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Hong Kong
begins to catch its breath
By John
Berthelsen
HONG KONG - Flying into Chek Lap Kok
airport, especially out of the disheartening decrepitude
of the Philippines or the laid-back indolence of
Thailand, it is hard to imagine that this is a city
famously in terminal decline, as many analysts have
predicted.
Chek Lap Kok is efficient, bustling
and stunning. The airport train to Central is nothing
short of spectacular. The city's infrastructure is
better than anywhere in Asia except for Singapore.
Telecommunications are among the world's best. The Hong
Kong Philharmonic has just hired the prominent conductor
Edo de Waart as its artistic director. It is the one
place in China where sanctity of contract and rule of
law are assured. Things are expected to work and they
get done quickly.
Now there are growing signs
that despite the pessimists' concerns, Hong Kong will
eventually reclaim its role as the most important city
in Southeast Asia, provided the local government lets
it. That is in part because it is increasingly apparent
that Beijing wants Hong Kong to succeed, if for no other
reason than to prop up Chief Executive Tung Chee-hwa's
disastrous government, and no matter how much Tung's
government stumbles. To do that, Hong Kong must
integrate further into the Pearl River Delta.
In
an apparent attempt to rescue Hong Kong's ailing economy
and with it the hapless Mr Tung, China in June pushed
through a free-trade agreement to allow goods to pass
freely between the special administrative region (SAR)
and the mainland without tariffs, and is seeking to cut
customs bottlenecks between the two as well. Beijing has
also markedly liberalized travel restrictions between
the two, allowing substantially more numbers of tourists
into the SAR.
One major sign of closer
integration is the projected construction of a US$1.9
billion bridge that would skip from Lantau Island, the
site of Hong Kong's international airport, across the
Pearl River to the gambling mecca of Macau and on to
Zhuhai city on the Guangdong province side of the
Chinese border. The Hong Kong-Macau-Zhuhai bridge is
more than just a span over water. It would play a major
role in tying together the 50 million people of the
Pearl River Delta into a single vast conurbation with
Hong Kong as its capital. Hong Kong has existed apart
from China for 150 years, the last five under Chinese
rule.
On June 30, Chinese Premier Wen Jiabao
came to Hong Kong to sign a Closer Economic Partnership
Arrangement (CEPA), a full free-trade agreement that
cuts to zero tariffs between the territory and the
mainland. The agreement also includes customs
cooperation and e-commerce businesses. It is due to go
into effect January 1. With no tariffs and with closer
customs cooperation, Hong Kong should become far more
integrated into China. Indeed, China has dramatically
liberalized restrictions on its citizens so that they
can visit the SAR.
Wen made his Hong Kong visit
the day before massive protests by 500,000 Hong Kong
residents that dramatically scuppered proposed new
sedition restrictions by the Tung government. At least
partly in an apparent attempt to soothe what was
obviously an increasingly angry city, Wen said the
government is "unswervingly committed" to the policies
of "one country, two systems", the agreement between
Britain and China that provided for Hong Kong to keep
its own political system for 50 years after its 1997
reversion to China.
Wen also said, "In the
meantime, we should step up efforts to promote economic
cooperation between Hong Kong and the Pearl River Delta
in particular." The premier reiterated that the central
government would unswervingly commit itself to the
policies of "one country, two systems", "Hong Kong
people administering Hong Kong" and a high degree of
autonomy, and the Basic Law of Hong Kong.
"This
is the message I have come to convey," he said, adding
that "these set policies of the central government
towards Hong Kong will not change".
Certainly,
Hong Kong has faced daunting problems over the past five
years, including a shockingly bumbling and inept
government, the severe acute respiratory syndrome (SARS)
epidemic, the three-year collapse of the global
financial bubble that devastated its financial industry,
and the encroachment by other cities on its role as
China's entrepot.
The government exacerbated the
territory's economic problems by artificially propping
up its overinflated property market in a vain effort to
protect a handful of property oligarchs, thus delaying
the pain of an inevitable market-clearing, and which has
been slowly deflating ever since. The composite
cost-of-living index has been falling without a break
since 1998 - 54 straight months of deflation. Despite
its status as Southeast Asia's financial center, major
multinationals have been fleeing for Shanghai and
Singapore.
There are now signs of recovery that
go beyond the anecdotal evidence of the newly
re-energized tai-tais - the well-to-do matrons
down from Victoria Peak haughtily fingering luxury goods
in Prada and Louis Vuitton and Gucchi in the Pacific
Place and Landmark shopping centers. Certainly, the city
seems as feisty and pugnacious as ever. It may be the
only place in the world that, when SARS hit, could be
expected to invent knock-off face masks with Gucchi and
Louis Vuitton logos. Its sales clerks and waiters
continue to be as disdainful as any in New York or
Paris.
Cathay Pacific Airways, Hong Kong's
patrician flag carrier, reported that SARS cut its
passenger levels by 1.9 million in the first half of
2003, down from 4 million in the same period last year.
The airline issued its first-ever profit warning.
Passenger revenue fell by 29.5 percent, also partly as a
result of uncertainty over the war in Iraq. At one
point, total passengers carried fell as low as 5,000 a
day. That has since recovered to about 19,000.
Retail sales, which in January had managed to
struggle back to 100 (using 1999 as a base of 100),
plummeted to 81 in May. But they had climbed back to
86.4 by June. Consumer confidence, which had fallen all
the way to 35.8 (using 1999 as a base of 100), had
climbed by more than 20 points to 58.7 by June.
"Most post-SARS indicators have been better than
expected, and deflation is falling fast," said Eric
Fishwick, an economist with Credit Lyonnais Securities
Asia (CLSA) in Hong Kong. "We remain optimistic,
although weak property prices are a risk." Geoffrey
Barker, chief economist for HSBC Securities in Hong
Kong, expects 0.5 percent growth for 2003, desperately
weak but still growth.
A crucial component of
Hong Kong's economy, the financial industry, is starting
to show signs of life. JP Morgan Chase, the investment
bank, recently released a study showing that the volume
of mergers and acquisitions involving Asian companies
rose 6 percent in the first half of 2002, to US$106
billion, year-on-year - despite the fact that across the
world, M&A activity actually fell by 10 percent.
In addition, Standard Chartered Bank reported
this week that across the spectrum of many of its
operations, business is improving. Losses due to
credit-card debt in Hong Kong improved, to a
still-sizable $104 million, down from $138 million in
the second half of 2002. Profits in wholesale banking
increased, and operating profits in consumer banking
rose to $109 million, up from $93 million in the second
half of 2002.
Part of what is happening is that
the brutal market-clearing in property that should have
taken place in 1997 is finally becoming a reality
despite attempts by the Tung government to prop them up
artificially. Property prices, which briefly in 1997
made the SAR the most expensive city in the world, have
fallen by about two-thirds. Hong Kong has now fallen to
fourth place, after Tokyo, London and New York. Retail
rental prices have fallen in every quarter except three
since 1998, which means merchants' sales margins are
higher and they can pass some savings on to consumers.
Unlike in Bangkok or Jakarta, the construction
cranes have never stopped swinging on the skyline
through the long economic decline, which accelerated
early this year with the arrival of SARS.Now, the
residential property market, the ultimate arbiter of
consumer confidence, appears to be on the mend. An
estimated 30,000 people viewed new apartments last
weekend, the highest number for more than five years.
There is evidence that the office market is
bottoming out as well, with Pacific Place available at
rents of HK$17-$20 (US$2.18-$2.56) per square foot. To
put that into perspective, when Exchange Square came on
to the market in the 1980s, IBM did a deal at around
HK$17 per square foot, which was seen as a necessary
enticement to attract an anchor tenant. The peak rental
for A-grade offices was well over HK$100 per square
foot.
In the middle of Hong Kong's steamy
summer, when tourism is usually at a dead stop, the
hotels are filling to the point where a visitor last
week who wanted to stay past his reservation period was
asked by his hotel to move to another because his room
was taken.
Exports, on which Hong Kong lives and
dies, are starting pick up as the global economy takes
stuttering steps toward revival. Total exports, which
fell 3.3 percent in 2001 and rose an anemic 8.7 percent
in 2002, averaged a 16.6 percent increase over the first
five months of this year. Re-exports, almost exclusively
from China, increased by an average of 20 percent over
the same period. Imports, which had fallen to minus 2.0
percent in 2001 and rose 7.8 percent in 2002, are up an
average of 12.3 percent for the first five months of
2003.
Virtually since it was founded by the
British in 1841, Hong Kong has been apart from China and
subject more than almost any other city in the world to
the vagaries of world trade and commerce. That is
beginning to change as it burrows into the side of
China. The SAR is still vulnerable. If mainland China
and Taiwan were ever to come to an agreement on direct
shipping and air links, Hong Kong would take a
devastating blow. Nonetheless, over the past decades its
residents have been adroit at adapting to new
situations, growing out of the manufacture of cheap toys
ultimately to multinational finance and service
industries. It is seeking to adapt again.
However, if it doesn't, the worry is that it
will become, as one observer recently told The Economist
magazine, "just another city on the Pearl River".
(Copyright 2003 Asia Times Online Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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