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Hong Kong cheers China's WTO entry but sees challenges too

Hong Kong will bask in the reflected glow of China's accession to the World Trade Organisation but the tiny territory will have to work a little harder to keep its place in the sun.

"We are very positive about the implications for Hong Kong of China's WTO entry," said Edward Leung, chief economist for the Hong Kong Trade Development Council.

"Of course we have to face the challenges which come from increasing competition from indigenous Chinese enterprises and from more direct contacts between overseas and Chinese companies," he said.

China is expected to be approved for entry into the global trade body at the five-day meeting of the WTO beginning on Friday in Qatar. Taiwan, which Beijing considers a renegade province, will be accepted as well.

TRADE DREAMS

Hong Kong's economy grew just 0.5 per cent in the second quarter on year and is widely expected to contract 0.3 per cent in 2001 as the United States, its second largest trade partner, slips into recession following the September 11 attacks.

Its largest trade partner, mainland China, has been a rare bright spot in Hong Kong's lacklustre trade picture in 2001.

Total bilateral merchandise trade with China was about $75 billion in the first half of this year, compared with $160 billion for full year 2000.

Nearly 40 per cent of Hong Kong's total trade is with the mainland. Moreover, more than 80 per cent of Hong Kong's exports are re-exports, most of which pass through the mainland.

Many are hoping that by joining WTO, China's exports will get a big boost, lifting Hong Kong in the process.

But Kim Eng Securities Economist Samuel Chiu said the benefits won't be felt right away.

"China's exports are very strongly correlated with growth in OECD countries, and the outlooks are quite sluggish. So even with China joining the WTO, Hong Kong won't benefit a lot in the near term," he said.

BIGGER PIE, SMALLER SERVING

It could be a different story later.

"In the longer term, Hong Kong will be able to benefit because China will export more. But there will be a smaller share of those exports going through Hong Kong," said Pu Yong Hao, senior economist for Nomura International.

The HKTDC's Leung said China's trade volume is expected to double in the five years after it joins WTO. By the association's "conservative estimate" Hong Kong's trade with China will increase by four to six per cent more than it would have grown if China hadn't joined WTO.

China's entry into WTO provides some clear benefits to Hong Kong. First, it will give the mainland more secure access to overseas markets, boosting its own exports and Hong Kong's share of re-exports.

In addition, China will accelerate the liberalisation of its economy and, perhaps most important for Hong Kong firms operating in the mainland, provide a more transparent, rules-based trading and investment environment.

"According to one of our surveys, the greatest challenge to Hong Kong companies operating in China is the lack of transparency," said Leung.

NOT A FREE RIDE BUT MAYBE NOT SO BUMPY

China's new place in the world does not come without challenges for Hong Kong.

A levelling of the playing field for foreign players means Hong Kong companies need to move up the value-added chain if they want to compete effectively in China with international firms.

There's also little chance that Hong Kong will increase its share of trade between the mainland and Taiwan. More than 30 per cent of cross straits trade passes through Hong Kong now.

But it may not lose much, either.

"Even now, Taiwan-China trade only goes through Hong Kong when it is for practical reasons, mainly because of Taiwan investment in the Pearl River Delta," said Leung, referring to the wealthy region of southern China abutting Hong Kong.

Then there's Shanghai, the upstart city to the north that is vying with Hong Kong to be China's premier city for financial and other services.

Hong Kong boosters acknowledge that Shanghai is likely to take over as the centre of China's domestic markets, and as the locus point for business in the Yangtze River Delta.

But they expect Hong Kong to maintain and even expand its role in the Pearl River Delta, and as a favoured location for businesses looking to the rest of Asia as well as China.

Indeed, the number of regional operations set up by foreign companies in Hong Kong hit record highs this year.

Companies polled by Hong Kong's investment promotion board cited Hong Kong's low and simple tax system, free flow of information, absence of exchange controls and the availability of communications, transport and other infrastructure as key positives for the territory.

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