Bridge to prosperity

In 2016 the bridge linking Hong Kong with the Chinese city of Zhuhai in the Pearl River Delta region will be complete. The $10 billion bridge has been called “the bridge to China” a figurative as well as literal description. But above all Hong Kong hopes it is the bridge to a new prosperity as the region moves up the economic value chain. Next year, work is expected to be completed on a mammoth $10 billion tunnel-and-bridges project connecting Hong Kong with the Chinese city of Zhuhai and the Pearl River Delta. The six-lane, 42-kilometers network, open for business in 2016, will be vital economically. It will cut travel and transport time between Hong Kong International Airport and Zhuhai from four hours to just 45 minutes.  The project is fraught with meaning as well. Hong Kong has often been called “the bridge to China” and this impressive piece of infrastructure provides a kind of literal expression. It’s also further evidence that Hong Kong is strengthening links to the mainland’s economy, and in ways that position the former British colony far more than mere way station or trading post.  Hong Kong has become a global fulcrum of trade, investment and capital that pivots between China and the rest of the world. The relationship has changed and matured over time. It must continue to do so in the years ahead if Hong Kong is to prosper and flourish. “It’s important that Hong Kong reinvent itself to take advantage of the changing times,” says Andrew Davis, associate director general of Invest Hong Kong, a government agency.

China is attempting to move up the economic value chain. It is gradually shifting to a consumption driven economic model rather than a simple export one. Hong Kong has an important role to play in these movements, both in terms of trade and investment. But Hong Kong must also be on top of what is happening elsewhere. This means responding to regional trade and investment flows through everything from cargo handling and supply chain management to legal services and banking. “Take something like sourcing, where you see US retailers opening up in Hong Kong,” says Davis. “It’s not just China. It’s sports gear in Vietnam, ladies’ garments in Cambodia, knitwear in Bangladesh. There are a whole range of countries with easy access to Hong Kong.”  Hong Kong punches far above its weight. With a population of just 7.2 million, Hong Kong is the world’s eighth largest trading economy, with $1.16 trillion total trade, and could pass number seven the United Kingdom this year or next. The former colony could surpass its former colonial master. Of course, on a very basic level, this number is deceiving. According to Hong Kong government statistics, about 98% of total exports are re-exports and the value of domestic exports has been steadily falling for a decade. About 55% of re-exports are destined for China. Ditto, the course of investments. Last year, Hong Kong ranked fourth among nations in terms of foreign direct investments (FDI) inflows, and fifth in terms of FDI outflows, according to a recent UNCTAD report. Much of that money is destined for China, or coming from the mainland. (About two-thirds of FDI inflow, for example, comes from either China or the British Virgin Islands, usually an offshore surrogate for China.) But, in many respects, that’s the point. Hong Kong’s economy is now more than 90% service-based. Its energy and focus are centered on underwriting, financing and moving goods rather than making them. More Than Another Chinese City As the Zhuhai project demonstrates, infrastructure is absolutely critical. Money continues to pour into Hong Kong ports to keep up with both growth and changes in shipping. In March, for example, COSCO Pacific Ltd. acquired for about $213 million a 40% interest in Asia Container Terminal Holdings Ltd., which owns and operates one of the territory’s container terminals. COSCO wants to establish Container Terminal 8 as hub for ultra large containerships. (see Ken Gwagni story on page 2) Hong Kong’s role as a “super hub” encompassing South China and the greater South China Sea region is essential to maintaining growth for the territory. “Hong Kong needs to be a regional type of hub. It needs to create a role itself that can endure the rise of China and the rest of the Asia-Pacific region and somehow remain unique and not just another big city in China,” says Peter Levesque, chairman of the American Chamber of Commerce (Amcham) in Hong Kong and chief commercial officer of Modern Terminals Ltd. “They have the building blocks. They have the competitive advantage. The issue remains getting the government to realize what they actually have and what they need.” “Hong Kong’s ability to be successful, especially its ability to compete with Shanghai, is going to be dependent on its ability to integrate within the Guangdong region,” Levesque believes. “Critical to its success as a transportation, logistics, trade hub in the region is the creation of a megalopolis, something that is bigger than Hong Kong, but one in which Hong Kong has a major role.” Capital & the Value Chain Capital is also a huge component of the exercise in moving up the value chain. Hong Kong is China’s largest foreign investment source. It is also the biggest offshore center for raising money for Chinese enterprises. The Hong Kong Stock Exchange is the main vehicle. Of the 1,643 listed companies, almost half are domiciled in China.  Hong Kong is China’s principal offshore center for convertible currency. (London began to offer Renminbi clearing operations only in April.) Hong Kong-based banks are offering more and more Renminbi-denominated instruments. The territory is extremely well placed when (and if) China liberalizes currency convertibility and control. Hong Kong will face potential obstacles along the way and most of those are China-based as well. If Chinese planners have their way, Shanghai could emerge as a rival to Hong Kong’s preeminent role of China’s financial center, for example, and its designation last year as free trade zone could also begin to dampen Hong Kong’s appeal. Infrastructure in Chinese airports and ports could improve to a point where it’s no longer so necessary to ship via Hong Kong; Shanghai already is the world’s biggest container port, in terms of TEUs and last year Shenzhen outperformed Hong Kong to take over the third spot, behind Singapore. Perhaps most troubling, Beijing could tamper with Hong Kong institutions, weakening rule of law, free flow of information and trust.  But so far, at least, Hong Kong plays its supporting role to China’s economic stardom extremely well. Much as it has done in previous waves of economic development, the Pearl River Delta (PRD) is leading China’s latest transformation, in terms of higher value manufactured goods, higher technology and domestic consumption. Hong Kong individuals and institutions will play a key role, but one that is more than mere trader.  “Hong Kong’s ability to be successful, especially its ability to compete with Shanghai, is going to be dependent on its ability to integrate within the Guangdong region,” Levesque believes. “Critical to its success as a transportation, logistics, trade hub in the region is the creation of a megalopolis, something that is bigger than Hong Kong, but one in which Hong Kong has a major role.” Ultimately, Hong Kong’s success will be dictated by whether the territory’s customers continue to knock on the door. In trade customers choose with their feet and their wallets follow.  “From a transportation and logistics standpoint, you need to have a world-class airport. You need to have a world-class ocean port. Hong Kong has both. That’s its major advantage. That’s what makes Hong Kong very unique.” “Simple fixes will keep Hong Kong more than merely relevant.” Levesque cites the issue of port capacity. Shipping concerns have been lobbying for years for backup land and barge berths, which could increase capacity by more than four million containers. But the project has been held up by infighting among government departments, which has created an impasse. Meanwhile, “congestion gets worse and customers are beginning to say ‘do we really need Hong Kong?’” Impact of Rising Costs in the PRD Now that labor and raw materials costs are rising rapidly in areas such as Guangdong province, Hong Kong manufacturers, who transferred factories pretty much completely out of the territory and into Southern China over the past two decades, are moving operations or weighing moves elsewhere in Asia, as are many of their Chinese mainland counterparts. Thailand, the Philippines, Vietnam, Malaysia, even Burma, should all gain in importance. This will happen as Southeast Asian companies themselves grow and expand outside their own borders.  Much of that trade – and support of trade – is expected to come through Hong Kong, as transport and infrastructure in these countries lag far behind even China.  Already, Hong Kong trade is expanding in different directions. India, for example, is Hong Kong’s seventh largest trading partner, propelled in large part by a booming and high-value trade in jewelry, gold and precious gems. China’s demand for high-end jewelry is growing. But at the same time, explains Davis, Indian precious metal traders are basing themselves in Hong Kong. “It makes life much simpler for them,” he says. Analysts forecast India-China business will expand rapidly over the next few years. Hong Kong is expected to gain a lion’s share of this increased flow. By the end of this decade, India-Hong Kong trade is expected to triple. Its growth rate is projected to outperform even Hong Kong-China trade.