China’s implementation of the 12th Five-Year Programme (FYP), which runs from 2011 to 2015, is expected to usher in a new era of economic integration and co-operation between Hong Kong and the Chinese mainland.
In a forum in Hong Kong last August to highlight the FYP’s implications, Vice Premier Li Keqiang noted that for the past three decades the Mainland and Hong Kong had worked on their respective advantages, while building a co-operative framework.
Now, a new phase of this developing relationship is underway. As the world’s economic centre of gravity shifts towards Asia, in which China plays a dominant role, Hong Kong’s regional business hub facilitating trade and investment flows is gaining added significance.
The Vice Premier announced new measures applying to Hong Kong, under which services trades between the Mainland and the SAR will be liberalised to a far greater extent by the end of the 12th FYP.
Hong Kong’s competitiveness as an offshore Renminbi (Rmb) centre is thus set to increase, adding a significant boost to the SAR’s role as an international platform for the Mainland and a central business district (CBD) for Asia.
International platform for China
China’s 30 years of reform and liberalisation have left their mark globally, as the Mainland became a competitive production base.
Wage rises over recent years have prompted some to believe that China has reached a crucial turning point where surplus rural labour supply is shrinking. But China’s export performance suggests that it still enjoys competitive advantages for labour-intensive manufacturing, and is capturing higher value-added work as well.
Indeed, China surpassed Germany to become the world’s largest exporting country in 2009, and its share of world exports continued its rise to 10.6% in 2010.
Apart from its competitiveness as a production base for export, China’s vast market for technology, equipment, products and services has also attracted global investors.
This is particularly so as China introduces another stage of development and re-balances domestic and external demand as sources of growth.
Foreign companies have been re-focusing their attentions in China from producing for export to selling to domestic customers.
Meanwhile Mainland companies are pioneering overseas expansion and their international heft is rising. FDI outflows attributed to Mainland companies reached US$68.8 billion in 2010, representing an average annual growth of 50% since 2002. China is now the fifth largest source of FDI in the world.
According to the 12th FYP, China will speed up its “going out” policy. Besides investment and co-operation in resources based projects, China also encourages overseas investment in areas such as technology research, manufacturing, international sales and distribution networks.
Under this externalising trend, Hong Kong’s traditional role as a platform for foreign companies, capital and products entering the Mainland market, will receive new functions to help Mainland companies and capital to go overseas.
Indeed, more than 65% of the Chinese mainland’s FDI outflows are destined for Hong Kong, most of which are believed to be channelled through Hong Kong for investment in other parts of the world.
The number of regional headquarters and offices from the Mainland operating in Hong Kong increased to 261 in 2010, indicating the SAR’s value as a managing hub for Mainland companies’ international business.
Hong Kong-Mainland Trade and Investment
|Hong Kong exports to the Mainland
|Hong Kong imports from the Mainland
|Hong Kong FDI stock on the Mainland
|Mainland FDI stock in Hong Kong (2009)
Source: Hong Kong Census and Statistic Department for trade data, MOFCOM for investment data
China’s escalating economic power and its integration with the world economy also support the prospect of the Rmb moving towards internationalisation, with a more flexible exchange rate regime. Hong Kong, as a leading international financial centre, is a natural testing ground for the Rmb to move in this direction.
Since the debut of a pilot Rmb cross-border trade settle scheme in July 2009, the cumulative amount of trade settlement in Rmb in Hong Kong reached Rmb1.3 trillion as at the end of July this year. Meanwhile, Rmb bank deposits in Hong Kong surged to Rmb572 billion.
As the first and largest Rmb offshore centre, the range of Rmb products and services available in Hong Kong has continued to expand. In addition to Rmb forward contracts, bonds and certificates of deposit, the first Rmb Initial Public Offer (IPO) was launched in April this year.
Apart from Mainland and Hong Kong companies, multinational corporations such as McDonald’s, Caterpillar and Unilever have also participated in the Hong Kong financial market to raise Rmb funds.
CBD in Asia
The rapid economic growth of China, together with the rise of ASEAN and India, have all caused the world’s economic centre of gravity to gradually shift to Asia. Behind the rising share of Asia in world GDP, an eastward drift of economic activity has been taking place, as shown by the growth of Asian inter-regional and intra-regional trade and investment.
Growing share of Asia in world export and import
||Share of world exports
||Share of world imports
| Asia excl. Japan
Source: World Trade Organisation
Growing share of Asia in world investment
||Share of inward FDI
||Share of outward FDI
Source: World Investment Report 2011
Hong Kong, being an international trade and financial centre, is essentially a CBD for the region, providing the business, information, capital and services support to foreign, Mainland and local participants as they seek their business fortunes.
Every year, the Hong Kong Government’s Invest Hong Kong unit helps more than 200 overseas companies that want to enter the Asian market set up office in the SAR. Besides, more than 3,600 overseas companies have set up regional headquarters or regional offices in Hong Kong as of 2010, to manage their Asian business.
Moreover, with Mainland companies “upgrading” and “going out”, allied to the growing interest of international companies in the Asian markets, increasing numbers of firms have been seeking listings in Hong Kong. As a result, Hong Kong ranked top in the world’s IPO market in 2010, and has steadily closed the gap on London and New York.
Besides business, information and capital flows, an enormous amount of goods move via Hong Kong as well.
Strategically located between Northeast Asia and Southeast Asia, Hong Kong International Airport handled over four million tonnes of air cargo in 2010 and ranked the busiest airport in the world. Hong Kong container port was the third busiest in the world, handling 23.7 million TEUs in 2010.
Significance of the new measures
Apart from maintaining Hong Kong’s sound legal system and business friendly environment to draw economic activities to cluster in SAR, it has been necessary to strengthen Hong Kong’s competitiveness vis-à-vis other emerging clusters.
Equally, there has been a need to increase the scope of Hong Kong’s roles and functions for the region.
The measures announced by Vice Premier Li Keqiang allow better access to the Mainland market by Hong Kong service providers, including legal services, banking and insurance, construction, testing and certification, and other services.
It is envisaged that by the end of the 12th FYP, service trades between Hong Kong and the Mainland will be substantially more liberalised through the Closer Economic Partnership Arrangement (CEPA). It is hoped that these will give Hong Kong the first mover advantage and attract foreign companies to use the SAR as a platform to tap the Mainland market.
In strengthening Hong Kong’s roles as a service platform for the international takeoff of Mainland companies, the Central Government is to encourage Mainland enterprises to tap Hong Kong’s advantages in finance, trade, investment, legal, accounting and consulting sectors in “going out”.
The Central Government will give more policy support to Hong Kong and Mainland companies in terms of project matchmaking, investment expansion, information sharing and personnel training, so that they can venture onto overseas markets together.
While encouraging Hong Kong and Mainland companies to build up co-operative sales networks internationally, the Central Government is also to encourage these companies to jointly develop international investment and infrastructure markets.
There is growing interest among overseas companies in China and the region either as markets or investment targets. That’s allied to the trend for Mainland enterprises to acquire companies or brands in overseas markets.
In either case, Hong Kong is able to capitalise on the emerging knowledge process outsourcing (KPO) market in the region to render services in investment and business research and operational support.
Demand for the Rmb is expected to grow further as China’s economic progress continues. Hence, an active RMB market will increase the competitiveness of Hong Kong as an international financial centre.
The Central Government’s support for increasing the scale of Hong Kong-based Rmb bond issues and development of more RMB financial products can only strengthen the SAR’s role as an offshore RMB centre.
As the Central Government gradually opens the gate for Hong Kong investors to channel Rmb-denominated assets back into the Mainland to meet their development and investment needs, there will be faster and stronger growth of Rmb-based business in Hong Kong.
Hong Kong’s position as an international financial centre will also be strengthened as a result of that growing business trend in terms of IPOs, exchange traded funds (ETFs) and a range of asset management services.
Physical proximity is an added and important element for Hong Kong to maintain its competitiveness as an international platform.
Transport between Hong Kong and the Mainland is included in the sub-plan for the comprehensive transportation system under the 12th FYP and the Central Government will support aviation co-operative agreements between Hong Kong and the PRD, as well as with other parts of the Mainland.
This will serve to increase regional air transport capacity, with Hong Kong’s hub linking other parts of the Mainland as well as Asia.
Last but not least, the Central Government has expressed its support for Hong Kong to participate in multinational and regional economic co-operation.
Additionally, the Mainland will accentuate the interests and concerns of Hong Kong when negotiating free trade agreements (FTAs) with foreign countries.
This is a new and significant step for Hong Kong’s future development. There has been a proliferation of FTAs in the region, so if the SAR is not a member or beneficiary under these, its CBD roles could encounter the risk of being marginalised. Also, Hong Kong’s service functions would be handicapped.
Co-operation for mutual development and prosperity
Further co-operation between Hong Kong and the Mainland, and the empowering roles conferred on Hong Kong, should again deliver mutually beneficial returns.
For example, the growth of the offshore Rmb business in Hong Kong will enhance business prospects for the SAR’s banking and financial sector, but will also contribute to the internationalisation of the Rmb.
Liberalisation of services trades will also benefit the Mainland, as Hong Kong service providers bring in the necessary technology, expertise and capital to assist the Mainland’s economic upgrading and transformation.
Hong Kong’s participation in the Mainland’s developing services sector will also enhance the content and quality of those services, to complement the country’s urbanisation programme.
Upgrading the manufacturing industries
After growing at an average of about 10% since 1978, China is now a member of the upper middle income economies group, according to the World Bank.
Thanks to the huge supply of low-cost labour, China has become a competitive production base and the largest exporter in the world.
However, China’s manufacturing and export processing sector remains labour intensive and low value-added. The average profit margin for most traditional light consumer goods production units in China was only 6% in 2009.
Labour shortages experienced in China’s coastal regions over recent years suggest that it is becoming increasingly difficult to boost productivity by shifting additional workers from agriculture to industry.
To avoid the so-called “middle income trap”, China must adopt a new growth strategy to replace horizontal expansion through low value-added manufacturing, if it is to ensure sustainable growth.
Indeed, since the 11th FYP, the Chinese government has been advocating the need for industrial upgrading and transformation.
While upgrading of the processing trade remains a major policy direction in the 12th FYP, the Vice Premier indicated that efforts would be made to expedite construction of the Pearl River Delta (PRD) processing trade upgrading demonstration area.
Processing trades accounted for 46% of China’s export in 2010. According to the Ministry of Commerce (MOFCOM), nearly half of the processing trade businesses are Hong Kong invested and most of them are located in the PRD.
Stable growth and transformation of Hong Kong funded processing trade businesses in the PRD are expected to contribute to the stability of the Mainland’s export sector.
According to the Minister of Commerce, Chen Deming, the Mainland will help Hong Kong-funded processing trade companies to sell their products in the Mainland domestic market, supporting their transformation and upgrade.
Markets are the driving force behind industrial evolution so a sizeable Mainland domestic market would be considered a “pull factor” for Hong Kong OEM manufacturers to develop their own brands and invest in technology upgrade and R&D.
Besides, the liberalisation of service trades between Hong Kong and the Mainland should accelerate development of service sectors that help promote an upgrade of the processing trades and the manufacturing sector as a whole.
Indeed, in an HKTDC exhibition of Hong Kong services in Guangzhou in May this year, over 750 Mainland visitors were interviewed. Many had used services such as advertising, marketing, design and brand consulting to help their companies upgrade. In selecting service providers or partners, 47% were interested in companies from Hong Kong.
Some 41% of the Mainland visitors interviewed indicated that their companies had plans to co-operate with overseas companies or research institutes to increase their technology level.
Given Hong Kong’s reputable legal and IP environment as well as its financing resources and business network, the SAR acts as a major platform for foreign technology to enter the Mainland through technology transfer, technology licensing and other means.
Chinese mainland technology imports in 2010
||No. of contracts
||Value (US$ bln)
Source: Ministry of Commerce
The Mainland is to support Hong Kong to set up a sub-centre of the Chinese National Engineering Research Centre and a hi-tech commercialisation base, so not only will technology innovation in Hong Kong increase, so too will Hong Kong’s contribution as a technology market place; the SAR will bring in technology for increased industry upgrades on the Mainland.
Improving the well-being of Mainland urbanites
Urbanisation will be one of the major policy objectives for China over the coming years. According to the 12th FYP, China’s urbanisation rate will increase by four percentage points by the end of 2015 from 49.7% in 2010.
In addition to higher income level, the changing lifestyles of urban dwellers have resulted in higher demand for goods and services. This is particularly so for services; according to a recent survey by HKTDC, 44% of respondents indicated that the frequency of eating out with friends and families has increased, and the frequency of visiting beauty salon, travelling for leisure, for example, have also increased markedly.
Per capita consumer spending by Mainland urbanites
|Per capita total spending
|Household equipment, supplies and services
|Transportation and communication
|Education, cultural and entertainment services
|Miscellaneous products and services
Source: China Statistical Yearbook
Some 73% of the survey’s respondents agreed that they are willing to pay more in return for services of better quality.
Mainland consumers in general have a good impression of Hong Kong services providers, considering them more international, with higher standards. They are also considered to be more professional and with superior management systems.
Among the liberalisation measures announced by the Vice Premier and other officials, some will enable better access for services targeting Mainland consumers.
For example, the Mainland will allow Hong Kong investors to set up wholly-owned hospitals in all municipalities and capital cities of all provinces.
Mainland authorities are to support Hong Kong companies to set up travel agencies, support Hong Kong banks to speed up the building of sub-branches network in Guangdong, and support Hong Kong insurance companies to enter the Mainland market.
All these measures should enhance the range of services offered to local consumers, and in the long run improve the competitive environment of the nation’s services sectors. These developments, in turn, should result in a rise in quality standards and promote the well being of Mainland consumers.