It has been two decades since the handover and a great deal has changed in Hong Kong and China.

Port of Hong Kong
Port of Hong Kong

Merchant class. It has been almost two decades since the former British colony of Hong Kong was brought back into the fold of the PRC (People’s Republic of China).
The territory’s flag, white five petal bauhinia blakeana – commonly known as the Hong Kong orchid - sits in a sea of red, like the yellow stars represented in the banner of the PRC itself. It is this flag, to which the city is subordinate, under the “one country two systems” outlined under the concepts of Basic Law that came to be as part of the return.

But for longer than any other emblem (over eight decades), embedded on the Colony’s flag, there was a scene of a Chinese merchant with his Chinese counterpart shaking hands (presumably on a business exchange) with a Chinese junk and western full rigged ship in the background. In many respects, this emblem was and has been Hong Kong. In essence Hong Kong is a trading community, largely based on being a conduit between China and the West.

Obviously, the relationship between Beijing and Hong Kong, not to mention the economic underpinnings, have changed greatly during the last two decades. The PRC joined the WTO (World Trade Organization) and Hong Kong’s engagement with the adjacent PRD (Pearl River Delta) region (see Paul Scott Abbott’s Nansha article on page 5), and the recent emergence of the rest of Southeast Asia (see Robert Wallack article on page 8), particularly Vietnam have created landing spots for Hong Kong investment as well as competitors for Mainland export oriented industries.

Politically, China’s Xi Jinping, president of the PRC and general secretary of the ruling Communist Party, is consolidating his power over China’s influential elites while emphasizing economic policies featuring domestic development over the export model which built the “Factory to the World” and for decades delivered double digit GDP growth.

The Bipolar Politics of Two Systems

There is an old Cantonese expression that roughly says it is better to be far away from the flagpole (or banner). Being far from the center of power once served the region well but times have changed.

Beijing expects HK’s [more properly, Hong Kong Special Administrative Region or HKSAR] new chief executive officer, Carrie Lam (Cheng Yuet-ngor) to tow the party line. Xi’s pan-China view of Hong Kong’s role as one-city of many, is at odds with many Hong Kongers. Lam acknowledged as much in her acceptance speech when she said, “Hong Kong, our home, is suffering from quite a serious divisiveness and has accumulated a lot of frustration. My priority will be to heal the divide and to ease the frustration - and to unite our society to move forward…Deeds speak louder than words.”

HKSAR’s new CEO, Carrie Lam
HKSAR’s new CEO, Carrie Lam

But what will the “deeds” entail? While many Hong Kong business leaders acknowledge there is a new dynamic with Beijing, they see their territory’s role as an investor and logistics facilitator in the PRD, an updated version of the city’s historic entrepot function. Beijing is less enthusiastic about Hong Kong’s role expanding north and worries that greater influence will create problems in other regions. The role of Hong Kong is further complicated by the uncertain relationship between Taiwan and China. Dr. Tsai Ing-wen a member of the DPP (Democratic Progressive Party) won the 2016 election against the pro-Beijing KMT (Kuomintang) incumbent Ma Ying-jeou. Unlike nearly all of her predecessors, Ma’s position on reunification with China is that it is not inevitable nor necessarily even desirable to the island state. Hence, how Beijing handles Hong Kong has great sway in Taipei. For these reasons, Lam inherits a difficult role balancing the demands from Beijing against local and Southeast Asian regional concerns. In her acceptance speech Lam said, “Hong Kong, our home, is suffering from quite a serious divisiveness and has accumulated a lot of frustration. My priority will be to heal the divide and to ease the frustration - and to unite our society to move forward…Deeds speak louder than words.”

It seems it will fall on Lam’s “watch” to determine whether Hong Kong will continue to be a unique region or just another Chinese city?

Two Very Different Systems

The concept of “one country-two systems” is starkly evident in the management of the economies of the PRC and Hong Kong. China’s commercial code is immensely complex. The TMF Group (courtesy of the AMCHAM HK) in its inaugural Financial Complexity Index 2017, globally China rated 7th just behind Colombia and Vietnam as countries whose commercial compliance strategy resembles chow mein. Hong Kong on the other hand, ranks 91st just ahead of the Jersey – a UK dependency off the coast of France, whose main purpose is to be a tax haven. To put it in perspective, the US ranks 70th and Japan 78th in the complexity index. For anyone who has ever worked in Hong Kong it is easy to understand – the entire tax code is under twenty pages long – a flat 15% makes it very simple as the 95% compliance attests. Not surprisingly, the Heritage Foundation in their 2017 Index of Economic Freedom has Hong Kong holding the top spot as the freest nation in economic terms. And on the other hand, China ranks 111th just behind Moldova.

Hong Kong has had its share of economic misfortune – the Great Recession the latest - but has been able to commercially reinvent itself and rise again. The new version of Hong Kong is the “world’s most services-oriented economy, with services sectors accounting for 90% of GDP,” according to the HKTC (Hong Kong Trade Development Council). Further, the special region is the money behind much of the development in Asia – a turnstile for investment. Hong Kong ranks second in Asia as a recipient of FDI (Foreign Direct Investment) and is Asia’s 3rd largest source of FDI, after Japan and China.

This dependency on the movement of capital is both a curse and blessing. It’s a curse when global markets are stressed or when problems in the Mainland spill over into the territory. But when global markets are good…

The turnstile is spinning money, as markets are booming and the economy accelerating. In the first quarter of 2017, Hong Kong’s economic growth was 4.3% year-on-year in real terms, compared to 2% for 2016. The growth of private consumption expenditure is up 3.7% year-on-year for the first quarter of 2017, from 1.8% for 2016. The investment expenditure increased by 6.4% year-on-year for the first quarter of 2017, after a decline of 0.3% for 2016.

Other sectors are also faring well. Exports grew at 9.2% year-on-year for the first quarter of 2017, from 1.8% for 2016; while exports of services also increased by 2.6% year-on-year for the first quarter of 2017, after the decline of 3.2% for 2016.

The Hong Kong Entrepot

Hong Kong’s very existence has been built around the concept of territory being an entrepot to China. Despite the rise of other commercial centers like Shanghai, and nearby Guangzhou, Hong Kong is still a crucial entrepot for Mainland China. As the 2016 HKSAR government statistics point out, 59% of re-exports were of China origin and 54% were destined for the Chinese mainland. China’s Customs statistics also reiterate the view Hong Kong is the second largest trading partner of the Chinese mainland after the US, accounting for 8.3% of its total trade in 2016.

Hong Kong is also by far China’s largest source of overseas direct investment. By the end of 2016, among all the overseas-funded projects approved in the Chinese Mainland, 44.7% were tied to Hong Kong interests, according to the HKTDC. The HKTDC also says the “cumulative utilized capital inflow from Hong Kong amounted to US$913.7 billion, accounting for 51.8% of the national total.”

Conversely Chinese mainland interests are a major investor in Hong Kong. According to the HKSAR Census and Statistics Department, the stock of Hong Kong’s inward investment from the Chinese mainland amounted to US$419 billion at market value or 26.5% of the total at the end of 2015.

Perhaps most importantly, Hong Kong as an entrepot is the port itself. Over 22% of the region’s GDP is tied up in logistics and that begins with the port itself.

The port is one of the largest but Hong Kong’s role may be changing. In 2001-2004 Hong Kong was the world’s largest container port – with Singapore a close second or sometimes arguably first. From 2005-2009 Singapore was clearly first and through 2005-2006 Hong Kong second. In 2010 Shanghai took over the top spot and Singapore has been number two ever since. What changed?

Besides Shanghai, a host of Chinese ports have risen to compete for Hong Kong’s traditional business. Ports like Shenzhen, Guanzhou and Ningbo-Zhoushan have emerged and Nansha and others are on the ascendancy. It’s not that Hong Kong is posting poor numbers (see chart) – 19.81 million TEUs is still a great year. But the port has posted as much as 24.5 million TEUS and has fallen throughput numbers for five straight years.

There was an article in the local South China Morning Post (“Why Hong Kong port has little chance of regaining top spot – July 1, 2017) on whether Hong Kong could ever climb back on top. The answer is likely no. That doesn’t mean the port can’t still be a major player in trade to and from the PRD and as a relay point for Southeast Asian cargo. But the role as the primary door to China has been ceded to Shanghai and Hong Kong’s port future will be about how successfully it fights for its regional identity.

Liaoning Makes a Call

Two decades after the return to China, Hong Kong has many question marks going forward. No more than the Hong Kong of 1997 is still the same, neither is Beijing. Nothing makes that point clearer than the July 6th visit of China’s first aircraft carrier. the Liaoning. It was a very visible signal to Hong Kongers of their Chinese heritage.

Still like the original symbol on Hong Kong’s flag of years ago, a Chinese junk and western square rigger, the Liaoning too is a story of East and West.

The Liaoning built in a Ukrainian shipyard was once known as the Varyag before being bought by a company in neighboring Macau (reportedly to be used as a floating casino) before being sent to Dalian to be retrofitted as China’s first aircraft carrier. East and West, West and East, still remains Hong Kong’s greatest calling card.