Objectives

1. L-2 : The Place of Hong Kong in the China’s Economy Objectives • to identify the different roles which Hong Kong plays in the economic activities of the mainland • to speculate on the extent to which these roles may be eroded in the next century Sept 2003

2. Hong Kong’s Different Roles • ________________- HK as final customer and as supplier buying from and selling to China • ________________ - organising transactions between China and third countries • ________________ - providing and organising funds for China • ________________ - point of contact, source of learning

3. HK is a significant final buyer of Chinese goods, but declining as a % HK is a very significant source of visitors to China 1993 84.7% 1997 83.3% 2002 ______ About 11% of China’s imports were HK “domestic” exports in 1990, but a falling trend 1994 6.8% 1997 5.8% 2002 _______ Current Position as Trading Partner?

4. What of the Future as Trading Partner? • As a FINAL MARKET: HK will grow absolutely but decline relatively as China’s trade with other countries grows faster • As a SOURCE OF SUPPLY: HK will decline, both absolutely and relatively as a source of manufactures, but grow absolutely as source of services

5. Hong Kong as Middleman • COMMODITIES • entrepot - HK firms buy from China, find buyers, set prices, take risk of ownership, make contracts • trans-shipment - goods pass through HK • brokerage - goods shipped directly from China to third countries - HK firms provide services • SERVICES • tourism - HK firms arrange inbound and outbound China travel

6. How Important is the Middleman Role? • For HK today, it is the centre of the economy: 110,000 Import/Export firms employ around 600,000 people • For China today, entrepot, trans-shipment and brokerage provided by HK is very important

7. What About the Future of the Middleman Role? • HK has a permanent geographical advantage and infrastructure development is well ahead of China • There are AGGLOMERATION ECONOMIES, SCALE ECONOMIES and LEARNING EFFECTS which give advantages to a ‘first-comer’

8. HK’s Advantages as Middleman • Well-established legal system • Pool of commercial information not available in China • TDC provides information and promotional infrastructure • Network of small firms allows pooling of risks - buying and selling offset each other • Trading skills in abundance • Attractive posting for expatriate personnel

9. What of the Future? • Some have argued that HK will be “overtaken” by __________ • In the long run, many of the middleman functions for the Yangtze delta and basin may shift to ____________ • BUT that leaves a major role for HK in servicing South China, where there are no obvious rivals

10. Hong Kong as Financier • HK as a SOURCE OF LOANS for China • HK as a source of FOREIGN DIRECT INVESTMENT HK as a Source of Loans for China • LOAN SYNDICATION -- Bringing together foreign lenders (By the end of 1990s, about _______of loans were syndicated in HK.) • One of the major providers of loans

11. Hong Kong as a Source of Foreign Direct Investment • In 1979-2000, 134,870 FDI projects registered as HK origin (50.5%) of the total • Hong Kong accounts for around 40.4% of China’s accumulated utilised value of FDI in 1979-2000

12. The Importance of HK FDI Into China • Responsible for large proportion of exports • Productivity higher and its growth much faster in FIEs • Responsible for introduction of ‘factory culture’ • ‘Low-tech’, low-skill, labour-intensive assembly operations, mass-producing mature products for low-price segments

13. The Argument over HK FDI in China? • AGAINST:little technological up-grading, ‘sweat-shop’ exploitation of migrant workers, social tensions, little commercial knowledge transmitted • FOR: low-tech fits the pattern of comparative advantage, output, incomes, jobs and exports have all boomed

14. Contact Point with the Outside World exhibitions representative offices for provinces, cities, enterprises Provision of Consultancy Services legal technological construction and property development market research accountancy academia? ‘Learning by Doing’ Provision of a ‘back-door’ to Taiwan Hong Kong as Facilitator

15. CEPA (Closer Economic Partnership Arrangement) • A free-trade agreement announced on 30 June 03. • A total of about 273 classes of goods made-in HK will enjoy zero import tariff when importing into the Mainland from 1 Jan 04. • CEPA also provides HK firms involved in 17 services sectors with earlier access to the mainland market.

16. Trade in goods: • Textile & clothing • Clocks and watches • Paper articles • Electrical & electronics products • Chemical products Trade in services: • Insurance • Legal • Banking • Accounting • Securities • Medical & dental

17. Two common questions Rule of origin The two sides are in the process of discussion of the origin rules. They will reach an agreement before end 2003. Possible economic benefits of CEPA • Opening up of new business opportunities in the Mainland for HK. • May attract to HK manufacturing - - Brand name products (e.g. watches) - - High value added products - - Substantial intellectual property inputs If so, attract manufacturers to return to HK? Doubt! May lure niche manufacturers, e.g. water filtration system since consumers put a premium on the “Made-in HK” label. 3. Provide a “first mover” advantage to service traders 4. Also benefit businessmen elsewhere in the world to enter the China market via HK?

18. Comments on the CEPA benefits The annual tariff savings from CEPA amounting at about HK$750 m will account for only about 0.06% of GDP (caution!) The origin rules are crucial to determine who will benefit from CEPA and to avoid exploitation by exporters from elsewhere Service traders will likely benefit from CEPA  establish a footing in the huge China market earlier ** Visit the Trade & Industry Department website.