EXPORTERS FOCUS. Strengthening Hong Kong's Entrepot Role !"#$ Hong Kong should strive to remain the preferred port of mainland China. !

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Kristin Greene
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1 $%&'()! Hong Kong should strive to remain the preferred port of mainland China. $!!"!#$%&'()*+,-.*+/01 $%&'()*+,-. /012 $%&'()* +,-./012 $%&'()*+,-"./%012 $%&'()*+,-! "#$%&'()*+,-./012 "$%&'()*+,-./01/2 $%&'()*+,-./012%3 $%&'()*+,-&./#012 $%&'( )*+,-./0 1 $%&'(' )*+,-./ $%&'()*+,-./012'() $%&'()*+,-./ 012 $%&'()#*+",-./0123 $%&'()!*+,-./0123 $%&'()*+,-./0 Strengthening Hong Kong's Entrepot Role The economic success of Hong Kong in the postwar years is often ascribed to its rise as a manufacturing centre and subsequently a financial centre. Although equally important, the contribution to the economy from exports of services which have been a major generator of foreign income is less noticed. As the re-integration of Hong Kong's economy with mainland China deepens, income earned from the trade of services, or the so-called "invisible trade", would become increasingly important in driving Hong Kong's growth ahead. Strengthening Hong Kong's status as the Mainland's "external port" and services centre in its re-integration with the Mainland is the paradigm shift in positioning the territory's economic development in the coming decade. Hong Kong in Transition The Hong Kong economy has undergone major changes since the opening up of the Mainland market for foreign trade and investment in The manufacturing sector which powered economic growth in the 1960s and 1970s has gradually relocated production facilities north of the Shenzhen boundary to take advantage of its lower cost base, enabling the expansion of the services sector in the territory. The number of manufacturing workers has fallen from about half of the workforce or nearly 1 million in the early 1980s to about 330,000 now, accounting for just 10% of Hong Kong's working population. The process has often been described as the "Hong Kong de-industrialisation". However, "deindustrialisation" is probably not the best description of what has taken place. The reality is that Hong Kong has been undergoing an extensive economic integration with the Mainland economy, particularly with the Pearl River Delta region, and the significance of the manufacturing sector has not diminished but taken on a new form in driving growth in the services sector. 6 Compass Vol.7 No.3 September 2001

Many statistics illustrate the integration process vividly. Re-exports, which accounted for only about one-quarter of Hong Kong's total exports in the late 1970s, have climbed to 90% now.

2 Many statistics illustrate the integration process vividly. Re-exports, which accounted for only about one-quarter of Hong Kong's total exports in the late 1970s, have climbed to 90% now. Of the total reexports of HK$962 billion in the first 10 months of 2000, about 95% had mainland China as the destination or as the origin of shipment. Moreover, survey results have shown that approximately 70% of re-exports involving mainland China are related to outward processing arrangements. Therefore, the 39-fold jump in re-exports over the past 20 years is strong evidence of the enormous expansion of Hong Kong's manufacturing industry in the hinterland. $%&'()*+,-./01 $%&'()*+,-.'/0123 $%&'() *+,-.../0+ ) $%&'()*+,-#+./0+1 $%&' ()*+,-.)/012!" $%&'()*+!,-./01 $%&'()*+,-./0123 $%&'(")*+,-.!/012 #$%&'()*+,-./01! $%&'()*+,-./!0 $%&'(%)*+,-"(./ $%&'()* +,- $%&'()*+,-.#/0123 $%&'()*+,-./012/ $%&'()*+,'(-./01 $%&'()*+,-./0102' 5 $%&'()*+,-./0 123 $%&'((()*+,-./01!" #$%&'()*+,-./01234 $%&'()*+,-./#01 Transportation and offshore trade services have enjoyed significant growth with the surge in crossboundary trade, and these activities have been reflected in the exports of services statistics. Exports of services have grown steadily at an annual compound rate of 13% in the past two decades and first overtook the value of domestic exports in In 1999, services exports reached HK$294 billion, 72% higher than the domestic exports of HK$171 billion. This has demonstrated Hong Kong's services sector has played an important role in the integration of the mainland China into the global economy. Meanwhile, the inextricable economic link between Hong Kong and the Mainland has been deepening over the years, resulting in the economic significance of the Hong Kong/Shenzhen boundary becoming less important. Many workers now spend their weekdays working in the Mainland but still have their principal residence in Hong Kong where they spend their weekends. An increasing number of Hong Kong residents are also crossing over for recreation such as golfing and holiday resorts and weekend shopping. Passenger departures for mainland China through various control points have grown at an annual rate of 12% in the past 10 years, reaching 45 million in The substantial increase in all kinds of crossboundary activities has highlighted the inherent limitations of gross domestic product statistics in a metropolitan city such as Hong Kong. National accounting statistics principles and concepts generically define cross-border consumption expenditure as imports and exports of services. However, the cross-boundary economic activities between Hong Kong and Shenzhen actually take 7

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3 $%&'()*+,-./012%34 $%&' $%&' ()*+,-./012+ $%&'()*+,-*./0123! "#$%&'()*+,-./0123 $%&'()*+,-./ $%&'()*+,-./0 123 $ $%&'(&)*+,-./0123 $$%&%' ()*+,-./0 $%&'()*+,-./01'( $%&'()(*+,-./"01 $%&'()*!#$++,-. $%&'()*+,#-./01+, $%&'()*+,-.#$%/012 $%&'(!)*+,-./0123! $%!&'()*+,-./01 $%&'()*+,-./012 place within one sovereign country. Such spending is "domestic" consumption in nature but is recorded as trade in services by the definition of national accounting statistics. As a result, GDP statistics will become increasingly difficult to interpret in the conventional way. In a similar manner, the definition of population also has a similar problem of treatment. As a case in point, the Census and Statistics Department revised down the population estimate last year by approximately 210,000 to 6.76 million to exclude those who stay in the Mainland on a long-term basis. Cross-boundary spending and purchases of residence, which are increasingly popular, are difficult to track. All these indicate that for a city like Hong Kong with many of its economic activities linked inextricably with the Mainland, measuring "true" economic output and economic growth is no longer a simple task of just looking at the national accounting statistics such as GDP numbers. Other domestic economic indicators, such as income growth or employment statistics, might serve better as indicators of economic prosperity and success. Unfolding a New View on Hong Kong The deepening economic integration between Hong Kong and mainland China, in particular with the Pearl River Delta region, has made it increasingly difficult to view Hong Kong as an independent economic entity as before. Not only has Hong Kong become a Special Administrative Region of the People's Republic of China since July 1997, but the economic development of Hong Kong has also linked up with that of the Mainland in view of the surging cross-boundary economic activities and the powering ahead of economic reforms and liberalisation in the Mainland. The ongoing integration process has unveiled the future of Hong Kong. Hong Kong should strive to remain the preferred "port" of mainland China, serving as an indispensable link between the Mainland and the world. The term "port" should not be narrowly defined as the traditional transportation hub for the shipment and transshipment of cargoes and goods, but should be defined broadly as the preferred place for conducting various kinds of economic activities including financial, information and marketing activities. 8 Compass Vol.7 No.3 September 2001

4 Hong Kong possesses many favourable ingredients for becoming one of mainland China's most important external "ports". The upholding of the "one country, two systems" principle has allowed Hong Kong to maintain its separate customs autonomy with essentially no import duties or excise tax. The tax system is simple and the tax rate low, and the legal and accounting systems well-rated internationally. The financial system and financial markets are first-class and favoured by international investors. With mainland China's continued economic liberalisation, Hong Kong should revitalise its new "entrepot" role by capitalising on its edge as a de facto "free-trade zone" within the Mainland. $%&'()*&+,-./012!" #$%&'()*+,-./01234 $%&'()*+,-./%012! "#$%& '()*+,-."/01 $%&'()*+,()-./012 $%&'$()*+,-./0 $%&'()*+, -./01234 $%&'( )*+!,-./01 $%&'()*+,-./ 012 $%&'()*#+,-./0123 $%&'()* $%& $%&'()*%+, -./01 $%&'()*+,-./0$123 $%&'()* +,-./0123 $%&'()*+,-./ $%&'()*+",-./012 $%&'()*!"+,-./) $%&'()*+,-./012*3 $%&'()*+,-./012! $%&'() Developing Hong Kong as a "port" of business services is in harmony with its objective of becoming a world city. The growth and development of a city is in itself a process of expanding the services sector to serve and support a growing hinterland where the manufacturing process locates. The strong service orientation of cities has become a global phenomenon. The prosperity of Hong Kong thus relies on how well it plays the role of a services "port" as the hinterland grows rapidly. Powering Hong Kong Services Ahead Hong Kong has been on track in adapting to such a role. On the one hand, Hong Kong has successfully tapped on the immense resources in the Mainland. On the other, Hong Kong's excellent physical infrastructure and international connections have facilitated the sustained growth of the Pearl River Delta region. The growth of Guangdong province has been among the fastest in the Mainland for the past 20 years. Many of the services were provided by Hong Kong, with the Mainland's imports of services growing at a compound rate of 27% per annum between 1990 and Hong Kong's services sector will benefit from the Mainland's sustained reform and liberalisation as fresh demand for Hong Kong's services will be generated. The Mainland's upcoming WTO entry will induce many Hong Kong corporations and individuals to invest or increase their investments in the Mainland. This Hong Kong-based investment will in turn propel the services industry in the territory, as Hong Kong is the home base for those investors. Last but not least, Hong Kong's role as an agent between mainland China and foreign investors would also create huge services income for the territory. 9

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5 $%&'()*+,-./&)!" $%&'()*+,-./'$01 $%&'()*+,-./ $%&'()*+,-.fqr!!" # $%&'()*+,-./0123 $%&'( )*+,-./0123 $%&'()*+,-./0123 $%&'()*+,-./*012 $%&'()*+,#-./01234 $%&'%()*+, $%&'()*+,-./01)23 $%&'()*+,-#./',0 $%&'()*+,-."#$%/0 $%&'()*+,-.&/012 $%&'()*+,-./&01234 $%&'()! OMMN N While the services industry already makes up the lion's share of Hong Kong's economy, there are still areas for Hong Kong to further exploit the potential of the industry. Firstly, there is room to further strengthen Hong Kong's role as a major international conference venue. For instance, the holding of the ITU Telecom Asia conference in Hong Kong, organised by the Geneva-based International Telecommunication Union last December, is not only an endorsement of the territory's status as one of the world's leading telecommunication hubs, but also a tribute to its ability to hold world-class events. Hong Kong should explore the possibility of holding international trade fairs and conventions for Mainland enterprises as part of the integration process. Hong Kong's success as a conference venue will draw a large number of international business leaders to the territory and reinforce its position as a leading business hub in the region. Secondly, Hong Kong should position itself to take full advantage of the potential growth in telecommunications and e-business in the region. The information technology revolution will not be reversed despite the temporary set-back to the internet industry. To meet the challenges of the knowledge-based "New Economy", there is a need to put in place a series of policies to further invest in both the soft and hard infrastructure. Conclusion Hong Kong has undergone many successful evolutions in its short history, creating an economic miracle on its own merits despite scarce natural resources. The economic re-integration with the Mainland on the back of the Mainland's economic liberalisation is the shaping force of Hong Kong in the decade ahead. While the challenges are big, revitalising Hong Kong as an external "port" of mainland China as the integration deepens is the propeller of growth in Hong Kong's services economy. Extracted from : Hang Seng Economic Monthly January Compass Vol.7 No.3 September 2001

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