The Rise of Greater China and the Prospect of Hong Kong Dr. XIAO Geng The University of Hong Kong 29 November 2003 Competitiveness = 1 / (transaction costs + factor costs) Transaction costs Costs of inadequate institutions and incentives Man-made costs that hinders mutually beneficial trade Hong Kong have maintained its competitiveness because of its low transaction costs, which more than offset its high factor costs WTO will reduce artificially created transaction costs in China because its rules target specifically on the following services sectors: Distribution and producer services Telecommunication Law and accounting services Banking and financial services
The Rise of Greater China China s economies of scale Labor force is larger than that in all developed economies GDP at Purchasing Power Parity is second only to U.S. (at current price: 1/4 of Japan and 1/10 of US) China is young and maturing Population profile is similar to Japan s in 1976, with working age population as much as 70%, the highest in the world A very big pool of unskilled labor and well educated engineers China is opening up Capital is moving to China through FDI, competing not with China but among foreign investors Hong Kong and western economic institutions are replicated in China Taiwan technology is integrating with Mainland labor and market Economic Implications China is changing the global relative prices Deflation in manufacturing products Inflation in knowledge, raw materials, energy, advanced services, including premier tourist services China is not causing a global deflation as its share of global export is only 6%! The growth of one fifth of global population will trigger a global change towards more competitive production and higher living standards for rich and poor
Reactions of the Global Economy Reactions to the global relative price changes: Expected returns in the past investment need to be adjusted Shareholders need to absorb losses & sunk cost Producers need to adjust strategies Consumers are enjoying cheaper and better products Economies need to re-position itself properly in the value chain, with China as a new partner What is happening now? China and Aisa gains market shares in exports and FDI mainly at the expense of mature economies Hong Kong, Taiwan, Korea, MNCs and other Asian economies are all doing well on economic integration with China, lowering costs and gaining competitiveness China s Surplus in both Labour and Capital Even China has become a net exporter of capital China run Current Account surplus in 17 out of 22 years since 1982, including last 10 years, accumulating a surplus of capital as much as US$170 bn or about 13.7% of GDP China has surplus bank deposits China s banking deposits increased from 30% to 180% of GDP over last two decades with money supply growing about twice as fast as nominal GDP About 20% to 30% of deposits have difficult to find good investment outlets, and have to be absorbed by government bonds and spent on government initiated projects This is a problem not only for China but also for Hong Kong, Taiwan and the entire Asia region The puzzle is the co-existence of surplus capital and labor
Why does not surplus capital hire surplus labour? Bottleneck in China s domestic financial system State banks not active nor effective in screening good projects Domestic stock markets still need to be improved to serve the best companies and investors Some alternatives from external financial services helpful but far from enough Foreign banks, FDI and MNCs provide financing services outside of the domestic financial system but only for large projects and high value added services Off-shore financial markets in Hong Kong provide some alternative services with much higher costs The property rights premium of international investment swap China and other Asian governments give good protection of property rights for foreign invested assets U.S. and other mature markets provide good protection of property rights for Asia s savings, which are invested in U.S. bonds Potential for Better Greater China Synergy In addition to surplus labor and capital, greater China has: Cutting-edge technology in Taiwan Rich natural resources in western region of China Rapidly growing markets in coastal China World-class off-shore financial services in Hong Kong
China s Most Wanted List: All in HKSAR Efficient and timely distribution networks Efficient and safe banks Efficient and robust capital markets Efficient and reliable accounting services Trusted and credible legal system Strengths of HKSAR Economy Low Transaction Costs Rule of law + property rights system Free and open economy + world-class financial system Low tax rate + simple tax system Low Exchange Rate Risk and Uncertainty Fully convertible currency Linked firmly to USD Open and deep capital market Next to Rapidly Growing Southern China fi strong potential for Lowering production costs Expanding turnovers Raising living standards in HKSAR
Performance of HKSAR Economy The shocks since 1997: About 70% loss in property, 40% loss in stocks, 15% drop in price level, an increase of unemployment rate from 2% to 7%, a change from a fiscal surplus to a deficit of above 5% of GDP and significant capital flight The anchor of Hong Kong economy: A currency board linking HKD with USD, robust property rights and regulatory institutions, and little hope of bailout by the government The performance: The private sector of Hong Kong is resilient with manageable problems in NPLs or corporate and individual bankruptcies Growth in trade continues thanks to integration with China The explanation: Most relative prices are flexible and adjusting quickly to re-gain competitiveness (except perhaps civil servants salaries) The private sector is continuously adjusting in spite of a relatively inexperienced government Lessons for HKSAR from Neighbours Lessons from Shanghai and Singapore: Clear vision, bold strategy and detailed blueprint Effective coordination among local and central governments and business No economic borders to residents or outsiders Lessons from Japan, Taiwan and other Asian economies: Political stability key to stable growth Protectionist policies only delay pain People and capital move faster than policy changes Implications for HKSAR: Economic and financial integration of greater China: HKSAR (finance), Southern China (manufacturing) and Taiwan (technology). HKSAR/Pear River Delta could provide the best of both HKSAR and Southern China for Mainland, Taiwan, Asia and international business
The Value of Hong Kong Mini window to the West under Chairman Mao Huge options gain with the early reform and opening under Deng Xiaoping Eroding franchise value as China s window to the West when Mainland cities are deepening their reform and opening Could become a pioneer and a training ground for China in its course of catching up with the developed economies, breaking the glass-ceiling on Asian development The Role of HKSAR in a Rising China A Chinese port city backed by a huge hinterland and run by Chinese under fully functional western-style institutions of international standards One step ahead of the Mainland: What would have happened to China s reform and development if Hong Kong was taken back in 1949? Hong Kong could play a strategically important role in China s and Asia s catching up with the West
End of the presentation Thank you