Hong Kong: Riding the Dragon

Meeting chaired by Geoffrey Catchpole

Anthony Griffiths

BRLSI Member & Secretary to the Board of Trustees

12 November 2004.

In 1843 Hong Kong was acquired by treaty with Britain. In 1843 Kowloon, with its nine hills symbolised as humps of a dragon, was also acquired. Since the Second World War, its future has been tied to that of China- the ‘Mainland’- but although now that cannot be known, it looks promising. The speaker would first look at conditions needed for prosperity, then at developments and finally at the challenges now to be faced.

Hong Kong has most of what is needed for success. The physical features are adequate. The workforce is generally well educated, there is freedom of travel and association and speech. There is free movement and protection of money. The pressures for conformity with the requirements from China in various ways are generally resisted and the rule of law is still observed, despite some qualifications. Its government is thought competent by its members, although others demur to some extent.

Under 20% of the area of its many islands is developed and over 36% of it comprises country and marine parks, but despite the relative smallness of its area and population, Hong Kong continues to be the 11th largest trading economy in the world. While its population in 1977 was around 3 millions, it is now around 7 millions. A small part of its population are foreign passport holders, which include a consistent 20,000 UK citizens, although the number of American resident investors is now growing. Domestic helpers, mainly from the Philippines and Indonesia, form a much larger proportion of the population. During the ‘Sars’ epidemic visitors stayed away and the economy suffered badly, but trade between China and the US brought a rapid recovery.

Business used to be dominated by manufactures, but now services create 87% of Gross Domestic Product. Although direct exports amount to under £10 billions, imports amount to around £130 billions and re-exports through China to £115 billions currently. Transhipments account for 86% of its total measured trade. Trade between countries, which is organised by Hong Kong agencies, is not accounted for by such figures, but it is substantial and growing. While on physical trade there is a current account deficit, the overall surplus is three times as great as the deficit, as it has been for some years. The statistics are dominated by trade services- for transport and travel essentially. Only 6% is currently provided by financial services, although these are rapidly growing. China’s rate of growth, roughly at 10% p.a. requires Hong Kong’s services and even if it now reduces to around 6% p.a., Hong Kong will still benefit considerably. The basis of China trade is intra-Asian and is free of the controls imposed on US and European trade, so a slow-down will still yield substantial trade opportunities.

Although Hong Kong could easily provide for itself, it is the second largest recipient of foreign investment in Asia (e.g. from Taiwan) since Chinese businessmen favour its facilities, US and Hong Kong businesses invest in both Hong Kong and China, as do multinational companies. After Tokyo, it has the second largest stock market in Asia, which deals in Chinese shares and is competitive with Singapore. Singapore has under 1000 regional centres and Hong Kong has more. Although the Hong Kong dollar has been pegged to the US dollar since 1984, the Chinese yuan may become fully convertible by 2009 or so.

In the view of the spear Deng Shaio-Ping was a ‘great statesman’ who was the ‘architect of China’s rise from misery under communism’. In order for China to develop itself adequately he ordered that Hong Kong should be free of direct control, although under nominal Chinese sovereignty. China has since improved its structures and systems, with an aim to be highly capitalistic, but with ‘socialist characteristics’. Some old guard leaders remain influential however and affect policies. As a ‘Special Administrative Region’ Hong Kong negotiates and signs its own economic and trade agreements, and administers its double-tax arrangements, although it cannot decide its own defence and foreign affairs policies.

Hong Kong has a natural deep-water harbour, a widely used international airport (mainly carrying freight), three good universities (plus seven others) and a well-developed infrastructure of roads, bridges, etc. The speaker listed ten prime features of Hong Kong, which provide its advantages.

1. Although there is some cronyism and bribery (common in many countries) its government is relatively ‘clean’.

2. There are some established monopolies and oligopolies, but they are not important now. Official taxation is relatively low, but the government raises much money (as an unofficial effective tax) through high prices for property sales.

3. While there is little formal censorship, some is self-imposed. In general information flows freely, there are no Internet controls and people are free to demonstrate – in 2003 around 1 million demonstrated against subversion laws.

4. Its law is based on English Common Law and equality is generally observed. While the judiciary is independent of government, since recruitment is now confined to locals there are doubts being aired on competence.

5. Although shipping is expensive, shipping, aviation and telecommunications operate at a high standard. Much land is devoted to marshalling yards and container depots. New technologies are readily adopted and widely used, which in turn affects the adjoining wealthy Chinese province (approximating in area to two-thirds the size of France), where Hong Kong television programmes bestow mutual benefits.

6. As in many countries, its skilled workforce is considered too small, although local and foreign talents are tapped. When manufacturing declined those made redundant were unqualified for service tasks and rapid change brings unemployment, but labour relations are fairly harmonious and there are few serious disputes.

7. Unlike some mainland areas, there is no religious persecution and in recent years the arts have flourished.

8. There is no personal income tax, but there is a salaries tax of 16% and a profits tax of 17.5%. There is no VAT and virtually no customs duty. Thus there is little local bureaucracy to require lawyers, which amounts to Hong Kong’s biggest business asset, probably.

9. The effective operating area for Hong Kong is the main manufacturing areas of Asia (except India), accessible relatively easy by plane. Since 2000, when China joined the World Trade Organisation, a ‘Closer Economic Partnership Agreement’ (CEPA) has operated. When the Asian crisis threatened Hong Kong’s economy preferences on trade with China were arranged, although these are now in question. Hong Kong has strong links with two developing manufacturing areas of the mainland- the Pearl River Delta (behind Hong Kong) and the Yangtse River Delta (behind Shanghai), but while the latter considers itself somewhat superior to the former, the PRD people have managed to exploit the imprecise Chinese laws to their own and Hong Kong’s advantage. Since it often takes years for central policy to be implemented, when the Cantonese economy boomed the central government imposed higher taxes. (General Motors lost billions of dollars in Beijing through failure to understand the system, but both the Chinese government and foreign investors are now learning how to minimise problems.) Also adjacent to Hong Kong are ‘Special Economic Zones’ which provide Hong Kong with a catchment area of over 60,000 companies with low labour costs (although these are rising now). Around 100 million rural people have moved to cities and many itinerants look for jobs. Although Shanghai is developing rapidly, the PRD area has more sophisticated consumers, which attracts sellers of quality products both from China and from abroad.

10. The prospects for Hong Kong are therefore relatively bright. Although the Hong Kong workforce at its height measured only around 1.5 millions, it now effectively employs over 10 millions, mostly on the mainland through Hong Kong registered companies. It is realised now by both sides that PRD and Hong Kong links are mutually beneficial.

The speaker concluded by listing some ‘challenges’, however:

a. The median age of its people in 1980 was 23, but it is now 38.5. While there are more females than males in Hong Kong, the reverse is true on the mainland eastern provinces, where the one-child policy has yielded an excess of males, which threatens stability.

b. Because of the Asian crisis in the main, Hong Kong unemployment rates have rapidly increased from an earlier 2% level.

c. Skilled resources are depleted in Hong Kong through female dropout rates.

d. In an expensive economy the gap between rich and poor widens. About 22% of households have incomes of below £600 (equivalent) per month and roughly 1 million people are receiving social security benefits.

e. The Executive Council does not have ‘geographical constituency’ representatives, who provide democratic candidates, whereas ‘functional constituency’ representatives do influence policymaking. This bone of contention threatens disharmony.