7 A Chinese global city?

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1 7 A Chinese global city? Looking ahead, it is worth considering whether and how Hong Kong should be involved in the preparation of the 12th Five-Year Plan (covering the period of ) under the One Country, Two systems principle. This will not only facilitate the economic development of the SAR, but also enable our timely and effective contribution to the Mainland s social and economic development during the 12th Five-Year Plan period. (Hong Kong: Central Policy Unit 2007: 29) Who needs Hong Kong? Our discussion in Chapter 6 points to the re-embedding of Hong Kong into China s national development. It is observed that Hong Kong continues to function as China s window to the outside world. But increasingly this is less to do with China acquiring management methods or the funnelling of capital from advanced industrialized societies and Chinese overseas. It is more a matter of using Hong Kong as a springboard for Chinese enterprises, which have experienced rapid growth and development, and thus are looking for new development opportunities and means of financing further organizational growth in order to go global. Equally significant is that, nowadays, economic flows between Hong Kong and China are two-way they are mutually dependent on one another, rather than one of them relying on the other. While Hong Kong s main function in the grand project of China s national development has changed, the saga of Hong Kong as a global city continues. According to Hughes, The Hong Kong mood is one of masterly expedience and crisis-to-crisis adjustment and recovery (1976: 129). How Hong Kong would make a major comeback from the post-1997 economic recession and launch a breakthrough in finding an economic future is still a question waiting for an answer. But within the post-1997 decade this global city, maintaining its economic dynamism, has proved many observers wrong. As noted in our introductory chapter, the cover of the May 2002 issue of Fortune ran this title: Who needs Hong Kong? How the city lost its lock on the China market. Inside, it was argued: The problem is that Hong Kong s China franchise has eroded not, as many feared, because Beijing is keeping Hong Kong down, but because China is

2 A Chinese global city? 153 rising fast. China s progress means that it just doesn t need Hong Kong as much. (Fortune 2002: 42) Yet, as the previous chapter showed, Hong Kong still has a lot to offer. Sassen suggests that Hong Kong has two specialized roles in two distinct sets of networks (2006: 47): first, it is assuming an important role in China s building of a national capital market; second, it serves as a global gateway between China and global finance. Once again, although in a different form and with a different set of functions, Hong Kong is playing a critical role of intermediation between China and the world economy. The growing China factor So, has Hong Kong come full circle? It began as an entrepot and a centre of commercial activities bridging China and the world economy in the mid-nineteenth century. Since then, it has taken a development route of its own, flourishing as an entrepot and a centre of commerce and finance for Chinese business, then as an industrial city, and subsequently a regional and international financial centre. By the time Hong Kong was returned to China in 1997 this could be seen as part of a longer process of Hong Kong China socio-economic integration since the 1970s so that, once again, Hong Kong holds a strategic position between China and the global economy. But epiphenomena can be misleading. It is a different China. Nor has the global economy remained unchanged. Today, Hong Kong plays this critical role of intermediation in the context of a rapidly growing and internationalizing Chinese economy in a period in which China is also changing rapidly in geo-political reach. China has become the factory of the world. Equally important is that it has also become a growing centre of domestic consumption, with the world s leading chain stores and brand names staring hungrily at this very expansive consumer market. Meanwhile, the interface between China and the global economy has changed significantly in the course of its active participation in the world economy at both the global and regional levels on the one side, and the deepening of economic reform in China on the other. Interest in the Chinese economy has moved from simply taking advantage of cheap resources (namely, land, utilities and labour) to eyeing the varied potentials of the world s leading industrial export nation, and a vast and growing consumption market (especially with the arrival of a newly formed middle class (see, for example, Pearson 1997; Davis 2005; Li 2005; Goodman 2008)). The liberalization of the service and financial sectors opens new prospects for Hong Kong and global capital. At the same time, Chinese enterprises are eager to take up opportunities and resources available outside China for the purpose of raising funds, and making acquisitions and investments ranging from natural resources above all energy to manufactures. Our discussion in Chapter 6 underlined the importance of this changing interface between China and the world economy for the strengthening of Hong Kong s position in regional and world finance.

3 154 A Chinese global city? One eye-catching feature of the socio-economic changes in Hong Kong over the past two decades has been its important role in regional integration. This began with the relocation of Hong Kong s manufacturing to the Pearl River Delta (see Chapter 2) in the 1980s, bringing about the formation of a rediscovered hinterland and a new spatial division of labour. With manufacturing production relocated to the neighbouring region and Hong Kong specializing in design, marketing and related commercial activities, and business and financial services, Hong Kong quickly changed into a metropolitan economy (Tao and Wong 2002). By the mid- 1990s, it was no longer secluded from the Pearl River Delta. Developments since 1997 have brought Hong Kong and the mainland even closer. Nowadays, Hong Kong s socio-economic integration with the mainland has long gone beyond the so-called front shop back factory model (Sit 1998). In 2006, some 13.5 million mainland tourists (53.5 per cent of all visitors) visited Hong Kong. More importantly, as we have discussed in Chapter 6, mainland enterprises have actively used the Hong Kong Stock Exchange as a venue for raising funds. Almost half (47.7 per cent) of Hong Kong s market capitalization was under H-shares and red chips in An indicator of the changing character of the China factor in Hong Kong s economy is the inclusion of H-shares in the compilation of the Hang Seng Index (HSI) in Indeed, it is expected that more and more of the mainland-incorporated companies will be considered for inclusion in Hong Kong s blue-chip list. With the listing of more H-shares in the benchmark index, the HSI will no longer be a barometer of Hong Kong s economy, and the index s correlation with the Hong Kong economy will diminish. This reflects the reality of the Hong Kong stock market as now over 50 per cent of the blue chips revenue is not generated from Hong Kong (South China Morning Post 2007). The above socio-economic changes are also reflected in the number and composition of Hong Kong residents working on the mainland (Census and Statistics Department 2006). 1 The number of Hong Kong residents working on the mainland rose from slightly more than 50,000 persons in 1988 to 228,900 persons in Given the expansion and intensification of economic interflows between Hong Kong and the mainland, this is hardly a surprise. More significant is that, between 1995 and 2005, the composition of those Hong Kong residents working on the mainland changed significantly, reflecting the changing character of economic relations between the two places. First, whereas 55.9 per cent of Hong Kong residents working on the mainland were in the manufacturing sector in 1995, the percentage dropped to 20.1 per cent in The leading sector has been taken over by wholesale, retail and import/export trades, restaurants and hotels (59.3 per cent). Equally important is the growth of employment in financing, insurance, real estate and business services, which by 2005 employed 11.0 per cent of all Hong Kong residents working on the mainland. Regarding the composition of Hong Kong residents working in China, the share of the occupation category managers and administrators dropped from 42.0 per cent in 1995 to 35.6 per cent in Meanwhile, professionals (e.g. lawyers, accountants) and associated professionals (e.g. surveyors, legal clerks) rose from 22.5 per cent to 44.6 per cent. In 2005, 28.9

4 A Chinese global city? 155 per cent of these Hong Kong residents (18.5 per cent in 1995) had attained tertiary education. Changes in the composition of those Hong Kong residents working on the mainland in show that, following the changing pattern of economic integration, opportunities across the border are no longer confined to those closely connected to manufacturing relocation. In fact, it is not unreasonable to expect that, with more and more mainlander trainees and junior staff acquiring work experience and management knowledge, Hong Kong managerial staff in mainland production plants will be replaced by locals. Increasingly, for the people of Hong Kong, opportunities on the mainland have shifted towards the tertiary sector and professional services. These changes suggest a potential cleavage within the professional and managerial class in Hong Kong (Lui and Wong 2003). The so-called China opportunity is not open to all professionals, managers and administrators. The differences between those in private business and commercial services on the one hand, and the public sector and social and community services on the other, are rather obvious. Opportunities available in the former activities are partly driven by Hong Kong enterprises that have actively explored new business on the mainland and partly by outgoing mainland enterprises that seek commercial and financial services from Hong Kong s professionals. Those working in the public and non-profit sectors and social and community services are fully embedded in the local context. Their service recipients are primarily local residents. Of course, as Hong Kong s economy recovers from the shocks of the Asian financial crisis and a depressing business environment brought about by the SARS epidemic, with the influx of tourists from the mainland and growing demand for professional services from Chinese enterprises, the entire population stands to benefit. However, in comparison with those in private business and commercial services, the benefits that can be obtained by locally embedded professionals, managers and administrators from the booming Chinese economy are, at best, partial and indirect. Such differences in access to the expansive China opportunity remind us that further regional and national integration in Hong Kong s economic development could be contentious. We have argued (see Chapter 5) that the formation and development of a global city are shaped by its institutional responses to opportunities in a changing environment. Yet, institutional responses rest heavily on city governance. City politics is not a side issue. In fact, it is the crux of the matter: without effective governance, no successful restructuring can be implemented. That Hong Kong was at an impasse after 1997 was the result of a breakdown in state society relations and effective governance. How Hong Kong as a global city will capitalize on the opportunities opened by China depends on the rebuilding of effective governance and a consensus between government and people. We discussed growing inequalities and social divisions within Hong Kong in Chapter 4. Here we further underline differences in access to the China opportunity even among the middle class. The point we intend to highlight is that difficulties in the rebuilding of social consensus and a shared vision should not be underestimated. In this regard, the future of Hong Kong as a global city should not be understood simply in economic terms. Politics matters in determining Hong Kong s path of future development.

5 156 A Chinese global city? The inevitable question: challenge from Shanghai Equally important would be Hong Kong s global connectivity in determining its future development (on Hong Kong global connectivity and its stable position in the league of global cities, see Taylor 2006). Discussion of Hong Kong s future development would inevitably invite sceptics to ask if fast-growing Shanghai will gradually replace its crucial position and function as a global city and international financial centre for China. Indeed, worries about Shanghai s challenge to Hong Kong s position as China s major window to global finance are not without foundation. Table 7.1 reports the market capitalization of stock markets in Hong Kong and Shanghai since It is observed that market capitalization in Shanghai s stock market was quite stable in the early years of the new century, but it has made a major leap since Very quickly, it is catching up (with an increase of per cent in ) and surpassed Hong Kong in 2007 in terms of the amount of money raised in the market. Rapid economic growth in mainland China is the major driving force behind Shanghai s growing significance in the financial world. The competition from Shanghai is real enough. Yet, it is still early to write off Hong Kong (Hua and Cao 2006). The long-term competitiveness of Hong Kong as a global city and an international financial centre, vis-à-vis Shanghai and other Asian global cities, rests upon its global connectivity. Table 7.2 shows world concentration of financial activities (namely the equity market, bond market, credit market, foreign exchange market and derivatives market). On the basis of an average normalized score for financial markets in the world, Hong Kong finds itself in sixth position in terms of overall concentration of financial activities. In the same league table, Shanghai is ranked 22nd. This league table of world financial activities prompts two interesting observations. First, there is a high level of concentration of financial activities in the USA and UK. The gap between their shares of world financial activities and those of the rest of the world is significant. One distinctive feature that divides the top two countries and the rest of the world is the structure of their financial systems. Apparently, both the USA and the UK are able to fare reasonably well across different kinds of financial activities. Those ranked between the third and tenth position may do well in one or two areas but are handicapped by their imbalanced structure. Second, there seems to be another gap between those who manage to climb up to the upper part of the table (say, on or above 15th position) and those lower down in the hierarchy. Hong Kong benefits enormously from its recent growth in IPO activities. It also does quite well in the foreign exchange market. But its equity market remains Table 7.1 Domestic market capitalization in Hong Kong and Shanghai, (US$ millions) Exchange/year Hong Kong 506, , , ,462 1,054,999 1,714,953 2,654,416 exchanges Shanghai SE 333, , , , , ,507 3,694,348 Source: World Federation of Exchanges (

6 Table 7.2 World concentration of financial activities World share of individual markets (%) Rank Country/city Financial activities Equity Fund Intl bond Domestic Bank Bank FX FX/interest concentration turnover raised market bond market foreign foreign turnover rate derivatives (average through amount amount assets liabilities market turnover normalized score) IPO outstanding outstanding 1 USA UK Japan Germany France Hong Kong Netherlands Switzerland Singapore Italy Korea Shanghai* Source: Adapted from Cheung and Yeung (2007: 7) Notes: Equity figures as of end-2006; international bond market figures as of Q3 2006; domestic bond market and banking figures as of Q2 2006; FX and derivative turnover figures as of 2004 * Data missing from one or more markets

7 158 A Chinese global city? relatively small in terms of its share of world market capitalization, and it still has to catch up in the bond and derivatives markets. Yet, compared with Shanghai, Hong Kong seems to be multifunctional. The competitive edge of Shanghai lies in its volume of transaction in equity market and IPO activities. Given that the RMB (renminbi) is not an internationally convertible currency, it remains rather underdeveloped in credit and foreign exchange markets. So far, our discussion of Hong Kong s position as an international financial centre is based upon measurements on a national basis. Should we carry out the comparison at a city level or on the basis of measurement adjusted for GDP with other major financial centres, the outcomes of the ranking exercise would be rather different (Cheung and Yeung 2007). Indeed, with the aid of these new measurements, Cheung and Yeung (2007) find that Hong Kong is a world leader in terms of financial sector foreign direct investment. Correspondingly, according to a study carried out by the Economist Intelligence Unit in 2000, among the 8,000 multinational corporations responding to its survey, 35 per cent have established regional headquarters in Hong Kong (Cheung and Yeung 2007: 13) (compared with only 3 per cent in Shanghai). After [being] adjusted for GDP, Hong Kong outperforms most major financial centres to become the leading locality for international direct investment in the financial sector after Switzerland (Cheung and Yeung 2007: 13). Regarding the export of financial services, according to the traditional measurement, Hong Kong ranked fifth in the world in Once adjusted for GDP, Hong Kong s ranking moved to third place, following the leaders of the UK and Switzerland, but occupied the same ranking as the USA (Cheung and Yeung 2007: 11). Factors such as a sound and transparent regulatory framework, an advanced and sophisticated business infrastructure, and compatibility with world standards in professional practices are all critical to Hong Kong s success in maintaining its status as an international financial centre (Cheung and Yeung 2007: 26). In this connection, there is still plenty of room for improvement in institution building in Shanghai. In fact, as long as China s financial sector is not yet fully liberalized and its currency is not internationally convertible, Hong Kong would remain an ideal locality through which China and its corporations can prepare for further reforms in financial management. In this regard, Hong Kong functions like an offshore centre (so that China can make the best use of its institutional rules and structure) and yet it is also a part of the country. On the one hand, responding quickly to the changing needs of the Chinese economy, Hong Kong has diversified its financial services from bank syndications to IPO and asset management; on the other, China benefits from having Hong Kong as a laboratory for testing various new initiatives in the course of moving towards more active participation in world finance. Of course, this is not to say that Hong Kong has no worries. Given the small size of its local economy, the scale of its financial markets is relatively small compared to those of other major international financial centres. More importantly, there is still a low degree of international element in Hong Kong s domestic stock market as measured by the number of foreign firms listed (Cheung and Yeung 2007: 28) In other words, much remains to be done in order to strengthen Hong Kong s position as an international financial centre. It is quite true that Hong Kong will

8 A Chinese global city? 159 continue to benefit from the rise of mainland China. This will be a major source of demand for financial services exports from Hong Kong. But such benefits are not necessarily confined to Hong Kong and China. That Hong Kong has assumed the role of being a premier IPO centre for mainland corporations contributes to the widening and deepening of the local stock market for attracting international investors to Hong Kong (Cheung and Yeung 2007: 30). How Hong Kong is going to manage its global connectivity will be a key to its future success. Further restructuring of the economy would also hinge upon Hong Kong s global connectivity and its services to China. It is estimated that if the size of the Mainland economy doubles over the next decade, Hong Kong s service exports would rise from the current 40 per cent of GDP to 50 per cent of GDP by 2016, of which half of the increase could be attributable to the Mainland factors (Leung et al. 2008: 3). As noted in Chapter 6, trade-related services, mainly made up of merchanting and merchandizing activities for offshore transactions, contributed almost one-third of all service exports in 2007 (Leung et al. 2008: 6), the largest share among all components of exported services. It is suggested that One of the reasons for the rapid growth of merchanting trade is the increasingly complex global supply chain, which led to importers demand for a broader range of services and more risk-sharing with its suppliers. For the importer, the outsourcing of such operations as sourcing, production, and logistics helps reduce the risks involved in working with different suppliers and coordinating from overseas. Some tasks are also less costly for the merchanting service provider than for the importer to do, such as ensuring compliance with relevant environmental and labour standards, where local knowledge and expertise are needed. Furthermore, given Hong Kong s robust legal system, importers may also feel more confident entering into contractual arrangements with Hong Kong service providers rather than with the manufacturers directly. (Leung et al. 2008: 7) Equally important are exports of financial services. There has been a drastic increase in such exports in recent years, tripling in value over the period (Leung et al. 2008: 9). These services include asset management, securities transactions and financial intermediation, with the former two being the most important impetus to growth in exports. The USA is the largest destination for financial services exports. But information on the fee structure of financial services provided to mainland corporations suggests that about 30 per cent of financial services exports in 2006 were mainland-related services (which include the listing of mainland corporations on Hong Kong s stock market, turnover of mainland-related shares in the local market, increases in merger and acquisition activities, and inward portfolio investment from mainland investors) (Leung et al. 2008: 12). The important point to note is that Hong Kong has moved further towards post-industrialism. The economy is increasingly service-based and service exports have come to constitute an important source of future economic growth. Future success in these areas again hinges upon Hong Kong s connectivity not only with China but also with other leading international financial centres.

9 160 A Chinese global city? Challenges and contradictions Given the galloping pace and momentum of China s economic growth and development, Hong Kong has been re-embedded in the national economic project of a globalizing China. As a response to the need to reposition Hong Kong s development in the broader national picture, the Chief Executive of the Hong Kong SAR government organized the Economic Summit on China s 11th Five Year Plan and the Development of Hong Kong in September Prominent members of business, professional, academic and labour sectors were invited to join four focus groups to work on an action agenda in the areas of trade and business, financial services, maritime, logistics and infrastructure, and professional services, information and technology and tourism. The agenda was published in January 2007 (see the above quotation). The call for closer cooperation, deepening of integration and adopting an active approach was, unsurprisingly, warmly received. The spirit of this new perspective is best captured in the call for Hong Kong to be involved in the preparation of the 12th Five Year Plan (covering the period of ) under the One Country, Two Systems principle. In the face of a vibrant Chinese economy, becoming part of the national economy is not only a safe bet but is also probably the best opportunity for the coming decades. Yet, there has been little discussion of the implications for Hong Kong of closer cooperation and further integration. The talk of Hong Kong s involvement in the preparation of the next Five Year Plan has a certain contradictory character this would involve strategic planning for a (at least, so defined) laissez-faire economy and the placement of this free market economy within the map of a planned (though increasingly market-driven) economy. Of course, one can say that, nowadays, with further marketization and liberalization, China works in fundamental ways like a market economy and the meaning of state planning has changed. So, Hong Kong s active participation need not bring about a major change in its long market-driven approach to development. While few observers of the Chinese economy would deny the significance of marketization and liberalization, it is equally important to recognize the central role played by the Beijing leadership in setting the agenda of national development, defining the parameters of reform, facilitating (or deterring) a certain course of strategic action, controlling the pace of economic growth, and defining the objectives of strategic economic action and programme. The Chinese state, whatever the label of socialism, is becoming less and less important in many domains of social life. Yet it remains the central player in directing national development. In this connection, Hong Kong s hope of closer cooperation with the mainland and assuming a more strategic role in national development depends to a significant extent on its strategic value to the Beijing leadership. Recent initiatives by the central government in making use of Hong Kong as a venue for the gradual opening of channels for individual mainland investors to invest overseas confirm the significance of Hong Kong s special status and position to China. Hong Kong continues to find its place in Beijing s strategizing and national development. With support from the central government, the Hong Kong SAR government may find it easier to handle infrastructural projects involving cross-border coordi-

10 A Chinese global city? 161 nation. Indeed, the strengthening of Hong Kong s metropolitan economy in the context of further regional integration would call for more inter-governmental collaboration at the local and regional levels. No only would this require changes in the government s role in planning and development, it would also challenge the existing framework of coordination in cross-border development. How ready is the HKSAR government, which quite consciously maintains an image of having minimal intervention in economic development, to deal with these emerging developmental issues on a larger scale? How ready is Hong Kong both the government and the private sector to espouse a new perspective and assume a new position in regional development? Surely new opportunities are in sight, but it is alarming to see that Hong Kong appears willing, even eager, to submit to the grander plan of national development. The expressions of fear of being marginalized in the national project, as we noted in Chapter 6, best reflect this change in perspective and orientation. Hong Kong s opinion leaders had long believed that Hong Kong would take the lead in reforming China s economy and bringing the country to the world both capturing the opportunities available through linkages with the outside world, and conveying to China critical information concerning world standards and practices. The active role played by Hong Kong between China and the world economy would not only be critical to China s modernization, but would also be crucial to maintaining Hong Kong s special position and status vis-à-vis China. Now the tables appear to have been turned. The mainland has become an economic powerhouse and Hong Kong s role as an intermediary appears to rest on how China chooses to use it to reach the outside world. It will be the Beijing leadership that determines how to liberalize its financial market, which in turn will shape Hong Kong s future financial development. It will also be the way the central government steers regional development (say, in defining the pace, scale and scope of the Pan-Pearl River Delta development) that will structure Hong Kong s future development in the areas of logistics, business services and tourism. The point is not that Hong Kong needs to prove to Beijing that it is functional to the national project. For a long time, Hong Kong has demonstrated its value to China. Indeed, its existence as a British colony in largely hinged upon such contributions. However, as China globalizes, there emerges a growing number of rising cities in competition with Hong Kong for its once almost unchallenged position and status. More importantly, it will be the central government that assumes the active and leading role in shaping the future course of national economic development wherein Hong Kong is eager to find its place. Paradoxically, Hong Kong has repositioned itself only to find itself placed in the back seat. The incorporation of Hong Kong into the plan of national development is double-edged. On the one side, there will be plenty of opportunities. On the other, Hong Kong is becoming a Chinese global city. More precisely, it will become one of several Chinese global cities with Shanghai, Beijing, and perhaps Tianjin, Shenzhen and others. In the past two centuries Hong Kong prospered because of its Chinese connection. As discussed in Chapters 1 3, Hong Kong has been able to grow economically and to climb the hierarchy of global cities because of its connectivity

11 162 A Chinese global city? with overseas Chinese business networks, and its unique ability to mediate between China and the world economy. It was, and still is, a very special Chinese city. It strikes a balance between being global and being Chinese by building an institutional structure that would fit in comfortably with the requirements of global business and finance and, at the same time, by working through Chinese networks on the mainland and abroad. Its special blend of Chinese global business and finance is the strength of Hong Kong in maintaining its position and status in the global urban hierarchy. Yet, its eagerness to be incorporated within China s national economic development and the turn towards the mainland for new opportunities may upset the previous balance of being both global and Chinese. In the short term, becoming a Chinese global city would help Hong Kong recover from its economic recession, but the long-term implications of such a strategy are far from clear. In the last analysis, the very notion of Hong Kong as a global city suggests that it has to maintain its embeddedness in both the regional economy and the global economy. It also implies that it is both a central node of the national governance as well as the global governance system. It has to understand Chinese culture but tap into the pulses of global culture. It has to be both embedded and autonomous at the same time. Losing either one of the two strands of its development would spell trouble for Hong Kong. The challenge to Hong Kong s future as a global city is exactly about how to maintain its global connectivity and outlook and to become a Chinese city (of a very different brand) at the same time. To be Chinese but retain its distinctive character and a measure of autonomy from China is the tightrope that Hong Kong has to walk to secure its economic and political future. We hope this book will contribute to the understanding of Hong Kong s place in China and the world.