At what rate is Hong Kong investment increasing in China, and are different industries now interested in the market?
First of all, we have a totally open economy. We do not keep track of funds moving in or out of Hong Kong, so we have no official statistics on how much Hong Kong businessmen have invested in China or anywhere else for that matter. All we have is reports from Chinese sources and anecdotal evidence.
Our rough estimate is that about two thirds of all overseas investment in China is from Hong Kong – either investment made by Hong Kong companies or entrepreneurs, or investments which went to China via Hong Kong.
In Guangdong province, the figure rises to 80 per cent. However, I don't know `what the latest situation is because in the last year, overseas investment has continued to rise, especially investment from Taiwan. A lot of it comes through Hong Kong and is included in the two thirds and the eighty per cent.
From your sense of it, would you say that quite a large proportion of investment was from Hong Kong itself?
Quite a large proportion and up until very recently, still rising quite substantially.
How do you think it will be affected by the austerity programme?
There are a lot of unknowns – questions to which no one, even in the Chinese government, knows the right answers. It would take a very brave man to predict right now whether they are going to have a hard or a soft landing. If it a soft landing, then the effect on Hong Kong would be at a minimum. If it is harder – and it would depend on how hard – but, one sector which I don't think will be affected will be the outward processing activities that Hong Kong manufacturers are involved in.
Which is still the fundamental core of the investment?
Yes. I don't think that sector will be affected because the vast majority of the goods produced through outward processing arrangements with Hong Kong are for export. I don't see why they would do anything that would damage that sector. It would be counter-productive for them. So, if that sector is left unaffected, even a harder landing would probably not have too great an impact on Hong Kong. The government itself does not believe in too much economic modelling, but other private sector institutions, especially banks have produced reports on this subject, that say that a hard landing might have the effect of reducing our GDP growth rate by 1 percentage point, which is not catastrophic.
Do you think in some ways it is not a completely bad thing?
I think it will be seen – especially with hindsight – as a blessing in disguise, because everybody knows that their banking and monetary system is a shambles and this gives them an opportunity to change their system and replace it with something that is sound, manageable, and rational. And that, in the long term, would benefit China and people who do business with China.
A shared language with southern China is clearly an incentive for many Hong Kong firms to invest there. What are the other reasons Hong Kong companies are choosing to invest on the mainland?
I think basically the Chinese population in Hong Kong, whatever kind of passports they hold, clearly re lard themselves as Chinese. There is a long tradition of Hong Kong investments going overseas, even in the 1970s. So, when China started to open up and to reform its economy, they saw it as a _golden opportunity. But, the process of Hong Kong investment in China at first developed very slowly. They announced their new policies in 1978 or 79, but up until 1985 or so Hong Kong people were still not going into China in a big way. At the beginning there was a lot of confusion about what was possible, and Chinese managers and workers were still very inflexible.
Gradually, I think, Hong Kong entrepreneurs, being Chinese, speaking the language, with basically the same cultural background d were able to make things work in China – in Guangdong, in Shenzhen, Guangzhou – and then from the mid-80s onwards, it took off in a big way, and the speed has been accelerating each year.
There is lot of foreign interest now from other areas – do you feel that Hong Kong with its language and family connections, will always have a natural advantage over other countries?
As foreign investments in China continue to grow, obviously our proportion of that will fall, but not in absolute terms. 1 think, in absolute terms, our investment in China will continue to rise. I think our people will continue to have some advantage over other people. Many foreign investors, especially those coming from far away places or even South Korea, find that they have difficulty operating on their own and they find it much more compatible to have a Hong Kong partner to go into China together with them. And I think this will continue to be the case for quite a long time.
Guangdong province is obviously appealing because of the language, but prices are increasing all the time and there are lots of opportunities in the hinterland. Are these being exploited?
Oh yes. For example, we have a very strong Shanghai community in Hong Kong financially especially and in the textile, clothing fields, but also they have spread into other fields. They were the ones that actually started Hong Kong's industrialisation when they came down in 1949 and the early 50s, some of them bringing with them their machinery from China and setting up textile plants, later on branching out into many other sectors of manufacturing. Those people have roots in other parts of China and many of them have gone to invest in their old home city or town. Even in northern China there is still a lot of Hong Kong investment.
The Chinese authorities, in the past two years or so, have been saying, having started economic reform very successfully along the coastal regions, that they wanted it to spread into the hinterlands along the rivers and along the borders. This is happening – along the Chinese border with 1 Russia, and along the Yangtze river, for example. One of our biggest companies in Hong Kong, one of our most successful entrepreneurs – Peter Woo of Wharf Holdings, has projects in Wuhan. He has very big plans for infrastructure there.
Is it true that there are now an increasing number of mainland companies here and why have they come?
I think that now every provincial government has a commercial office in Hong Kong and many cities have companies in Hong Kong. hey want to tap Hong Kong capital and know-how. It is amazing, especially in the past year or two, almost every week, there is something going on – there is a delegation from one province or another.
Do you think that they are doing particularly well because Hong Kong companies are keen to develop partnerships with mainland Chinese firms, for a sense of security after 1997?
Yes, I think there must be that type of psychology. But, ultimately, it is the profits that matter. If something is not profitable, then businessmen will not do it. Has 1997 already happened? I don't agree with that of course, and I don't think that after 1997, Hong Kong will become totally a part of China. In terms of sovereignty it will be a part of China, but the border will remain. There must continue to be a control on the border, because Hong Kong will remain a separate customs territory, a separate member of the GATT, and very much a separate economic entity.
Many say that we are already economically integrated with southern China. The government would rather use the term interdependence. 1 think this is important, because we must not give outsiders a false impression – that we will be completely absorbed into China and there will be no difference between Hong Kong and China. I think Hong Kong's chief value to China lies in its separateness. I think it is important for us to retain that separate identity, for the benefit of both Hong Kong and China.
Do you think that that will be easy to do?
I think if the Chinese authorities mean what they say or if they abide by the Sino-British joint Declaration and the Basic Law, then we should continue to have a higher degree of autonomy. As a matter of fact, we will have autonomy in all matters except foreign relations and defence, and I don't see why we can not maintain this separateness from China which will benefit both of us.
There is also a view that there is so much manufacturing going over the border that Hong Kong will become just a service centre for China -is that a fair assessment?
Not in the foreseeable future because for example, in textiles and clothing, we still have the multi-fibre arrangement under which we have financial agreements with our important markets, all of which require that the goods should be of Hong Kong origin.
We are doing quite a lot I would say for an economy of our nature, where there is minimum government intervention, and it does not pick winners. We are encouraging more research and development, especially applied commercial research. Hong Kong has the requirements to become a centre of higher technology production. We hope that that will 3ecome bigger, so that we maintain a manufacturing capability. That is important because if Hong Kong companies are to retain control over the trade in manufactured products produced in China, but re-exported via Hong Kong, they must be able to have the technical know-how. As a matter of fact, even in cases where a company's product is manufactured in China, right now, most of the so-called front end and back end activities are done in Hong Kong – front end such as: product development and design, sourcing, tooling, component making- back end such as: product testing, quality control, marketing, packaging. And all the related financial services.
How do you feel about the suggestion that Shanghai could become the new Hong Kong and could overtake Hong Kong in terms of importance as a financial centre?
The Chinese economy is going to be so big that there will be room for more than one Hong Kong – there is room for several Hong Kongs, but Hong Kong has some natural advantages. In southern China if not along the whole coast of China, we have by far the best deep water port; harbour. We have superior infrastructure. In Shanghai, for example, they will have to spend huge sums on their roads if they are going to able to transport the raw materials to Pudong and then ship the goods out. Compared even with Beijing, the road system in Shanghai is primitive.
As to whether Shanghai and others will overtake us – I doubt it very much. They will be growing at a faster rate than Hong Kong because they are starting from a much lower base, but Hong Kong will not be standing still. I have a firm conviction in the ingenuity of our entrepreneurs and their capacity for hard work. For five to ten years, it will continue to be the leading city in central Asia, in terms of finance, communications, transport, and business. *