Hong Kong Needs Closer China Ties, Blackstone’s Leung Says

Hong Kong should build a free-trade zone with the neighboring Chinese province of Guangdong to make it a more competitive commercial and financial center for the world’s second-biggest economy, a former top city official said.

By creating a zone that allows Hong Kong-based companies and individuals to freely access Chinese markets, the city would be able to better exploit lower tax rates and other advantages it has over Shanghai and mainland regions, Antony Leung, who served as finance secretary from 2001 to 2003 and is now greater China chairman for Blackstone Group LP, said yesterday at a Bloomberg seminar.

“What Shanghai lacks is the pool of talent that’s already residing in Hong Kong,” Leung said. “Hong Kong is renowned for a low tax and simple tax regime, and with our rule of law, with the freedom, with the convenience and comfortable living, I think we can attract a lot of talents.”

The comments underscore the challenges Hong Kong Chief Executive Leung Chun-ying faces in fending against competition from Shanghai, which China targets making a global financial center by 2020 and where authorities last month set up a free trade zone to test investment, trade and market reforms. BlackRock Inc., the world’s biggest money manager, last month said it’s cutting investments in Hong Kong on concern its markets will underperform.

No Future

“Hong Kong has no future if we can’t merge with the Pearl River Delta,” Justin Chiu, executive director at Cheung Kong Holdings Ltd., the developer controlled by Asia’s richest man, said at the seminar.

Debate in Hong Kong about its role in China is intensifying as Chinese leaders pledge to give markets a bigger economic role, while demands from opposition lawmakers for democracy in the former British colony raises the ire of the central government in Beijing.

Guangdong, the biggest regional economy in China, is lobbying for a free-trade zone with Hong Kong and Macau, Governor Zhu Xiaodan said in September. The zone will let Hong Kong’s services industry grow and lift the region, he said.

Talent Pool

Li Ka-shing, Asia’s richest man, said in September Hong Kong needs to raise its competitiveness if it wants to avoid losing out to Shanghai.

Hong Kong should build rail links to Macau and the neighboring Chinese city of Zhuhai, rivaling similar high-speed networks that China has built between its cities, said Chiu.

“We marginalize ourselves when we’re cutting ourselves off from the Pearl River Delta,” said Chiu.

At the same time, Hong Kong also needs to manage the social tensions that have risen with closer ties, Regina Ip, an executive council member, said yesterday at the seminar.

“The integration has also given rise to political problems in the form of resentment against more competition for Hong Kong-based resources - baby milk formulas, maternity beds, kindergarten school places,” said Ip.

Only 35 percent of people in Hong Kong trust in the Chinese government, according to a survey by the University of Hong Kong Public Opinion Programme of 1,007 people conducted Sept. 15 to 17.

Rising discontent may erode China’s support for Hong Kong, Allan Zeman, chairman of Lan Kwai Fong Holdings Ltd., the biggest landlord for restaurants and bars in Hong Kong’s business district, said at the seminar.

“Beijing has lost faith in Hong Kong,” Zeman said. “It is watching us very carefully, so we really shouldn’t shoot ourselves in the foot and allow other cities in China to surpass us.”

Hong Kong risks falling behind its rivals if citizens there don’t start rallying behind Chief Executive Leung, a Chinese official said in September.

Leung has struggled to gain broad public support since taking office in July last year, when he defeated front-runner Henry Tang, who had the support of tycoons including Li.