Hong Kong-Zhuhai bridge. It will be a fairly tight, mostly services and high-tech manufacturing area.
Will Hong Kong be the lynchpin there?
There will be several lynchpins, actually. Hong Kong will be playing the international financial role and the international managerial role, but not by any stretch of the imagination will it be playing the only important role. Within 10 years you'll have Guangzhou and Shenzhen, which have already become major economic cities, becoming absolutely critical in terms of the way the economy of the PRD functions.