DSG Asia

1. DSGAsia The Current and Future Economic and Business Environment of Hong Kong Presentation to The Asia-Pacific Student Entrepreneurship Society Simon Ogus August 24th 2003 simon@dsgasia.com; www.dsgasia.com DSGAsia Independent Asian Economic & Political Analysis

2. The scramble for the China market is nothing new German cartoon circa 1900 DSGAsia Independent Asian Economic & Political Analysis

3. Where we once were, and where we may be going DSGAsia Independent Asian Economic & Political Analysis

4. China today - the America of the 19th Century? Disinflation driven by technological change is wonderful for income growth - not so deflation Source: Friedman and Schwarz, CEIC DSGAsia Independent Asian Economic & Political Analysis

5. Disinflation driven by technological change and supply side shocks causes major shifts in relative pricing DSGAsia Independent Asian Economic & Political Analysis

6. Is the world’s love affair with China’s 2.6 billion armpits justified? • Cyclically, the risks seem far less acute than most elsewhere. Domestic demand remains well underpinned • The medium term macro policy framework is excellent. Unlike many others the PRC has a logical and deliverable game plan • However, central edict and local practice remain different issues. Inequality, corruption and demographics pose the greatest threats • China’s monopsonistic position allows it to access a cost of capital way below the level its risk profile would imply • Under WTO, behaviour could become worse not better • Hong Kong-Shanghai is not a zero sum game DSGAsia Independent Asian Economic & Political Analysis

7. Hyper-competitive exchange rates mean that Asia will continue to win market share in global trade DSGAsia Independent Asian Economic & Political Analysis

8. Foreign firms producing for export in China quite like a “cheap” RMB. In any case, Beijing ain’t budging DSGAsia Independent Asian Economic & Political Analysis

9. The region will shadow the dollar and continue to rack up FX exchange reserves. Gold should benefit DSGAsia Independent Asian Economic & Political Analysis

10. Entrepreneurship at its best…. and its worst! “The best money you ever make is from dancing on someone else’s grave” Anon. DSGAsia Independent Asian Economic & Political Analysis

11. SARS: Exponential Fear, Square Root Recuperation • The impact of SARS on domestic demand will be transient • Production disruption will be minimal • Tourism and business travel will take longer to recover • A sense of proportion is needed. 170,000 people die of ordinary pneumonia in China each year DSGAsia Independent Asian Economic & Political Analysis

12. Why have Hong Kong’s entrepreneurs traditionally prospered? • Institutions: strong legal and financial systems, minimal bureaucratic and government interference • Location: geographically at the heart of Asia, quasi-monopoly as China’s window on the world • Openness: to goods, capital, people and ideas, high degree of civil liberties • Mindset: people have a refugee mentality, are self-driven, and have low expectations of government • Opportunity: you can pretty much do what you want to do DSGAsia Independent Asian Economic & Political Analysis

13. Which of these endowments seem to be at risk? • Institutions: perception of institutional erosion, increasing government and bureaucratic obfuscation • Location: China quasi-monopoly status is disappearing • Openness: increasing introspection, anti-immigrant stance • Mindset: an entitlement mentality has been building However…. • Opportunity: you can still pretty much do what you want to do. This is why Article 23 has been so vehemently opposed DSGAsia Independent Asian Economic & Political Analysis

14. Hong Kong’s entrepreneurs are responding admirably to a brave new world • Estimates suggest that Hong Kong companies are earning USD12-30 billion p.a. in the PRC – 7-18% of GDP • 100-200,000 Hong Kong residents are now living and working in China – 3-6% of the labour force • Inward FDI also continues to grow strongly. Overseas company registrations have risen 41% since the handover. US FDI alone has risen 68% • China is doing its bit. Tourism is surging, CEPA and QDII/QFII will be helpful The problem is that none of this is creating many local jobs DSGAsia Independent Asian Economic & Political Analysis

15. Hong Kong’s Port is in Terminal (sic) decline but trade-related incomes will continue to grow DSGAsia Independent Asian Economic & Political Analysis

16. Hong Kong and Singapore are creating jobs but there is a skills mismatch in both economies DSGAsia Independent Asian Economic & Political Analysis

17. There is no easy solution to the skills mismatch • Import more skilled workers – the new Mainland professionals scheme is a strong step in the right direction • Encourage lower-skilled workers to relocate back over the border. Public housing and welfare reform is essential • Radically overhaul of the education system. Enhance language skills, alter mindsets and methodologies • Re-assign budget priorities and clamp down on tax avoidance DSGAsia Independent Asian Economic & Political Analysis

18. Hong Kong and Singapore: too many civil servants, too much dependence on property DSGAsia Independent Asian Economic & Political Analysis

19. Hong Kong’s Phantom Structural Crisis • Hong Kong’s ‘structural’ problems are fixable – a lack of visionary leadership and political will is the real problem • Clamping down on tax and subsidy cheats could go a long way to balancing the budget. Civil service reform would also help • Immigration, education, environmental and property market reforms are all achievable. Vested interests have to be told the party is over • The irony is that unaccountable governments do not have to try to be liked. Populist authoritarianism is a continued recipe for inaction • Nevertheless Hong Kong will adjust despite the government! DSGAsia Independent Asian Economic & Political Analysis