China and the WTO: What will it mean for Hong Kong?

By Staff -- Logistics Management, 8/1/2000

Hong Kong is still grappling with the business implications of its return to Chinese rule three years ago. Now the city-state is facing another potential threat to its centuries-old role as the trading hub of Southern Asia: the impending entry of the People's Republic of China into the World Trade Organization. (See "China's new role in world trade," Page 117.)

The official "party line" of the Hong Kong Special Administrative Region government, which reports to Beijing, is that Hong Kong will benefit tremendously when China enters the WTO. "Given our strengths in value-added services, Hong Kong's distributive trades, financial services, insurance, telecommunications, tourism, and many other professional services stand to benefit significantly," said Secretary for Trade and Industry Chau Tak-Hay in a statement earlier this year.

Chau's prediction probably is close to the mark. Hong Kong is subject to China's "one country, two systems" policy, which aims to take advantage of Hong Kong's business and technical expertise while maintaining political control over the former British colony. It's in China's interest to continue to promote the flow of Hong Kong's knowledge and capabilities to the Mainland. It's in Hong Kong's interest, too: The trading hub has become heavily dependent on China as a client for its services sector.

But that rosy forecast hides some legitimate concerns that Hong Kong may lose its competitive advantage in China. More business opportunities certainly will open—Hong Kong companies currently are subject to the same restrictions as are foreign corporations, so when China liberalizes its markets, they will benefit along with everyone else. But that means greater competition by large multinationals for Hong Kong's relatively small service providers, along with a potential flight of manufacturing to lower-cost Chinese factories, suggests a recent report by consultants GHK International on behalf of the Hong Kong Trade Development Council.

If Hong Kong is to retain its position as the gateway to China's markets, say economists at the Bank of East Asia, it will need to reposition itself. Not only will Hong Kong businesses have to take greater advantage of their cultural and linguistic ties to the Mainland, they advise, but they also will need to shift their focus from being middlemen to becoming direct market investors. Because China most likely will take over Hong Kong's position as a manufacturer of low-end products, they recommend that Hong Kong businesses emphasize the development of high-technology, high value-added industries. The two industries that are most likely to fit the bill: information-based "cyber businesses," which can take advantage of Hong Kong's superb telecommunications infrastructure, and financial services, which will remain more liberalized and efficient than those in China for decades to come.