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Is Hong Kong irrelevant?
By Phar Kim Beng
HONG KONG - Since the
handover of Hong Kong back to China on July 1, 1997, the
general commentary on the former British colony has been
mostly negative. Noting how it is saddled with high
costs and a sagging economy, many have written about
Hong Kong's terminal decline, especially in relation to
the growth of Shanghai.
Peter Woo of the Hong
Kong Trade Development Council (TDC), together with
other political and business elites now at the helm of
the Tung Chee-hwa administration of the Hong Kong
Special Administrative Region (SAR), have constantly
affirmed to the contrary, however. Woo and others
believe that Hong Kong's unique position will be
unaffected, if not enhanced, by the liberalization of
China.
Helped by what Woo calls "three flows and
four strengths" of Hong Kong, the city will retain much
of its vigor for years to come, it is said. What are
these unique characteristics? They are the free flow of
information, capital and people. In addition, Hong
Kong's strengths are based on an independent judiciary,
a viable market system, an educated workforce, and a
stable currency.
Be that as it may, regardless
of whether one is talking about the private or public
sector of Hong Kong, one can't deny that both are faced
with various problems.
In the former, the
downturn in the property sector in 1997 - for decades
the mainstay of Hong Kong economy - has caused the price
of local real estate to depreciate by some 60 percent.
This has led to the parallel decline of the stock
exchange as most listed firms invested heavily in this
sector. Delinquent loans have been on an up trend too,
as are personal bankruptcies.
In the latter, the
government has found itself facing a structural deficit
of HK$40 billion (US$5.1 billion) a year. At this rate,
it is reported that Hong Kong's fiscal reserves will
completely evaporate in about five years. Should this
occur, the government will be compelled either to become
a sovereign debt-issuer - that is by selling bonds to
finance its deficit - or to borrow from financial
institutions abroad.
The risk is not in
borrowing money from within or abroad, however. With an
empty cache, the Hong Kong Monetary Authority will no
longer be able to defend the pegged currency - a policy
meant to buttress the entire financial system so as to
allow Hong Kong to have the necessary currency stability
to be a leading financial center.
That having
been said, talk about the "death of Hong Kong", as
Fortune magazine would have it, are invariably long on
Hong Kong's liabilities and short on its assets. Far too
often, such commentary latches on to Hong Kong's high
operating costs, exorbitant rents and lack of a
proficient English-speaking workforce. But it gives
short shrift to Hong Kong's years of accumulated
management expertise in China. If anything,
entrepreneurs from Hong Kong are poised to benefit first
from the growth of China.
While China's share of
world trade remains small, standing at a mere 6 percent,
one-third of its internal growth has come from domestic
consumption. Although China's growth is unevenly spread
out, its south coast has registered impressive gains.
In this regard, Hong Kong is in a strategic
position to benefit from the growth of China. Hong
Kong's physical and cultural proximity to mainland China
are major competitive advantages too. Taking advantage
of China's low production and labor costs, Hong Kong's
various light industries, namely toy, textile and
electronic makers, have also shifted to the Pearl River
Delta. To be sure, Hong Kong is not declining, either in
the relative or absolute sense. Rather, it is undergoing
what is perhaps one of the most wrenching
transformations in its history. Its light industry is
being hollowed out.
If Hong Kong used to don the
role of OEM (original equipment manufacturing) center,
it is now the hub with which various services are
rendered in ensuring the smooth delivery of consumer
items throughout the globe.
Given the
intensifying pace of globalization, other cities or
countries are bound to create better tax schemes or
business environments to challenge the position of Hong
Kong too. This is already happening judging by the
Singapore government's decision to lower its corporate
tax to 21 percent. Although Hong Kong has a flat tax
rate of 15 percent, competing with a competitive
city-state such as Singapore based on a
6-percentage-point margin is too close for comfort.
Nor can Hong Kong be compelled to lower its tax
base whenever others do it, as the SAR government is
already dependent on a narrow band of tax revenue to pay
for a diverse range of public services. If anything,
Hong Kong has to learn how to create wealth, not merely
attract it.
Admittedly, except for the handful
of elites who possess the knowledge and networks, no one
knows how to create wealth in a service economy. Since
only up to 7 percent of Hong Kong's population base has
had any tertiary training and university education, Hong
Kong has been slow to benefit from the transition to a
service economy.
It is this situation that makes
Hong Kong's future appears gloomy in the interim. But
overall Hong Kong still has various strengths to enable
it to be the first to tap into the growth of China.
(©2002 Asia Times Online Co, Ltd. All rights
reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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