Written evidence submitted by the Hong
Kong Association
THE EMERGENCE OF THE PEOPLE'S REPUBLIC OF
CHINA AS A REGIONAL POWER AND ITS IMPACT ON THE INTERNATIONAL
SYSTEM
1. This submission focuses on the importance
of the Hong Kong Special Administrative Region (SAR). There are
three parts to this submission: first, given the Committee's focus
on China, we examine the strong ties between China and Hong Kong;
second, the regional economic importance of Hong Kong; third,
the significance of the Hong Kong-UK bilateral relationship. This
submission has been made by Dr Gerard Lyons, Chief Economist of
Standard Chartered and is made on behalf of the Committee of the
Hong Kong Association.
I. CHINA'S
RELATIONSHIP WITH
HONG KONG
2. The Hong Kong economy is deeply connected
with that of the mainland. In fact, Hong Kong has a unique relationship,
being part of China, but with a constitution enshrined in the
basic law that allows Hong Kong a high degree of autonomy with
executive, legislative and independent judicial power. The pace
of economic, social and cultural integration has deepened in recent
years, supported by the signing of the Closer Economic Partnership
Arrangement (CEPA) in 2003. This agreement applies zero tariffs
to all Hong Kong origin goods and grants preferential treatment
in 27 service sectors. Furthermore, CEPA has deepened Hong Kong's
economic ties in the Pearl River Delta (PRD), the region immediately
bordering Hong Kong and which accounts for about one-third of
China's exports. Hong Kong has reaped considerable benefit as
well as making a significant contribution to the mainland's economic
development.
3. The advantages that Hong Kong offers
are well documented. Its institutional infrastructure is strong.
Hong Kong is viewed as one of the most competitive economies in
the world, coming top in the Heritage Foundation's Index of Economic
Freedom for the past 12 years. As a regional hub, the Hong Kong
International Airport connects Hong Kong to over 140 locations
around the world, including 40 in mainland China. Hong Kong boasts
a simple and low tax regime with no restriction on the flow of
goods and capital, thus making it an attractive location for business.
4. Inward foreign direct investment (FDI):
When China adopted the new "open door policy" in 1978,
Hong Kong businesses were the first group to invest in southern
China, and were seen as the key drivers in developing manufacturing
capacity there. And this strong connection has remained. Today,
Hong Kong is China's largest direct investor. In 2005, USD 18
billion of the total of USD 60 billion of FDI invested in China
came from Hong Kong. It is estimated that Hong Kong businesses
have set up over 60,000 factories in China, mainly in the Pearl
River Delta area, hiring somewhere between 10-13 million workers.
Even in Shanghai, where investors from Taiwan, Korea, Japan and
other major industrial countries are highly concentrated, Hong
Kong is still the most important source of investment with over
11,000 ventures and USD 23.45 billion in aggregate. Alongside
Hong Kong companies investing in the mainland, this also includes
China affiliated companies in Hong Kong bringing capital raised,
or profit earned, back to their parent companies in China. It
also includes foreign companies who use their entities in Hong
Kong to invest in China. Taiwanese businesses are particularly
keen to use Hong Kong as an offshore centre given the government
regulations in Taiwan regarding investment on the mainland.
5. Although some multinational companies
choose to invest in China directly rather than via Hong Kong,
the territory continues to offer considerable advantages to foreign
businesses, especially small and medium sized enterprises. Strength
in providing financial and professional service, such as consultancy
on the China market, has persuaded many foreign companies to use
Hong Kong as a springboard to leap into China. In 2005, there
are 1,167 companies that have set up regional headquarters in
Hong Kong, 115 of them from the UK.
6. Outward foreign direct investment: While
the direction of capital flows in the past decade was mainly from
the world into China, there are already signs that this is being
countered by a rising outflow as Chinese companies invest more
in the global market. This is partly prompted by China's need
for natural resources. It is also important for Chinese businesses
to tap the global market as competition in the domestic market
intensifies. The Chinese government is also seeking to relax outward
investment as China's foreign exchange reserves surge. IBM-Lenovo,
Rover-Nanjing Automobile and CNOOC's bid for Unocal are prime
examples of what can be expected in the future. The type of companies
that are seeking overseas opportunities will also broaden from
large transnational companies to small and medium enterprises.
Again, Hong Kong can offer its expertise and knowledge of the
global market to serve these companies, as well as make the most
out of its international network.
7. Trade: China is Hong Kong's largest trade
partner, accounting for 45% of Hong Kong's total trade. Meanwhile,
Hong Kong handles about 10% of China's total trade. This percentage
has steadily declined, down from almost 70% in the early 1990s,
because of the growing competition from ports in Shenzhen and
Shanghai and rapid development of cargo handling capacity in these
cities and the relatively low cost. In response to such a challenge,
Hong Kong businesses are increasingly engaging in offshore trading,
which allows Hong Kong companies to handle the trade transaction
without the goods physically coming to Hong Kong ports. Offshore
and onshore trading activities together now account for almost
40% of Hong Kong's GDP, up from 11% in 1989.
8. Tourism: While CEPA and other efforts
to integrate the Hong Kong and Chinese economies will only show
benefits in the medium to long run, the benefits from Chinese
visitors are more immediate. The individual visitor scheme allows
mainland residents in selected cities to visit Hong Kong in their
individual capacity. The scheme now covers the whole of the Guangdong
province, Beijing, Shanghai, Tianjin, Chongqing and another 13
Chinese cities. Mainland visitors are instrumental in reviving
Hong Kong's tourism industry, retail and hospitality sector during
the post-SARS period. Out of a total of 23.3 million visiting
tourists in 2005, 12.5 million came from the Mainland China. This
accounts for 53% of Hong Kong's incoming visitors and represents
48% of China's 31 million outgoing tourists in 2005. The figure
is not only limited to holidaymakers, but also included business
travellers. The opening of the Disney theme park in September
2005, and other tourist attractions in 2006, should continue to
ensure steady growth in this sector.
9. Renminbi (RMB) banking services: Banks
in Hong Kong were allowed to launch renminbi banking services
in early 2004. The range of services was limited at the start,
but is gradually broadening with the permission of the Chinese
financial regulators. This development puts Hong Kong in a prime
position to become an offshore centre of RMB banking services
as the Chinese authorities gradually open the country's capital
account. Further to RMB banking services, many banks are also
aiming to use Hong Kong as a centre for wealth management for
their Chinese customer base, given the broad range of products
available in Hong Kong.
10. Capital market: Given the structural
issues of the Chinese capital market, Hong Kong has played a considerable
role in assisting Chinese companies, both state-owned and private,
to raise capital for their development. On the main board of the
HK Stock Exchange, H-shares1 and Red Chips2 were responsible for
43% of the total market turnover. These two categories of shares
make up about one-quarter of the USD 1.1 trillion total market
capitalisation of the main board. Out of the USD 21 billion raised
through initial public offerings (IPOs) in 2005, 83% was in H-shares
and Red Chips. The notable additions to the list in 2005 included
China Construction Bank, Bank of Communication, China Shenhua
Energy Co Ltd and Shanghai Electric Group Ltd. It is expected
that Hong Kong will remain the preferred market for the listings
of China's state-owned commercial banks and other state-owned
enterprises.
II. REGIONAL
ECONOMIC IMPORTANCE
OF HONG
KONG
11. As mentioned above, at the end of last
year, 1,167 international companies had regional headquarters
in Hong Kong, 115 of these were from the UK. The number of regional
HQs has grown steadily; up from 1,098 in 2004 and from 855 in
2000, highlighting that Hong Kong has retained its regional importance.
In addition, many companies also have regional offices in Hong
Kong, numbering 2,631 at the end of 2005. These regional HQs and
regional offices represent parent companies located outside of
Hong Kong.
12. Hong Kong's regional importance, and
global significance, stems from many factors: it is one of the
most open and dynamic economies in the world; it has a strong
legal system, with an independent judiciary and rule of law; it
has an anti-corruption environment and sound corporate governance;
a world class communications infrastructure and an international
financial centre. Freedom under the Law and Human Rights are guaranteed
under the Basic Law and continue to be upheld eight years after
the handover. In the past, Hong Kong was often viewed as the gateway
to China. Now, it is the gateway from China for many companies,
as a growing number of large mainland-based companies have listed
in Hong Kong. This unique set of circumstances positions Hong
Kong well in the East Asian region, given that intra-regional
trade is rising sharply and the regional importance of China continues
to grow.
13. Hong Kong's hosting of the World Trade
Organisation's (WTO) Ministerial meeting last December was a clear
sign of the global role that it enjoys. Hong Kong is able to enter
into international agreements on its own behalf in commercial
and economic matters. It is a member of, for instance, the WTO
and the Asia Pacific Economic Cooperation Forum (APEC), in which
it is a champion of both free markets and lower trade barriers.
14. Hong Kong is also an active member of
the global coalition against terrorism. Hong Kong has joined the
Container Security Initiative and, given the importance of its
financial centre, is important in its support for eliminating
funding for terrorist networks and combating money laundering.
Hong Kong has passed legislation to bring it into compliance with
applicable United Nations anti-terror resolutions.
15. One of the biggest issues and challenges
with the emergence of China is the issue of intellectual property
rights (IPR). In view of this, it is noteworthy that the US Trade
Representative and other US agencies regularly cite Hong Kong
as an example for others to follow with the introduction of effective
legislation aimed at controlling illicit production as well as
improved enforcement.
16. Hong Kong's importance as an international
financial centre is also key. In terms of foreign exchange (FX),
for instance, Hong Kong is the world's sixth largest FX trading
centre and Hong Kong has the seventh largest holdings of FX reserves.
Where economies such as Hong Kong hold their reserves will have
a very significant impact on the global economy, and even on geopolitics
in coming years. A decade ago, Asian central banks held one-third
of global currency reserves, now they hold two-thirds, the bulk
in dollars. Hong Kong is also an active member of the 11-member
EMEAP (Executive Meeting of East Asia and Pacific Central Banks)
group, being the chair of its Financial Markets committee and
led the launch of the Asia Bond Fund programmes—a regional
initiative to pool foreign exchange reserves of the 11 EMEAP-member
central banks to promote regional bond market development.
17. Being the world's largest net external
creditor (in GDP terms, 259%) with USD 429 billion of net external
assets at the end of 2004, Hong Kong is a major financier in the
global system. It is the world's fifth largest net portfolio investor,
the sixth largest foreign direct investor, holding more direct
investment assets abroad than, for instance, Japan. It is also
the seventh largest recipient of foreign direct investment, next
only to China in Asia.
18. As stated above, one of the many important
features for Hong Kong is its strong financial sector, backed
by its legal system and strong corporate governance. This should
not only help Hong Kong in the future but it is also likely to
be seen as best practice for the Chinese mainland's financial
markets to follow. Hong Kong is also the world's 12th largest
international banking centre in terms of external assets, and
the second largest asset management centre in Asia. It also has
the largest number of authorised insurance companies in Asia and
is one of the world's four largest gold trading centres. Hong
Kong's stock market is the ninth largest in the world, or the
second largest in Asia with a total market capitalisation of USD
1.1 trillion at end-January 2006. In 2005, USD 70 billion of new
capital was raised by the Hong Kong Stock Exchange, the second
largest in the world and top in Asia.
19. Being the largest direct investor in
Mainland China and a key component of the global supply chain
evolving around southern China, Hong Kong is also the world's
largest exporter (including re-exports) of toys, textiles, handbags,
clocks and travel goods, as well as the 10th largest service exporter
of the world. In essence, the Hong Kong economy plays a very important
role within the region.
III. HONG KONG—UK
BILATERAL RELATIONSHIP
20. There are many aspects to the Hong Kong-UK
bilateral relationship. The UK maintains substantial economic
and business interests in Hong Kong. The UK has, in the past,
supported Hong Kong's autonomy, helping its prosperity and way
of life, by supporting bilateral agreements, promoting trade and
investment and arranging high level business and commercial visits.
There is strong cooperation across a wider range of areas too,
including cooperation in the fight against terror and law enforcement,
to stronger educational ties. The strong economic and social ties
are reflected in the numbers of UK citizens and British businesses
based in Hong Kong, some with a substantial presence. Yet, despite
this, there is a feeling that the relationship has not strengthened
as much as it could have done since the 1997 handover.
21. Hong Kong is the second largest export
market for the UK in Asia, or 14th largest in the world. In return,
the UK is the fifth largest export market for Hong Kong, or the
second largest in the EU. Both economies are the 12th largest
import supplier of each other. Since handover, the HK-UK trade
links have continued to grow, albeit only modestly. Total trade
between the two grew from USD 11 billion in 1997 to USD 12.8 billion
in 2005, with most, if not all, of the growth being in Hong Kong's
exports to the UK (Table 1). This performance is relatively disappointing
compared with the 50% expansion in Hong Kong's total trade between
1997 and 2005. As a result, the UK's share of Hong Kong's total
trade fell from 2.8% in 1997 to 2.1% in 2005.
22. Despite the lacklustre performance of
HK-UK trade, business connections between the two remain strong.
The Hong Kong Trade Development Council has set up a HK-UK Business
Partnership Programme with UK Trade and Investment in October
2004, aiming at promoting two-way business interaction between
the two economies. The tie between the UK and Hong Kong is relatively
small in terms of investment, despite the heritage. Hong Kong
is the 7th largest recipient of UK direct investment in the world.
The SAR is also the UK's 12th largest source of foreign direct
investment. Conversely, according to the Hong Kong government,
the UK is the second most favoured destination (excluding offshore
financial centres) of Hong Kong investors, and the SAR's sixth
largest source of direct investment. However, the actual share
and absolute amount of investment involved is relatively small.
As of end-2004, Hong Kong invested a total of USD 7 billion in
the UK, while the UK invested USD 9 billion in Hong Kong, each
accounting for 2% of the total. The London Stock Exchange also
opened its first Asian regional office in Hong Kong in October
2004.
23. Other than UK-HK business relationships,
another important link for the UK is the provision of education
services. It is estimated that almost 20,000 students from Hong
Kong are studying in the UK. Hong Kong is also acting as a springboard
for students from mainland China who would like to know more about
studying in the UK. The British Council's teaching centre in Hong
Kong runs the Council's largest English-language teaching operation
in the world, provided training to over 33,000 students a year.
24. There are about 18,000 British nationals
residing in Hong Kong, accounting for 3.4% of the foreign population
in the SAR, the eighth largest among different nationalities.
Other than that, there are 3.5 million British Nationals (Overseas),
mostly living in Hong Kong. The Passport Section of the British
Consulate-General in Hong Kong remains the largest passport issuing
operation outside the UK. The British Government is responsible
for providing consular and passport services to the holders of
British National (Overseas) passport. Under the UK Residence Permit
Scheme, about 5,000 gratis UKRPs have been issued to BN(O) holders,
mainly students, to enjoy non-visa stays in the UK for over six
months.
25. These strong historical, economic, business
and cultural ties with Hong Kong give the UK a strong foundation
on which to build, as it focuses on the future progress and development
in East Asia. The above highlights not only strong UK-Hong Kong
ties, but equally significantly the importance of Hong Kong in
terms of the current and future development of mainland China,
and also the territory's influential regional role.
26. The Hong Kong Association acts as a
focus in the UK for the promotion of the long-standing and special
links between the HKSAR and the UK, in particular with regard
to business and bilateral trade. It has a wide membership, including
large British owned, Hong Kong or UK registered companies and
represents a huge UK investment not only in Hong Kong but also
in mainland China. Its meetings are attended by representatives
from UK companies of all sizes and organisations seeking to improve
their awareness of Hong Kong. The Association organises regular
events to support its membership and these include meetings with
politicians, officials and senior businessmen, amongst others,
associated with both Hong Kong and the United Kingdom. Over the
last year guests to lunches and meetings of the Association have
included the Chairman of the Treasury Select Committee, the Chairman
of the FSA, Chief Executive of the HKSAR Donald Tsang, Hong Kong
Justice Secretary Elsie Leung and the UK Deputy Prime Minister,
John Prescott. The Society's Chairman is Baroness Dunn and amongst
those on its Committee are The Chairmen of Standard Chartered
Bank, HSBC, John Swire & Sons Ltd, Jardine Matheson, The Chief
Executives of P & O and British Airways (until December 2005)
and The Directors General of the Hong Kong Economic and Trade
Office and the Hong Kong Trade Development Council.
References
1 H-shares are securities of companies incorporated
in the PRC and nominated by the Chinese Government for listing
and trading on the Hong Kong Stock Exchange. They are quoted and
traded in HKD. Like other securities trading on the Hong Kong
Stock Exchange, there are no restrictions on who can trade H-Shares.
2 Red Chip shares are securities of Hong
Kong incorporated companies that trade on the Hong Kong Stock
Exchange. They are quoted in HKD. Red Chips are companies that
are substantially owned directly or indirectly by the Chinese
Government.
Hong Kong Association
27 February 2006
Table 1
HONG KONG'S EXPORTS AND IMPORTS with WESTERN
EUROPE in 2005
| | |
| | | |
| Exports HKD million | Jan Dec
| | | |
|
| 2004 | 2005
| | % Change
|
| Markets | Value
| Value | | 2004-03
| | 2005-04 |
| | |
| | | |
| Western Europe | 286,468 |
330,102 | + | 16.8
| + | 15.2 |
1 Germany | 62,900
| 72,720 | + | 11.9
| + | 15.6 |
| 2 United Kingdom | 65,853
| 69,247 | + | 14.8
| + | 5.2 |
| 3 Netherlands | 33,141 |
42,639 | + | 18.5 |
+ | 28.7 |
| 4 France | 26,588 | 31,688
| + | 20.6 | + |
19.2 |
| 5 Italy | 23,390 | 26,503
| + | 21.3 | + |
13.3 |
| 6 Spain | 14,651 | 17,457
| + | 11.7 | + |
19.1 |
| | |
| | | |
Imports HKD million |
| | | |
| |
| Jan Dec
| | | |
|
| 2004 |
2005 | | % Change
|
| Markets | Value
| Value | | 2004-03
| | 2005-04 |
| | |
| | | |
| Western Europe | 197,716 |
205,320 | + | 11.8
| + | 3.8 |
| 1 Germany | 39,999 | 41,054
| - | 3.0 | + |
2.6 |
| 2 United Kingdom | 28,837
| 30,973 | + | 19.1
| + | 7.4 |
| 3 Switzerland | 27,108 |
28,609 | + | 17.4 |
+ | 5.5 |
| 4 Italy | 26,022 | 26,556
| + | 19.3 | + |
2.1 |
| 5 France | 18,653 | 19,683
| + | 14.6 | + |
5.5 |
| 6 Belgium | 13,995 | 14,550
| + | 15.8 | + |
4.0 |
| | |
| | | |
| | |
| | | |
Source: Hong Kong Trade Statistics, Census and
Statistics Dept.
|
