Written evidence submitted by British
Chamber of Commerce in Hong Kong
EXECUTIVE SUMMARY
Input to the FAC Inquiry into the UK Government's
Policy on China: British Business Opportunities in Hong Kong—What
Support is Needed from the UK Government?
It is the contention of the British Chamber
of Commerce that Hong Kong remains a leading international business
centre based on a British common law system and operating to world
class institutional standards. Indeed, to ignore Hong Kong and
the influence that it exerts on the Chinese economy and the Asia
Pacific region would cause the United Kingdom to miss significant
advantages that flow from Hong Kong's well-rehearsed institutional
advantages. It is the view of the Chamber that there is a need
for a mindset change so that British business can fully understand
Hong Kong's changing role and develop the measures that the Chamber
feels are necessary in order to realise opportunities that are
arising consequent on these changes.
The Parliamentary Foreign Affairs Committee
when developing its findings should keep at the forefront of their
minds the fact that Hong Kong remains:
— One of the world's major economies,
with a GDP of almost US$163 billion in 2004 (compared with Shanghai's
GDP figure for the year of US$90 billion.)
— The world's freest economy—ranking
first on the Heritage Foundation's Index of Economic Freedom for
the past 12 years. (China ranks jointly with Zambia in 111 place.)
— A leader in GDP per capita terms.
In 2004, Hong Kong's GDP per capita stood at US$23,647.
(Mainland China's GDP per capita statistics by city tend to be
over-inflated as they are based upon official population figures
that do not include the vast number—often amounting to millions—of
migrant workers that Mainland cities attract. Best case official
statistics currently put GDP per capita in a handful of China's
major cities at around US$5,000.)
— A major trading economy, ranking
11th globally by import and export value in 2004. Hong Kong represented
2.9% of both global imports and exports, while the entire UK contributed
to 4.9% of global imports and 3.7% of global exports.
— The ninth largest Stock Exchange
by market capitalisation (which is already the largest capitalisation
per head of population anywhere in the world). With all the major
China company listings timetabled to take place here, Hong Kong
is expected to be one of the top three stock markets by capitalisation
within ten years.
Hong Kong achieves this with a population of
just 6.9 million and an area of 1,104 square kilometres (slightly
lower than London's 2001 Census population and roughly two-thirds
the area).
Much of Hong Kong's success can be attributed
to its geographical position, its deep water port and its historic
logistic tradition as the interface between China and the world.
What has changed is that with the change of sovereignty and the
impact of the Asian economic recession plus SARS the pace of integration
with the mainland has increased; indeed many regard the creation
of the so called "9 plus 2" as the creation of a Pearl
River Delta Common Market. However it is regarded, the fact is
that it is becoming progressively easier for those who wish to
do business in the mainland of China to do so from Hong Kong which
was not the case as recently as eight years ago. Hong Kong's institutional
advantages offer international companies a high degree of certainty
for doing business in the region. These attributes ensure that
Hong Kong continues to perform as a business enabler and risk
manager for business in and with the Mainland of China. Furthermore
its reach spreads across not only the Chinese mainland but throughout
the region.
A further phenomenon has been the unprecedented
growth in the number of mainland Chinese businesses that have
established themselves in Hong Kong. These companies are increasingly
using Hong Kong to network with international business, to raise
capital and to explore global markets. The reasons for this development
are exactly the same as those for international companies except
in reverse using Hong Kong as their risk manager to enter global
markets. The natural product of both ends of this equation has
been and will continue to be the development of RMB Banking, RMB
Capital Debt and wealth management business. This already makes
Hong Kong a unique financial centre and this uniqueness will become
even more compelling as the range of businesses develops in this
trade.
In analysing the opportunities for British business
the key message to British companies is therefore to exercise
caution in assessing media reports that simply scratch the surface
of economic reality in Mainland China and fail to comprehend the
significant risk mitigation benefits of using Hong Kong as an
access point for Mainland business. They should base their investment
decisions on realistic assessments of their own capabilities and
experience in the Mainland Chinese market and the maturity of
that market for their product or service and ensure that they
fully understand the pros and cons of using Hong Kong as an access
point for mainland business.
RECOMMENDATIONS
— That the next China Task Force
Meeting should take place in Hong Kong to emphasise the recognition
of the key role played by Hong Kong in trade and investment between
the United Kingdom and China.
— That British business based
in Hong Kong should be invited to participate in the development
of the British China trade strategy.
— That the United Kingdom Government
continues to play an active role in supporting Hong Kong/UK business
and cultural links.
— That there should be greater
promotion of British business in Hong Kong which focuses on highlighting
the UK's core strengths.
— That there should be an easily
accessible database providing statistics on the UK's existing
engagement in the region, as well as regular meaningful updates
on UK/China-related events and policy developments.
— That a programme of research
be put in hand to ascertain what each economic region of China,
(including Hong Kong and Macao) and relevant industry sectors
are likely to need in terms of professional services in the future
and how the UK can rise to the challenge of fulfilling those needs.
— That communication and marketing
strategies be developed and deployed to demonstrate the UK's capabilities
and commitment in the area of "cutting edge" professional
services.
— That the "Education in
the UK" marketing campaign fund be restored for China with
an allocation to Hong Kong.
— That research is carried out
to determine the precise statistics on the number of members of
British professional and learned institutes in Hong Kong.
Finally the perception in the British, Hong
Kong and Mainland Chinese business communities alike has been
that the UK has refocused its attention on the Mainland, at the
cost of its involvement and profile in Hong Kong. The Chamber
would like to see a more visible acknowledgement of the scale
of UK business interests in Hong Kong and continued firm support
from government in promoting Hong Kong as a regional centre for
business for Mainland China and the Asia Pacific region.
This paper has been submitted to the Foreign
Affairs Committee (FAC) of the House of Commons in response to
a request for input from the FAC. The FAC has asked the British
Chamber of Commerce in Hong Kong (the Chamber) to comment on the
opportunities for British business in Hong Kong. The FAC has also
sought the advice of the Chamber on what measures the British
government should be taking to support and facilitate these opportunities.
Although the main focus of the FAC's current inquiry into East
Asia is on "the emergence of the People's Republic of China
as a regional power and its impact on the international system"
and the political consequences of this, the FAC has rightly widened
this remit in order to place developments in Mainland China within
a regional context. As Hong Kong continues to play an integral
part in the economic success of Mainland China, it is vital that
the role of Hong Kong is understood by British policy makers and
businesses alike.
Hong Kong remains a leading international business
centre based on a British common law system and operating to world
class institutional standards. Indeed, to ignore Hong Kong and
the influence that it exerts on the Chinese economy and the Asia
Pacific region would cause the United Kingdom to miss significant
advantages that flow from Hong Kong's well-rehearsed institutional
advantages. This paper will set out these advantages and will
outline some of the opportunities that British business can gain
by fully understanding Hong Kong's role and the measures that
the Chamber feels are necessary in order to realise these opportunities.
This response has been compiled by the Business
Policy Unit of the British Chamber of Commerce in Hong Kong, the
Chamber's think tank and advisory group on Government policy,
and represents the broad views of the Chamber's members. The British
Chamber is one of Hong Kong's largest international business organisations.
The Chamber comprises major multinational companies and institutions,
as well as a substantial number of SMEs and represents a broad
spectrum of British, Hong Kong, international and Chinese companies.
Collectively, this membership makes a significant contribution
to the Hong Kong economy and to employment, and constitutes a
representative cross-section of business opinion in the SAR.
HONG KONG—ECONOMIC
OVERVIEW
Since 1997, Hong Kong has faced numerous challenges
that have captured media attention. Some commentators, witnessing
the economic difficulties brought on by the Asian Financial Crisis,
then by Severe Acute Respiratory Syndrome, went as far as to repeat
the gloomy predictions of the "Death of Hong Kong."
[76]Media
attention turned to the region's economic success story, China,
where double digit growth and the rise of new urban business centres,
most notably in Shanghai, made for a good story. The message was
clear—Hong Kong's days are over, Shanghai is the place to
be. However, this grossly over-simplified assessment fails to
portray the reality of the situation.
In fact, Hong Kong remains:
— One of the world's major economies,
with a GDP of almost US$163 billion in 2004 (compared with Shanghai's
GDP figure for the year of US$90 billion.)
— The world's freest economy—ranking
first on the Heritage Foundation's Index of Economic Freedom for
the past 12 years. (China ranks jointly with Zambia in 111 place.)
— A leader in GDP per capita terms.
In 2004, Hong Kong's GDP per capita stood at US$23,647.
(Mainland China's GDP per capita statistics by city tend to be
over-inflated as they are based upon official population figures
that do not include the vast number—often amounting to millions—of
migrant workers that Mainland cities attract. Best case official
statistics currently put GDP per capita in a handful of China's
major cities at around US$5,000.)
— A major trading economy, ranking
11th globally by import and export value in 2004. Hong Kong represented
2.9% of both global imports and exports, while the entire UK contributed
to 4.9% of global imports and 3.7% of global exports.
— The ninth largest Stock Exchange
by market capitalisation (which is already the largest capitalisation
per head of population anywhere in the world). With all the major
China company listings timetabled to take place here, Hong Kong
is expected to be one of the top three stock markets by capitalisation
within 10 years.
Hong Kong achieves this with a population of
just 6.9 million and an area of 1,104 square kilometres (slightly
lower than London's 2001 Census population and roughly two-thirds
the area).
Today, Hong Kong's economic outlook is extremely
good. It does not hit the double digit growth recorded by leading
Mainland Chinese city economies, but it should be remembered that
economic growth in Mainland China is measured from considerably
lower starting points. In 2005, Hong Kong's economy expanded by
7.3% in real terms and by 8.6% in 2004. Growth in 2006 is projected
at 6% in real terms. A combination of external trade and domestic
demand suggests that, although Hong Kong has moved past the peak
of the current economic cycle, there is still sufficient economic
drive for Hong Kong to achieve its medium trend growth of 4%-5%
in coming years.
As Hong Kong continues to grow, it faces significant
challenges, which in turn give rise to potential business opportunities
for companies in certain sectors. Declining birth rates and increased
life expectancy mean that Hong Kong is facing an aging population,
which in turn is putting significant strain on health care services.
Economic success and demographic changes are also increasing demand
for manpower and educational services. Competition in the manufacturing
sector is increasingly driving companies to look for improved
hi-tech solutions. The environment, however, represents Hong Kong's
greatest challenge. Poor air quality and a lack of space in local
landfills, in particular, are leading to calls for greater investment
in renewable energy and recyclables. These challenges present
obvious potential opportunities for British companies skilled
in these fields.
HONG KONG'S
ADVANTAGES
Much of Hong Kong's success can be attributed
to its geographical advantages. Hong Kong's deep water port was
a key factor in the early establishment of Hong Kong as the entrepot
for trade into and out of southern China. This advantage has continued,
with the rapid expansion of Mainland Chinese trade, fuelled by
external demand for processed goods and internal demand for commodities,
creating significant opportunities for Hong Kong's logistics-related
businesses. A further advantage is Hong Kong's air connectivity
with the rest of Asia, making it an ideal choice for companies
looking to establish regional headquarters or offices. Bordering
Mainland China, Hong Kong has direct flights to 40 Mainland destinations.
Services to other Asian countries place most destinations, including
India and Japan, within a 5-hour journey time from Hong Kong.
For this reason, Hong Kong has one of the busiest airports in
the world in terms of number of passengers and volume of cargo.
Hong Kong's institutional set-up has created
enduring value-added benefits for business, both as a market and
as a platform for trade with Mainland China and the Asia Pacific
region. Hong Kong's rule of law and international banking system
offer solid foundations for companies doing business in the region.
Hong Kong also offers a fully convertible currency, simple and
low taxes, free flow of information, clean government, and well-established
international business norms. These attributes ensure that Hong
Kong still performs a critical role as business enabler and risk
manager for companies wishing to do business in Mainland China.
Whilst authorities in Mainland China continue
to make efforts to upgrade legal and financial systems and to
impose international rules of business in line with the Mainland's
WTO commitments, this process represents a mammoth undertaking.
Enforcement of policy at the local level remains particularly
problematic. The protection of intellectual property rights (IPR)
provides a clear example of this. Though the institutional arrangements
exist for trademark and patent registration in Mainland China,
and copyright protection should be automatically extended under
China's membership of the Berne Convention for the Protection
of Literary and Artistic Works, IPR infringements remain rife.
Indeed, US Customs data for 2004 shows Mainland China as the top
source country for IPR infringement products, amounting to 63%
of the total value seized. Mainland China was also the top source
for counterfeit articles entering the European Union, accounting
for 54% in 2004. Hong Kong, by contrast, with its solid legal
infrastructure and tradition of contract enforcement, is far better
able to protect intellectual property rights.
As well as its institutional advantages, Hong
Kong also provides important social infrastructure and community
support. There are over 40 international schools in Hong Kong,
compared with 14 in Shanghai. Hong Kong's medical services are
world class and still employ a significant number of British doctors.
The British community remains significant, with over 17,000 resident
Brits. This helps to ensure that British arts, culture, sporting
events, and business and social clubs continue to thrive here.
The environment also remains an attraction with a large amount
of open space close to the city and air quality standards which,
though deteriorating, remain significantly better than most major
cities in Mainland China.
HONG KONG'S
ROLE IN
GREATER CHINA
Since the early 1980s when Mainland China first
started on its economic reform programme, Hong Kong has been a
leader in developing business there. Its close proximity to Shenzhen,
the fishing-village-turned-metropolis bordering Hong Kong, provides
a dramatic demonstration of the scale of economic growth derived
from Mainland China's experiment with market economics, coupled
with investment from Hong Kong. In 1980, Shenzhen had a population
of 321,000 and a GDP of US$180.2 million. By 2000, the Census
population of Shenzhen (excluding migrant workers) was 7 million
and GDP had increased to US$27.3 billion. Hong Kong's reach soon
extended beyond Shenzhen to other cities in the Pearl River Delta
region, the economic area covering 9 cities of the Mainland Chinese
province bordering Hong Kong, Guangdong. This area has become
one of the world's leading manufacturing bases for a wide variety
of consumer products, many of which account for the majority of
both domestic and global output.
Hong Kong continues to be a driving force in
the economy of this area. There are currently an estimated 53,000
Hong Kong-owned companies operating manufacturing facilities in
Guangdong Province, employing some 10 million people. Hong Kong's
continued role in the manufacturing and sourcing of product from
Mainland China should be clearly understood by British businesses
wishing to take advantage of low costs of production in Mainland
China to improve their margins in home markets. For businesses
with little or no experience of Mainland Chinese business norms,
Hong Kong companies offer the expertise and trust required. Contracts
originating in Hong Kong provide British companies with the assurance
that the goods that they have ordered will be delivered on time,
to the correct specifications and at the agreed price. British
businesses also often do not appreciate the extent to which Hong
Kong continues to be a showcase for goods manufactured in Mainland
China. From a purely practical standpoint, this means that British
companies often take considerable time to visit factories in Mainland
China, often spending hours of unproductive time journeying from
one manufacturing facility to the next. The majority of Hong Kong-owned
factories have their showrooms in Hong Kong, and increasingly
Mainland Chinese-owned producers are using Hong Kong as a base
to showcase product, either through the numerous trade shows held
in Hong Kong each year or by establishing their own offices in
Hong Kong. This makes Hong Kong an ideal first stop for British
businesses that want to explore manufacturing and sourcing opportunities
in Mainland China.
Though Hong Kong's initial focus for business
in Mainland China was largely limited to its immediate hinterland
and to export processing, Hong Kong's role in the region's development
now covers a much wider remit both in economic and geographical
terms. Mainland China has long been Hong Kong's largest trading
partner, accounting for 44% of its total trade value in 2004.
Hong Kong is Mainland China's third largest trading partner after
the United States and Japan. Hong Kong also remains by far the
largest contributor to foreign direct investment (FDI) in Mainland
China. In 2004, one-third of Mainland China's US$60 billion in
utilised FDI came from Hong Kong, and according to the Shanghai
Municipal Commission of Commerce, Hong Kong has now become the
most important source of investment into the city. As well as
manufacturing, Hong Kong investors are particularly active in
real estate and related city development and infrastructure projects,
retail, and producer services sectors. Central government support
for Hong Kong's continued economic success under the "One
Country, Two Systems" framework has led to various cross-boundary
initiatives aimed at boosting Hong Kong's economic interaction
with Mainland China. One such initiative, the Closer Economic
Partnership Arrangement (CEPA), provides preferential and accelerated
market access for a range of Hong Kong service sectors, as well
as zero import tariffs on a range of Hong Kong-made goods. British
companies would be well-advised to follow these developments in
order to be able to leverage such initiatives to gain greater
access to Mainland markets through Hong Kong.
In the last few years, Hong Kong has experienced
unprecedented growth in the number of Mainland Chinese businesses
that are setting up in Hong Kong. Mainland companies have been
particularly noticeable in establishing regional headquarters
(RHQs) and regional offices (ROs) in Hong Kong. There are currently
1,167 international companies with RHQs in Hong Kong and 2,631
companies with ROs. Mainland Chinese companies, which up until
a few years ago did not significantly rank among these, now represent
9% of Hong Kong's RHQs and 6% of ROs. This compares with UK companies
owning 10% of RHQs and 8% of ROs in Hong Kong.
Mainland companies are now increasingly using
Hong Kong to network with international businesses, raise capital
and explore global markets. Hong Kong has become a major service
centre for Mainland China. Hong Kong is the first offshore centre
to launch RMB banking services, with current RMB deposits of over
RMB22.6 billion. As the RMB deposit and fund raising markets increase
in Hong Kong, it is likely that Hong Kong will become the global
centre for RMB clearing, functioning in much the same way that
New York does for the US dollar and London does for sterling and
the euro.
On the Hong Kong Stock Exchange, H-shares (of
those companies incorporated in Mainland China) and Red Chips
(of those companies incorporated in Hong Kong but controlled by
a Mainland Chinese state-owned entity) were responsible for 43%
of the total market turnover on the main board in 2005. As of
February 2006, these two categories of shares made up 38.9% of
the total US$1.2 trillion in market capitalisation of the main
board. Out of the US$21.1 billion raised through IPOs in 2005,
83% came from H-shares and Red Chips. Looking forward, Hong Kong
will remain the preferred market for the listings of Mainland
Chinese enterprises. British businesses should, therefore, be
aware that Hong Kong now provides a base to meet and explore opportunities
with a critical mass of Mainland Chinese companies. Hong Kong
is likely to remain a centre for a broad range of financial services,
from corporate fund raising to individual wealth management, servicing
new demand from Mainland China.
As well as the business and financial sectors,
Hong Kong's tourism and retail industries have also been significantly
impacted by a sharp rise in Mainland tourist arrivals, and recent
investments such as the opening of Hong Kong Disney. In 2005,
12.5 million of 23.3 million tourist arrivals in Hong Kong came
from Mainland China. Again, this is something that British business
should be aware of in exploring the consumer habits of Mainland
Chinese tourists. To give one example, a walk into Marks &
Spencer in Central, Hong Kong, where sales assistants are now
equally conversant in Mandarin as they are in English and Cantonese,
now provides a good indication of the fashion tastes of middle-income
Mainland Chinese tourists.
OPPORTUNITIES FOR
BRITISH BUSINESS
This paper has attempted to highlight Hong Kong's
enduring institutional advantages and strengths as a regional
business centre. It has also attempted to outline some of the
key roles that Hong Kong plays as a link between Mainland China
and the global market. It is hoped that in understanding these
advantages and roles, British business will take steps to realise
the opportunities for trade and investment that are arising from
Mainland China's development.
As Mainland China continues to advance its place
in the global economy, British businesses may be tempted to by-pass
Hong Kong and enter the Mainland Chinese market directly. This
might well be the best option for certain companies in certain
industries. Major corporations most notably in the consumer electronics
field are already doing this, by setting up RHQs and research
facilities in Shanghai, for instance. It should be remembered
that these companies generally have 10 or more years' experience
of doing business in Mainland China and operate in business sectors
that were early starters there. These companies also have significant
resources and well-established links with local authorities, which
enable them to deal with many of the inefficiencies of doing business
in Mainland China. They often relocate to Mainland locations to
take advantage of the army of low-cost, well-educated graduates
that they need, most often in the engineering field.
The key message to British business is, therefore,
to exercise caution in assessing media reports that simply scratch
the surface of economic reality in Mainland China and fail to
comprehend the significant risk mitigation benefits of using Hong
Kong as an access point for Mainland business. They should base
their investment decisions on realistic assessments of their own
capabilities and experience in the Mainland Chinese market, the
maturity of that market for their product or service, and a fundamental
understanding of the advantage of using Hong Kong in the achievement
of their goals.
SUGGESTED UK GOVERNMENT
SUPPORT
The Chamber has been active in its support of
the UK Government's Asia Task Force and China Task Force initiatives,
taking part in the Asia Task Force workshop in Hong Kong in February
2006 and providing written feedback to the China Task Force in
May 2004. In the earlier days of the China Task Force initiative,
the Chamber was concerned that Hong Kong was not fully included
in the process. [77]In
a recent meeting with Deputy Prime Minister John Prescott, who
also chairs the China Task Force, Chamber members were assured
that this was not the case and that senior UK government policy
makers were well-aware of the advantages that Hong Kong provides.
The Chamber welcomes the Deputy Prime Minister's suggestions that
a future CTF meeting take place in Hong Kong and looks forward
to providing input in this regard.
The UK continues to play an active role in supporting
Hong Kong/UK business and cultural links. During the last six
months some 16 British trade missions have visited Hong Kong and
19 British business groups have participated in international
trade fairs in Hong Kong. The Chamber fully supports these initiatives,
but feels that these events suffer from a relatively low profile
and fail to communicate not only Hong Kong's continued importance
to UK companies but also the degree to which the UK is actually
engaged in the Hong Kong market.
The Chamber would like to see greater promotion
of UK business in Hong Kong, focusing on highlighting the UK's
core strengths. The Chamber has sought through its committees
to see how in the medium and long-term British business could
use the strengths that Hong Kong offers to take more effective
advantage of the unfolding opportunities in the China market.
Implicit in this process would be more information about UK strengths
and their relevance to the needs of Hong Kong and the developing
Chinese economy. Central to this would be an easily accessible
database providing statistics on the UK's existing engagement
in the region, as well as regular meaningful updates on UK/China-related
events and policy developments. This would enable the Chamber
to play a greater role in providing useful and timely contributions
to future UK policy initiatives, as well as lend increased support
to the various missions and events organised by the UK government
in Hong Kong.
There is no doubt that the UK government faces
significant challenges in its role as facilitator of business
opportunities between the UK and the PRC, including Hong Kong.
In the past, business links were firmly routed in the trade of
tangible goods. Whilst these still exist, the government and UK
business now face the far more challenging task of promoting the
UK in the sale of services and technology aimed at supporting
the development of PRC business. We would suggest that research
be undertaken to ascertain what each economic region of China,
(including Hong Kong and Macao) and relevant industry sectors
are likely to need in the future and how the UK can rise to the
challenge of fulfilling those needs. Just as importantly, communication
and marketing strategies need to be developed and deployed to
demonstrate the UK's capabilities and commitment in these areas.
There are strong bi-lateral education and training
links between Hong Kong and the UK. This takes many different
forms at school, college and university level and has been an
area of collaboration for many years. One of Hong Kong's key strengths
in today and tomorrow's global economy lies in its human resource
capacity and much of that capacity has been educated and trained
in the UK or is associated with one of the UK's many professional
bodies. The UK has the largest market share in attracting students
and the volume in the market has grown since 1997. The increase
in numbers is in part due to the active marketing campaign conducted
by the British Council as part of the Prime Minister's Initiative
(2002). A resumption of the campaign fund with an allocation to
Hong Kong would be appreciated and deliver a good rate of return.
Little is known about the number of members of British professional
bodies and learned institutes and it is recommended that research
should be conducted to determine the exact statistics.
Finally, the UK has enjoyed a long and successful
association with Hong Kong. Since 1997, however, the perception
among the British, Hong Kong and Mainland Chinese business communities
alike has been that the UK has refocused its attention on the
Mainland, at the cost of its involvement and profile in Hong Kong.
The Chamber would like to see a more visible acknowledgement of
the scale of UK business interests in Hong Kong and continued
firm support from government in promoting Hong Kong as a regional
centre for business for Mainland China and the Asia Pacific region.
British Chamber of Commerce in Hong Kong
February 2006
76 First made in Fortune magazine, 26 June
1995. Back
77
This separation is apparent in the UK government language that
refers to "China" or "the PRC" and assumes
that Hong Kong is excluded from this. From a Hong Kong perspective,
the distinction is made between Hong Kong and "Mainland China",
with Hong Kong being included in "China" or "the
PRC." Back
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