1. The Role of Hong Kong in the Chinese Economy Howard Davies

2. Objectives u to identify the different roles which Hong Kong plays in the economic activities of the mainland u to speculate on the extent to which these roles may be eroded in the next century

3. Hong Kong’s Different Roles u Trading Partner - HK as final customer and as supplier buying from and selling to China u Middleman - organising transactions between China and third countries u Financier - providing and organising funds for China u Facilitator - point of contact, source of learning

4. Current Position as Trading Partner? u HK is a significant final buyer of Chinese goods, but declining as a % u HK is a very significant source of visitors to China u About 10% of China’s imports were HK “domestic” exports in 1990, but a falling trend

5. What of the Future as Trading Partner? u As a FINAL MARKET: HK will grow absolutely but decline relatively as China’s trade with other countries grows faster u As a SOURCE OF SUPPLY: HK will decline, both absolutely and relatively as a source of manufactures, but grow absolutely as source of services

6. Hong Kong as Middleman u COMMODITIES u entrepot - HK firms buy from China, find buyers, set prices, take risk of ownership, make contracts u trans-shipment - goods pass through HK u brokerage - goods shipped directly from China to third countries - HK firms provide services u SERVICES u tourism - HK firms arrange inbound and outbound China travel

7. How Important is the Middleman Role? u For HK today, it is the centre of the economy: 90,000 Import/Export firms employ around 600,000 people u For China today, entrepot, trans-shipment and brokerage provided by HK is very important

8. What About the Future of the Middleman Role? u HK has a permanent geographical advantage and infrastructure development is well ahead of China u There are AGGLOMERATION ECONOMIES, SCALE ECONOMIES and LEARNING EFFECTS which give advantages to a ‘first-comer’

9. HK’s Advantages as Middleman u Well-established legal system u Pool of commercial information not available in China u TDC provides information and promotional infrastructure u Network of small firms allows pooling of risks - buying and selling offset each other u Trading skills in abundance u Attractive posting for expatriate personnel

10. What of the Future? u Some have argued that HK will be “overtaken” by Shanghai u In the long run, many of the middleman functions for the Yangtze delta and basin may shift to Shanghai u BUT that leaves a major role for HK in servicing South China, where there are no obvious rivals

11. Hong Kong as Financier u HK as a SOURCE OF LOANS for China u HK as a source of FOREIGN DIRECT INVESTMENT

12. HK as a Source of Loans for China u PROVIDER OF LOANS u In 1989, provided 17% of commercial loans to China u LOAN SYNDICATION u (bringing together foreign lenders) u In 1989 a further 25% of loans were syndicated in HK

13. Hong Kong as a Source of Foreign Direct Investment u By 1993 108,914 Hong Kong joint ventures (64%) of the total u Hong Kong accounts for around 73% of the total foreign direct investment u Guangdong alone had 44,000 foreign- invested enterprises in 1993 with around 6.3m employees

14. The Importance of HK FDI Into China u Responsible for large proportion of exports u Productivity higher and its growth much faster in FIEs u Responsible for introduction of ‘factory culture’ u ‘Low-tech’, low-skill, labour-intensive assembly operations, mass-producing mature products for low-price segments

15. The Argument over HK FDI in China? u AGAINST:little technological up-grading, ‘sweat-shop’ exploitation of migrant workers, social tensions, little commercial knowledge transmitted u FOR: low-tech fits the pattern of comparative advantage, output, incomes, jobs and exports have all boomed

16. What is the Future for HK Manufacturing in China? u MIT Report in 1997 recommended aiming for high-tech development based on innovative products u But HK firms are not equipped for that, nor is the Hong Kong system u In any case, its the market for low-price goods which is growing most quickly u current approach willprobably serve well for some time

17. What Are the Options for HK Firms Manufacturing in China? u CARRY ON AS BEFORE u ACQUIRE THE SKILLS NEEDED TO DEVELOP THE CHINA MARKET u UP-GRADE TECHNOLOGICALLY - THE MIT SOLUTION u LEAVE MANUFACTURING AND FOCUS ON TRADING AND PROPERTY

18. Hong Kong as Facilitator u Contact Point with the Outside World –exhibitions –representative offices for provinces, cities, enterprises u Provision of Consultancy Services –legal –technological –construction and property development –market research –accountancy –academia? u ‘Learning by Doing’ u Provision of a ‘back-door ’ to Taiwan