GET READY AND FLY

Future of Hong Kong's Economy after China's Entry to the WTO

By Thinex Shek

After striving for over 10 years, China is now perhaps in her final stage of entering the WTO. Mainland membership of the WTO is desirable to all parties concerned and that has not been altered by the bombing on the Chinese Embassy in Belgrade. Despite the difficult negotiations which may still lie ahead, there remains an optimism that China will become a member by the end of this year.

There is no doubt that if China is successful in getting into the WTO, Hong Kong's economic relationship with the Mainland, our long-standing role as a middlemen and our function as a gateway will change in complexion. Hong Kong has been relying on re-exports as a source of foreign exchange earnings and growth. Fears have been expressed that with China inside the WTO, our traditional trade and commercial roles will be challenged. Some worry that there will be many multinationals bypassing Hong Kong to enter into the China market, and there will be intensifying competition from our neighbouring countries, in particular Singapore, which offer some attractive policies to lure foreign capital.

Strengths and Opportunities

We do not agree with such pessimistic prediction, but it may become true if we do not prepare ourselves now. The new economic order would bring in new challenges, problems as well as opportunities. Hong Kong stands to benefit from the development, in particularly in the services sector. The key is Hong Kong's adaptability, and how we position ourselves to meet with the changes and to grasp these opportunities.

The most important part of the negotiations is tariff reduction. More foreign goods will be imported into China, for which Hong Kong can play a part as a transshipment hub and logistic base providing intermediary services, as mainland's enterprises will be unlikely to accommodate the increase in trade with their present trade mechanism and infrastructure. This may happen in the form of “offshore trade”, resulting in greater demand of such services as sourcing, merchandising and distribution. There will be pressure and competition from other Chinese ports in Guangdong and Shanghai, and the lesson is that Hong Kong needs improving some of our own services to stay ahead, e.g. to really make a start in e-commerce and be a leader in logistics and supply-chain management.

Some commitments for the opening of distribution, telecommunications and insurance are biased towards big multinationals. Instead of directly competing in the market, Hong Kong entrepreneurs can serve as a partner to multinationals to provide front-line services and add value to whoever has gained access. Besides, with the opening of the China market, not only large companies, but also the small and medium ones, will be given equal and increasing access. That is where Hong Kong can play a useful role with our know-how of doing business in China

Greater foreign investment in China is anticipated. Hong Kong could be cashing in in many areas as a middleman, because SAR businessmen are more familiar with the Mainland's legal, accounting and other systems than foreign investors. More and more Hong Kong bankers will establish their presence throughout China to absorb the capital from the territory as well as the outside. A growing trend of personnel movement between the Mainland and Hong Kong is expected, as the subsidiaries of Chinese banks in the territory will serve as a centre of training to expand their foreign exchange business and to enhance the quality of their assets. In terms of business financing, Hong Kong will become a major source of finance to both Chinese and foreign enterprises given the latter's increasing investment in China. There would be at least growing demand of red chips listing on the Hong Kong Stock Exchange, and further development on bond market due to the massive economic restructuring in Chinese provinces and municipalities.

One of the major opportunities comes from the reform of state-own enterprises, as they are not yet strong enough to endure competition in the market place without the protection currently enjoyed. There is an urgent demand on professional expertise related to quality management systems and training, industrial and marketing strategies but the market does not seem mature enough yet to be able to afford or prepare to pay for the high consultancy services fee. This will give Hong Kong consultancy firms an opportunity to offer more competitive rates.

The opening of China market will also result in a growth of other intermediary and professional services in Hong Kong such as accountancy and legal services. Massive economic development will bring in additional business opportunities to hoteliers and tour operators, construction, freight forwarding and transportation, which are Hong Kong's core businesses and strengths.

The Need to Add Value

Prosperity in Mainland China will be shared by Hong Kong. Hong Kong is definitely an economic and financial centre in Asia and will remain for a long time a jumping-off point for doing business in Mainland China. To cope with the opportunities and to maintain our status as an economic hub, Hong Kong's advanced financial and communication infrastructure will be put to full utilisation in providing the quality and range of services to Mainland China at levels not readily available there.

Although everything is positive for Hong Kong in the long-term, business deals do not come automatically. Our businessmen will have to realise that the scene will be changing. Some of the commitments may take several years to be realised, but preparation should start now. Advancement of service excellence is a must to promote our headquarter function, so that whoever gains entry into the China market will find that they need to “outsource” in Hong Kong. All services we provide have to be supplemented with better infrastructure and user-friendly business environment. Of course, we have to be very conscious of the fact that our operating costs are still comparatively high in the region.

Chamber in Action

The Chamber has initiated a major project to tap the experiences of its members in different business sectors to look at the opportunities and challenges to Hong Kong after China's entry to the WTO. This business -- not academic -- project is done with the assistance of CSI and is scheduled to be completed in fall 1999. It will also provide inputs to the Government on what business think the Government should do to ensure a “level playing field” for Hong Kong business after China's entry to WTO.

Thinex Shek

25 May 1999