In late May, the Hong Kong government unveiled a multimillion-dollar rebranding exercise that featured a dragon logo and the slogan: "Hong Kong--Asia's World City." The idea was to remind the international business community that Hong Kong is not just another Chinese metropolis. But for many of Hong Kong's 7 million residents, the move seemed more like an act of desperation.
In fact, the administration of Chief Executive Tung Chee-hwa is plenty worried. After weathering the Asian crisis, the city is fast losing its competitive advantage. "With the mainland changing and growing so fast, we have to compete for shelf space," explains newly appointed Financial Secretary Antony Leung. He adds: "People see that our cousins in the north are moving faster than us."
Therein lies the great irony: As Hong Kong enters its fifth year as a Special Administrative Region of China, the motherland, besides being the city's No. 1 partner, is increasingly its greatest competitor, too. With cities from Shanghai to Beijing to Shenzhen vying for a piece of the action, Hong Kong is losing its monopoly on China trade.
Signs of the challenge are everywhere. Multinationals such as Compaq Computer Corp. and IBM are shifting people and offices across the border. China's industrial giants are tapping the Shanghai equities market instead of the Hong Kong Stock Exchange. Hong Kong's pollution and high costs have undercut its appeal as a place to live and work. And China is closing the infrastructure gap, having plowed billions into ports, roads, and telecom.
BODY BLOWS. To be sure, Hong Kong isn't about to fade into oblivion. With China predicting that its economy will grow 7% a year for the next decade, Hong Kong's slice of the pie, though shrinking, should still be considerable. China's accession to the World Trade Organization will give Hong Kong at least a short-term lift. And despite absorbing body blows since the handover, Hong Kong's legal system and civil freedoms remain in place--a matter on which Tung was eager to reassure President George W. Bush during a mid-July visit to Washington.
While the city has reinvented itself over and over, there's no guarantee that it can this time. Never before has Hong Kong faced competitive pressure on so many fronts. All sorts of things--from salaries to rents to feng shui experts--are cheaper on the mainland (table). The city remains the world's No. 1 port, but even there the mainland is becoming a force. And the rapid development of mainland stock markets is putting the Hong Kong Exchange in the shade. Last year, 230 companies listed in China. By comparison, only 43 listed on Hong Kong's big board.
What's more, having established their credibility by listing in Hong Kong and New York, Chinese heavyweights PetroChina Co. and China Petroleum & Chemical Corp. are tapping the Shanghai market with billion-dollar offerings. That means the fat underwriting fees for such deals will not go to Hong Kong securities houses but to Chinese firms.
While the corporate defections don't amount to an exodus, some big names are starting to shift their operations. Hong Kong apparel maker Giordano has based its international IT operations in neighboring Guangzhou city and named a mainlander to head them up. "We've found this team much more effective than the previous setup in Hong Kong," says Giordano President Peter Lau. "I suppose it is the devotion to their work, as opposed to the Hong Kong staff, whose focus was on short-term pay." DHL Worldwide Express Inc. is eyeing a move to nearby Shenzhen, where costs are a fraction of Hong Kong's. "If we don't get a more favorable cost position [in Hong Kong]," says Ross Allen, operations director for Asia-Pacific, "we won't be investing here."
Often, it just pays to be close to the action. Investment house CLSA Global Emerging Markets is moving its equity team from Hong Kong to Shanghai. "China is now more open," says CLSA Chairman Gary Coull. "Information is more accessible than ever." And when China joins the WTO, more finance companies will follow suit--as Beijing opens its securities markets to foreigners.
Alcatel Asia Pacific President Ron Spithill has been running things from Shanghai since last year. "We chose Shanghai as a place with the most powerful vision in the region to be a leading center of technology," he says. Spithill also lauds the city for aggressively wooing foreign companies and providing top-notch infrastructure.
Next to China, Hong Kong looks as if it has been standing still. While its best resource has always been its people, the schools turn out rote thinkers who speak lousy English. Even top universities underwhelm. "These students are not stacking up," says a U.S. investment banker. Despite moves to clean up the air and water, the environment continues to give foreign companies pause. One is Walt Disney Co., which aims to open a theme park by 2006. "We hope to see the environment improve [by then]," says Steve Tight, head of Hong Kong Disneyland.
It's not as though the Tung administration is sitting idly by. In response to rapid development of container handling facilities in Guangzhou, the Ports & Maritime Board is staying ahead of the game by providing just-in-time delivery for the likes of computer assemblers. On the environmental front, the government is forcing diesel taxis to switch to cleaner fuels and has initiated talks with Guangdong province to tackle cross-border pollution. It also has set in motion educational reforms that are supposed to foster creative thinkers.
But staying competitive will require bolder moves from a leadership that has become complacent over the years. For starters, the government needs to loosen immigration laws to attract IT engineers and managers from the mainland, a controversial matter in a city where unemployment is stuck at 4.6% and the economy is expected to grow 1.5% this year. Opening the border 24 hours a day also would further integrate the city with Guangdong, forcing competition on monopolistic retailers and bringing down prices in a city that is still one of the world's most expensive. And to develop as a regional air hub, the city will have to pursue an open-skies policy that allows carriers to pick up more passengers in Hong Kong.
Above all, Tung will have to make choices that will hurt the city's various business lobbies. If Hong Kong doesn't start making some serious progress soon, its rebranding exercise will be an expensive waste of time.
By Frederik Balfour and Mark L. Clifford in Hong Kong
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