With an annual growth rate pushing close to the double-digit mark and a huge pool of increasingly wealthy consumers to be tapped, it is clear why China attracts in excess of US$50 billion a year in actual foreign direct investment. And for over 30 years, the American Chamber of Commerce in Hong Kong has been at the forefront of trade in the Greater China region, facilitating its growth. It now stands as one of Asia's most influential business organizations with 2,000 members from more than 30 countries, ranging from multinational organizations to small and medium-sized enterprises. With mainland China on the march and the widely-expected emergence of Shanghai as Asia's business capital in the long term, Hong Kong's future is unclear. Will it consolidate its position as the hub of south China trade but at the expense of infiuence further north? Or do a robust financial system, a strong infrastructure and a business-friendly legacy guarantee it a place at the heart of China's economy? Jack Maisano, the president of AmCham Hong Kong, talked to China Economic Review about the changes taking place in China's economy and what these bode for foreign firms and the commercial health of the SAR. Excerpts of the conversation:
Q: As the Mainland's infiuence continues to grow in business terms, how do you think Hong Kong's position is changing?
A: Hong Kong's position is growing significantly year by year and it's growing in more than one direction. It's a significant player financially for Chinese companies in terms of IPOs; it's a source of opportunity for China through inbound investment; and it's becoming a very important source of information for Chinese companies as they seek to expand outside of China, in particular to the West. Branches of AmCham are expanding quickly in places such as Shanghai because China is expanding. You can't have US$50 billion to US$100 billion of inbound investment in China without a significant number of western executives being close to where they are spending their money. But this doesn't mean closing down in Hong Kong. They have kept their operations here as well as opening or increasing their operations in Shanghai and elsewhere. What we are seeing now is a significant number of regional headquarters moving back to Hong Kong simply because it's a better place to manage the region and coordinate multi-office operations in China.
Q: Why is Hong Kong the location of choice for regional headquarters?
A: Hong Kong is the prime location now for the same reason it has been for the last few decades. We have very strong legal and financial systems, tremendous infrastructure in terms of IT, access to good quality staff of an international nature, good transportation connections, rule of law, transparency and, increasingly, we have knowledge of China. The nature of these companies' operations requires them to be flexible and fast-moving. For example, while you are negotiating a factory contract, it may be better to be on the ground in Shanghai alongside the people you're negotiating with. But after the contract is signed and the factory is up and running it might make more sense to watch the operation from Hong Kong.
Q: The Mainland is making efforts to catch up in several of the areas you mention. Do you think it will be able to match Hong Kong as a service provider in the near future?
A: No, I don't see that happening any time soon, certainly not in the next 10 or 20 years. You cannot recreate the software, people, skills, legal system, financial infrastructure, history and reputation that Hong Kong has in any sort of predictable timescale. It is much easier to move a factory than it is to move a process that is working as well as the kind of oversight processes that we have here in Hong Kong. What our annual members' business survey has always shown is that people appreciate the IPR protection, transparency and predictability Hong Kong offers. In mainland China these areas are still developing.
Q: Many of your members have interests in the Pearl River Delta area. What is your response to talk of a shift in focus from the Pearl River Delta to the Yangtze River Delta?
A: We don't see a shift, we see China operating on more than one cylinder. If you wanted to make a simple breakdown you could say heavy industry in the north, light industry in the south. But China is developing an infrastructure and manufacturing capabilities in a range of areas and there isn't any one particular location that can satisfy the demand. China has not even really begun to satisfy its own internal demand so once domestic consumption starts to rise, other centers will begin to flourish to a similar extent. There could be third, fourth, fifth regions that will become manufacturing behemoths. If anything, we actually see an increase in growth in the Pearl River Delta due to strong labour support, strong support from Hong Kong, amazing growth on the west side of the delta and in Macau, and a whole refocusing of the delta towards electronic and light industrial products, not just textiles.
Q: To what extent does this change in the balance of production apply to China as a whole?
A: I think you're seeing China move up the scale in electronic equipment, automobiles and heavy equipment. I don't think there's any area that they're not involved in, whether it's pharmaceuticals, metal refining or processing agricultural products. It's a big country, there are lots of people and they're going to need lots of production centers. The Pearl River Delta and the Yangtze River Delta have a head start and that gives them an advantage in terms of familiarity, supply chain, infrastructure, port facilities, etc. But the west of the country will start catching up quickly and there will be lots of competition. There are places developing out west – the likes of Chongqing and Chengdu – and I think there's every chance the automotive industry will see steady growth in these areas. They have a huge population base, huge need and there is already a division of labor around the country because some areas have a more established supply chain for certain kinds of goods.
Q: Shenzhen was once the only place AmCham members could start up their operations in China. Do you think there are signs that it is now losing its edge as an investment destination?
A: There is a sense that it might be close to saturation and therefore people are looking to the western side of the Pearl River Delta where there is more greenfield. There is less activity, cheaper land and there are highways, port facilities and other facilities being set up that may attract investment. If Shenzhen wanted to counter this saturation, there are two main routes it can consider. One would be to go upmarket, moving from less finished goods to more finished goods, and less high-priced goods to more high-priced goods. The other method is to generate an internal market through tourism, legal and banking facilities, hotels and restaurants – thereby initiating a consumer binge that begins to feed a whole new kind of consumer growth. I think that's maybe where Shenzhen is now. A lot of people from Hong Kong go to Shenzhen on a regular basis, not just to do business but for leisure activities. They play golf there, eat there, get their clothes made there. Shenzhen is really becoming an adjunct to Hong Kong.
Q: What role does AmCham play regarding specific aspects of China's trade policy such as textile quotas?
A: We have a strong textile contingent in AmCham and they have been over to Washington to give their advice and let legislators know what the situation is on the ground here. And of course, we were eager to see the negotiations taking place between China and the US reach a conclusion. Whenever possible, we come down on the side of free trade: the more free the trade, the better. However, the negotiations were difficult because they affected a lot of people – workers, retailers, manufacturers, consumers, and the whole logistical supply chain in between. Businessmen want stability. They want to know what the process is and where we stand. They can live with quotas, they can live without quotas: they just want a decision.
Q: What are your views on the intellectual property rights situation in China?
A: We encourage the government to support IPR for US companies operating in China and clearly this is an area where China needs to do much, much more. Processes need to be put in place to control rampant counterfeiting and piracy that are against the law in China. I believe that the US and Hong Kong governments, and others too, are quite willing to work with China and help it find the right path. There are tried-and-true ways to implement the control programs but it requires willpower and I understand that a lot the areas where piracy is taking place are difficult to weed out. Nevertheless, it's a serious area which, until it's seen as being serious, will become more and more difficult to control. It is already starting to affect China's own intellectual property creation and this is an important internal issue for the country's continuous growth. China wants to promote intellectual property and the only way people will be encouraged to create it is if they know it will be protected.
What if US consumption slows? Excerpted from the Morgan Stanley report Global: Economic Comment China and the Worldview by Stephen Roach, Nov 4, 2005:
China's booming economy is now widely expected to keep on booming for the foreseeable future. (1) Australians are especially enamored of China – mainly because they have benefited handsomely from a Chinese-induced surge in commodity export prices. (2) India wants to figure out how it can be the next China; an FDI push is key in coping with India's "left-behind" complex. (3) China risk is growing, however, in the face of an increasingly vulnerable American consumer. (4) The worldview has not made the connection between the China boom and US consumption.
After years of believing that the inevitable China crisis was just around the corner, the world has rushed to the other side of the ship. China's booming economy is now widely expected to keep on booming for the foreseeable future – an impression certainly validated by the latest batch of Chinese economic statistics on GDP, industrial output, and money and credit… There is even hope that the Chinese consumer is now positioned to fill any void left by the American consumer.
China's growth dynamic remains heavily skewed toward exports and export-led fixed asset investment. These two sectors now account for more than 85% of Chinese GDP and continue to grow at nearly a 30% y-o-y rate. By contrast, the Chinese consumption share of GDP seems set to fall further this year from the record low of 42% hit in 2004. This structure of the Chinese economy speaks of a stealth vulnerability that the worldview refuses to consider. China's main source of end-market demand is not internal consumption but the American consumer. Fully 35-40% of Chinese exports currently go to the United States. The investment dynamic is also dependent on the need to expand export-producing capacity.
Needless to say, a few eyebrows were raised when I conveyed the latest estimates of our US team that growth in real consumer demand was on pace to slow to an anemic 1.2% annualized clip in the current quarter. I stressed that a saving-short, overly indebted, income deficient US consumer was highly vulnerable to a shock. Sharply higher energy prices and/ or a bursting of the US property bubble would undoubtedly be much tougher to digest in that context – there seemed to be little fear of a sharper adjustment to the downside. Nor was there much appreciation of what such a possibility could mean to China – the new savior of an unbalanced global economy.
China dampens US economic and security interests
Excerpted from the US-China Economic and Security Review Commission annual report released in November:
The U.S. – China relationship is not inescapably destined to be adversarial, and certainly not violently so. However … it is vital for the United States to recognize that in many respects China has different interests, goals, and values than the United States, and to reflect those differences in the way it deals with China. In areas where China poses challenges to the United States, the United States must meet the challenges with a variety of tools and approaches, and as aggressively as necessary to protect important U.S. interests.
Perhaps the greatest challenge that faces the United States is to develop a coherent strategic framework for approaching China in a way that does protect vital U.S. interests while recognizing legitimate Chinese aspirations, minimizing the likelihood of conflict, building cooperative practices and institutions, and advancing both countries' long-term interests wherever that is possible. It then is critical for the United States to use the substantial leverage it has – because of its role as a major purchaser of Chinese exports and a major supplier of technology China wants for its economy, and because of the current U.S. status as the sole superpower – to persuade China to engage productively in the U.S.-China relationship and to work with the United States to resolve differences. This surely will test U.S. creativity and diplomatic skill.
Slowdown in manufacturing production
Excerpted from CLSA's press summary of the China PMI Report on Manufacturing, Nov 1, 2005: Expansion of Chinese manufacturing production was sustained for a nineteenth consecutive month in October, but the pace of growth was only marginal and the weakest seen over that period. Weaker market demand and the oversupply of products in certain sectors were reported to have led to the latest slowdown in growth of production.
Growth of new orders was also sustained at the start of Q4. The launch of new products was reported to have supported the latest rise in sales while orders to export markets continued to improve but, overall, growth in October slowed to the weakest in the series history … October's survey suggested that profit margins were again squeezed, as input prices continued to rise while output prices fell.
The pace of cost inflation slowed from September's recent high but remained solid – which largely reflected high oil prices. Strong competition and oversupply again restricted companies' output pricing power. Manufacturers again stepped up their purchasing activity in October – Inventories of inputs, meanwhile, rose marginally for the first time in four months – partly reflecting weaker than expected production requirements.