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Asia's Supercities


Regions: ASIA

ASIA'S SUPERCITIES

Peter D. Everington is ready to bail out of Hong Kong. As managing director of Regent Pacific Group Ltd., he's fed up with the island's outrageous property prices--and confusing politics. "Perhaps the more important consideration for us is the large degree of uncertainty over the runup to 1997," he says. So he may move the 25-person office, which handles $3 billion in funds, to Kuala Lumpur, where he can rent a five-room house with a garden and pool--for one-quarter the price of his 2,800-square-foot Hong Kong apartment.

Two years before Beijing's takeover, uncertainty is clouding the mood in prosperous Hong Kong. Exorbitant real estate prices and worries over political instability are forcing global corporations to assess whether they want to be in Hong Kong after 1997. Long the preeminent financial and business center in the region, Hong Kong faces intensifying attacks from Asia's emerging supercities. Shanghai, Singapore, Kuala Lumpur, Taipei, and Bangkok are bent on luring multinationals. They also want to grab a share of Hong Kong's wealth by establishing their own modern financial markets.

NEW BOOMTOWNS. The cities that succeed stand to gain a lot more than face. Despite the recent financial blowout in some emerging markets, Asians are confident that hundreds of billions of Western dollars will continue to flow to their region, the world's most dynamic. Cities that can become Asian hubs for global companies will flourish, especially as Asian Tigers' economies move away from low-wage manufacturing. The new boomtowns will be centers for industries such as finance, communications, and high tech. And their newfound luster will likely increase the stature of Asia's upwardly mobile nations on the world scene.

Still, the race to upstage Hong Kong won't produce just one winner. Unlike earlier times, when the British colony dominated the region, Asia is simply too large--and has generated too much wealth--for any single city to satisfy the region's demands. "There will be more than enough for competitive Asian capitals to grow and prosper," predicts Hong Kong Director-General of Industry Denise Yue. Indeed, many observers see a cluster of Asian cities evolving, each with varying strengths. The struggle is to see which cities will become Asia's versions of New York, Hollywood, Silicon Valley, and Detroit.

Even with the increased competition, Hong Kong holds some strong cards. The territory remains the gateway to China, and its economy is integrated with booming Guangdong province. "Geography is very much on our side," says Clint Marshall, head of corporate banking at Hongkong & Shanghai Banking Corp. "We're 20 kilometers from where it's all happening."

The city of gleaming skyscrapers is also non-Japanese Asia's financial nerve center, a locus of loan syndication, fund management, venture capital, and stock-brokering. Moreover, Hong Kong is a key product-development center for goods such as cellular phones, audio appliances, and electronic toys assembled in China. And of all the cities in the region, Hong Kong ranks as the most creative, with everything from kung fu films to "Canto-pop" hits produced and distributed there.

PILING UP. Yet Hong Kong faces difficult times. Soaring prices for prime office rentals have forced some companies to look for less expensive cities. Feuding between Britain and China has left the city in limbo. Beijing, dissatisfied with Governor Chris Patten's election reforms, says it will throw out the existing legislature in 1997. The two sides are at loggerheads over the makeup of a supreme court, threatening Hong Kong's rule of law, an essential ingredient in ensuring business confidence.

Other would-be Asian financial capitals sense opportunity in Hong Kong's troubles. Government leaders of Singapore, for instance, sell their city-state as a bastion of political stability and efficiency. Singapore has made a name for itself as a high-tech manufacturing center, with advanced research and development and production facilities. The nation of 2.7 million has long been the gateway to Southeast Asia. Now, it's pressing to pass Hong Kong as the financial and communications hub of Asia.

Singapore's successes are piling up. It has the fourth-largest foreign exchange market, a large futures market, and its banks are becoming powerful players in loan syndication. In a bid to attract money managers, Singapore has announced plans to allow foreign fund managers to manage a portion of the country's huge Central Provident Fund, the nation's mandatory savings plan.

But Hong Kong advocates counter that Singapore has a long way to go. The government's controls over its domestic media are a major problem, along with pressure felt by securities analysts to avoid negative reports. "As long as there are restrictions on the free flow of information, they can't expect to be a major funds-management and stock-brokering center," says William H. Overholt, managing director of Bankers Trust Co. in Hong Kong.

Nowhere is the rivalry between Hong Kong and Singapore more intense than in communications. News organizations such as The New York Times and USA Today have chosen Hong Kong, opening news bureaus there recently. Singapore has attracted entertainment groups such as HBO, ESPN, and Walt Disney, which are investing substantial sums for studios and production facilities.

"PAINLESS OPERATION." Much of the credit goes to Singapore's Economic Development Board (EDB). Its aggressive bureaucrats offer one-stop shopping for foreign investors interested in the city-state. "They are very good at making it a painless operation to assess Singapore," says Harold Anderson, vice-president for programming and production at ESPN Asia (Singapore) Ltd. The EDB offered ESPN tax holidays as well as subsidies for training.

But the EDB can't do much about Singapore's expensive labor, phone rates, and cars. In fact, high costs in Hong Kong and Singapore provide others with an opening to become manufacturing centers.

Kuala Lumpur "has a distinct advantage over Singapore" when it comes to costs, says John F. McDonnell, chairman of McDonnell Douglas Corp., which recently chose Malaysia's capital for its regional headquarters. Labor costs are half those in Singapore, and rents are one-third of the city-state's. Malaysia also wants to enter the financial capital sweepstakes. Its entry is Labuan, a small island off the coast of eastern Malaysia. Labuan, an "international offshore financial center," has the lowest tax rates in the country and looser rules on foreign exchange. It has about 400 offshore companies and 40 foreign banks.

TRAFFIC JAMS. Malaysia might be taking on more than it can handle. Its bureaucracy is cumbersome. Expatriates can wait up to 18 months to get a work permit--and the government has tough limits on the number of expatriates it will allow in. Unlike Hong Kong and Singapore, it doesn't afford expatriates favorable tax treatment. Pollution and traffic congestion are worsening.

Another city known for its traffic jams, Bangkok, is angling to make itself Asia's auto-assembly center. Bangkok benefits greatly from the presence of such major Japanese auto makers as Toyota, Nissan, Honda, and Isuzu, which have been in the area since the mid-1980s. That gives Thailand a selection of parts suppliers that have been brought up to world standards by the Japanese. "The supplier base cultivated by the Japanese is incredible," says Bill Kennedy, regional manager for Chrysler Corp., which is favoring Thailand for the role of its Southeast Asia hub.

While Bangkok concentrates on the auto industry, Taipei is targeting high tech. Companies in and around the Taiwanese capital have made the island the world's leading producer of image scanners, computer mice, and monitors. It's quickly becoming a large semiconductor source as well. The government is building a $300 million software-development park in Taipei and has targeted 10 key industries, including aerospace and semiconductors, for incentives, government funding, and other backing.

Like their counterparts in Singapore, Taiwanese officials also dream of taking on Hong Kong in finance. Taiwan has announced plans to build a "Wall Street" of Asia, replete with New York-style twin towers, in Taipei. But companies are doubtful. The main reason is Taiwan's slow pace of deregulation. Foreign banks, for example, are limited mostly to trade finance and hampered by reams of red tape.

Perhaps no city is more eager to take on Hong Kong than its old rival, Shanghai. It has experienced three consecutive years of 14% growth as billions in foreign investment have flowed in, especially to the new Pudong district. In everything from bicycles to autos, Shanghai is the center of manufacturing for China. The city's four-year-old stock market is China's largest. City leaders want more. "We aim to become the international and financial business center in the western Pacific," says Hu Yanzhao, chief economist at the Shanghai Municipal Planning Commission.

Under current policies, Shanghai is unlikely to reach that goal. Chinese leaders, fearful of losing control of the economy, have resisted opening their financial markets. For instance, Beijing authorities, spooked by the market's fall last summer, put the brakes on new listings at the Shanghai exchange.

Further compounding Shanghai's headaches is the inability of China's banking sector to modernize. Strapped with huge debt from nonperforming loans to state enterprises, China's specialized banks have been unable to remake themselves into commercial banks. "The delay of financial reforms will delay the establishment of Shanghai as an international finance center," says Guan Jinsheng, vice-chairman and CEO of Shanghai International Securities Co., the brokerage firm recently cited in a major bond-trading scandal.

Even so, Shanghai leaders don't worry about losing out to Hong Kong. They say the two can play complementary roles, with Shanghai the domestic financial hub and Hong Kong the international center. "China needs several Hong Kongs and Shanghais," says Hu. "For 1 billion people, I'd say we need about 12 Hong Kongs or Shanghais."

Even with the high rents and political uncertainties, Hong Kong remains the preferred location for Western corporations looking to coordinate China business. Frank Martin, president of the American Chamber of Commerce in Hong Kong, says membership is at a five-year high, uith 52 members joining in December alone. "Hong Kong is the closest to a perfect Asian center," says Mark Michelson, director of Warren Williams International, a public-affairs consultant in the territory.

But Hong Kong's advantages of location and personal connections with China's elite will only take it so far. China is not the only player, as India, Indonesia, and others rev their engines. The shock of adapting to the new world of Chinese sovereignty is likely to change Hong Kong and the way it operates. In the face of such uncertainty, Singapore, Taipei, and the other would-be supercities see opportunities aplenty.

HONG KONG

ADVANTAGES: Gateway to China. Excellent infrastructure. Creative hub of Asia

DISADVANTAGES: High real estate prices. Uncertain political future. Brain drain

FOREIGN CORPORATE PRESENCE: Siemens, AT&T, Philip Morris, Hewlett-Packard, Sanwa Bank, Northern Telecom, CNN

GREG GIRARD/CONTACT

SINGAPORE

ADVANTAGES: Gateway to Southeast Asia. Excellent infrastructure. Tax breaks and incentives for favored industries

DISADVANTAGES: Rigid bureaucracy. Government controls on information. High labor costs

FOREIGN CORPORATE PRESENCE: Sony, Seagate, ESPN, Motorola, Unisys, Whirlpool, Caterpillar

SHANGHAI

ADVANTAGES: Gateway to inland China. Strong industrial base. Domestic financial center

DISADVANTAGES: Restrictive central-government policies. Infrastructure bottlenecks. Poor legal system

FOREIGN CORPORATE PRESENCE: Citibank, Alcatel, Volkswagen

TAIPEI

ADVANTAGES: High-tech prowess. Free press. Government funding for targeted industries

DISADVANTAGES: Poor infrastructure. Unstable relations with China. Protectionist financial policies

FOREIGN CORPORATE PRESENCE: Mitsubishi Electric, Texas Instruments, Philips, Framatome, Ford

BANGKOK

ADVANTAGES: Low labor costs. Favorable foreign investment policies. Advanced network of auto-parts suppliers

DISADVANTAGES: Bad infrastructure. Poor legal system. Worsening pollution

FOREIGN CORPORATE PRESENCE: Toyota, Honda, Chrysler, MinebeaBy Joyce Barnathan in Hong Kong, with Margaret Dawson in Taipei, Pete Engardio in Bangkok, and Ellen White in Singapore


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