?If you want to be in the China market, it is imperative that you start planting the seed today. If you are a Hong Kong company, like us, you probably planted to seed a long time ago." So says John Hung, executive director of Wharf Holdings, a huge conglomerate whose interests in China range from property development, to power plant construction, to cable TV to the massive and well-known proposal for reshaping Wuhan in the heart of China into a major port and transportation hub.
But, you don't have to be such a large and well established company to be interested in China if you are from Hong Kong. Every business in the colony has its eyes turned to the mainland. Martin Barrow, a director of Jardine Matheson, sums up the volume of interest when he says, "If you look back to the first year of the open door policy, 12 per cent of our trade was related to China. Now it is 54 per cent and will clearly climb to 60 or 70 per cent. There is also staggering growth in our re-exports to China ? up 1000 times since the open door policy. Domestic exports are up 700 times, and imports are also way up."
The Kowloon-Canton Railway Corporation, which carries passengers and freight from Hong Kong to Guangzhou, is currently waiting for approval on a proposal to build a second line to the border from the container port at Kwai Chung, largely because the existing line simply does not have the capacity to meet the demand for freight. "Of the 500 plus trains a day that run to the border, only about 14 train paths are available for freight. And there is not enough capacity on the line to increase it," says Kevin Hyde, the corporation's chairman. The company also plans to build larger freight yards to cope with the growing bottlenecks.
A recent survey by French securities company, Credit Lyonnais, confirms the trend. Listed companies in Hong Kong, it says, are involved in at least 802 projects over the border, with the total value of projects involving local companies (in discloseable transactions) amounting to HK,$521bn (US$66.8bn). This sum is equal to one third of the entire capitalisation of the Hong Kong stock market.
Areas of investment interest on the mainland are increasingly varied. As the traditional industries in manufacturing continue to flourish in neighbouring Guangdong province and pushing further inland, property and infrastructure development and the service sector are also claiming large proportions of the investments.
Not only the fly-by-night investors ? which vice premier Zhu Rongji's recent austerity measures aim to swat ? are buying up property left right and centre, but so are the more committed and established corporations. Kumagai Gumi Hong Kong is involved in several on-going projects, not least of which is its massive development of Hainan island. Here the company is building offices and apartments in the capital Haikou, and developing a free port at Yangpu, with the aim of creating an industrial, financial and commercial centre. It is a unique project, not least because Kumagai is the only company to have been allowed to own land in China, and then re-sell it.
"We are running out of land in Hong Kong," explains Kumagai's chairman, Mr. C.P. Yu. "If you want to do property development, there really isn't much you can do here. And the land is getting so ex."
Cost benefits are inevitably a major draw to manufacturing and service industries alike. Labour costs, land prices and escape from Hong Kong's rising inflation make mainland alternatives all the more appealing. Cathay Pacific, the colony's international airline, now has 200 employees over the border in Guangzhou, paying just a quarter of the wages it had seen forking out in Hong Kong. The Hong Kong government has also recently given permission to HongKong Bank to recruit up to 350 workers from southern China to meet its shortfall in staff.
The lure of cut prices attracts the Hong Kong business man to China, as much as it does any overseas entrepreneur. But, if you are from Hong Kong you automatically inherit certain advantages, and companies have not been slow to exploit this upper hand. Years of experience, networks of contacts, strategic positioning and, of course, a common language with mane southern mainland Chinese, have put other nationalities in the shade.
"Foreign investors dare not venture into Guangdong, because whatever is Good, they believe the Hong Kong Chinese have taken," Liu Chee Ming, managing director of Jardine Fleming goes so far as to say.
This firm foothold that the Hong Kong Chinese have established, has led many foreign companies to adopt the "if you can't beat them, join them" attitude.
"We have become the bridge for business, the conduit between China and the outside world," explains Wharf's John Hung. "It puts us into a crucial position. We go in and shake hands with the Chinese, do a joint venture in their way, take a risk which we feel is acceptable –which say, the Americans or the British would find totally unacceptable."
There is also the issue of 1997, of course. Increasingly, Hong Kong companies see investment over the border as being a stabilising influence in the light of the PRC's impending reclaiming o sovereignty. In the same way, mainland companies are becoming more and more attractive as partners to Hong Kong businessmen, as they bring with them a promise of security. Citic Pacific, the wholly owned Hong Kong-based subsidiary of the hugely influential state owned CITIC Beijing, is one company that has benefited from this movement, striking up partnerships and clinching deals on both sides of the border with great success.
"We can give them a kind of protection or continuation of the business that they are currently engaged in Hong Kong," admits Peter Lee, executive director of the company. "Frankly, we are selling our name and our background."
Citic Pacific is just one example of another rapidly emerging trend ? the reciprocal focus of mainland companies on Hong Kong. Drawn by promises of wealth and the relative freedom of being a Hong Kong-registered subsidiary, a growing number of companies are establishing a presence. A mainland study, quoted recently by the Financial Times, estimates that China had invested HKS156bn (US$20bn) in Hong Kong during 1992 alone, although the figures are impossible to verity. Involvement in the Hong Kong market has begun to get under way, with the first two of the nine proposed state-owned companies having recently listed. Some analysts say that by the year 2000, China-backed companies could account for half the total market capitalisation of the Hong Kong market.
"Hong Kong is a place that has enjoyed prosperity for a very long time," says Citic Pacific's Lee. "The Chinese have every confidence in the continued growth of Hong Kong, and its important status in the region. The mainland Chinese are coming to Hong Kong to try to benefit from this continued growth. if you know that you are going to take back your house a couple of years down the road and you know that this house's value is going to increase, and then you are given an opportunity to participate in owning say part of the house, it is a good opportunity."
This mutual appreciation is gradually changing the nature of the relationship between Hong Kong and the mainland.
"Seven or eight years ago, we used to talk in a more cautious way about a relationship of interdependence between the two. Now, we have really gone beyond that and it's much more a relationship of integration," says Barrow of Jardine Matheson.
Barrow takes the view that Hong Kong will eventually become purely a service centre, handling front and back-end activities, "but with all the basic work done across the border." His vision involves the emergence of a Greater China, incorporating "the role of the mainland with its human resources and land. The role of Taiwan with its technology and finance, and the role of Hong Kong with all its broad middle man role of marketing, management and design of transport, and financial services."
There seems to be a general consensus among many Hong Kong businessmen that the colony's importance as a port and a financial centre will not be challenged, despite the emerging prominence of the likes of Shanghai or even Wuhan ? if Wharf Holdings plans come to full fruition. With the sue of the market, there is room for several ports and financial centres to coexist.
"With the trade growth in China being so fast, and so massive, I believe that over time, even if Hong Kong operated 14m dwt which is the projection for 1995, we would need other ports in China to cover its needs," says ports Hung of Wharf Holdings. "There has got to be a finite limitation to the physical ability of Hong Kong."
Peter Lee of Citic Pacific agrees. "Hong Kong being the centre which provides financial services, telecommunications, etc — with this infrastructure in place, there is no other city in the next five to ten nears that can replace Hong Kong. I don't imagine that there is any city in the southern region that can in the years to come."
Zhu Rongji's recent austerity measures have been received on the other side of the border with a certain amount of cautious optimism. The steps are felt to be essential if China's economy is to be controlled, and will not have any damaging impact on the colony. Martin Barrow of Jardine Matheson points out some of the more immediate advantages when he says, "I think it will provide good investment opportunities in China because I think there are going to be transactions that haven't come off for some reason that can be picked up or maybe it'll be possible with the market in a less heated state to find better
transactions, negotiate better terms and so on."
Citic Pacific's Peter Lee's optimism is long term. "With the present austerity programme in force, it may cool down the investment pace a bit. I tend to think this is a short term consolidation, which is healthy from the longer perspective. This recent cooling down may give a more solid base for the next round of even longer expansion."
C.P. Yu of Kumagai Gumi also welcomes the austerity programme, and is unconcerned about its effects. The biggest challenge for his company's future, he says, is the competition from other Hong Kong companies for China's rich pickings. "Whatever you try to do, everyone else is trying to do it too and an the large companies in Hong Kong ? all the big names ? are there. If they are not there, they are going there. So it is the competition that will be the challenge in the future." *
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