• Hong Kong's future rests on increased connectivity and maintaining a competitiveness that will strengthen its position as a global hub.

On 15 January 2007, the Hong Kong government released a set of reports entitled "Our Way Forward" that contain over 200 action items. The reports are the result of nearly nine months' work to establish Hong Kong's future economic positioning and a roadmap for getting there, marked by the Economic Summit held last September in response to mainland China's 11^th Five-Year Plan released in February 2006.

Strategic economic positioning has been the subject of regular debate in Hong Kong since the onset of the Asian financial crisis nearly 10 years ago. While various ideas have been put forward in the past, these latest proposals are the most comprehensive and concrete to date, covering most major sectors of the economy. However, obtaining a consensus on these proposals and putting them into action will be a challenging and time-consuming task. As such, it is essential to focus on identifying any major guiding principles that inform the action proposals in order to ensure that Hong Kong remains a leading business and financial centre.

Guiding Principles

Over the past 10 years there has been no shortage of ideas as to how Hong Kong can sustain its successful track record and remain a key metropolis in southern China. These include the call to make Hong Kong a "world-class" city in the 1999 Policy Speech and the identification of four major economic sectors or "pillar industries" - namely, financial services, logistics, tourism, and producer and professional services - in the 2002 Budget Speech.

Most recently, attendees at Economic Summit held last summer agreed that Hong Kong should "develop further its status as an international financial centre, trade centre and shipping centre" as laid down in China's 11^th Five-Year Plan.

The action agenda in the Report on Economic Summit on China's 11^th Five Year Plan (Action Agenda) contained 207 proposals covering four major areas: financial services (80 items); maritime, logistics and infrastructure (27 items); trade and business services (34 items); and professional, information technology and tourism (66 items). Implementing all these proposals will be no small task.

The proposals are clearly the result of careful deliberations by the members of the Economic Summit and, when implemented, will definitely drive Hong Kong's economic development focusing on the "three international centres". Nonetheless, it may be helpful to identify whether there are a few guiding principles common to all the major sectors that are conducive to further developing Hong Kong as a key metropolis.

Upon review, there appears to be at least two important characteristics, or guiding principles, underlying many of the action proposals. Borrowing terminology from the IT world, the two principles are those of 'connectivity' and 'hub'.

To succeed in remaining a key metropolis based on the "three international centres", Hong Kong must be connected with the Mainland and the rest of the world. Equally important, Hong Kong must also be a hub that attracts funds, talent and companies from the Mainland and around the globe so that activity will take place within the territory. Without connectivity, Hong Kong will be isolated and marginalised. Without the ability to attract and retain funds, talent and corporations, transactions and events will increasingly take place elsewhere.

Outer Connectivity

The acknowledgement that Hong Kong needs to be connected to the Mainland and the rest of the world is not new. While Hong Kong is well established as one of the world's freest cities, much has been done in the past few years to facilitate two-way flows of goods, people and funds between Hong Kong and the Mainland to address the asymmetric connectivity between Hong Kong and the Mainland versus Hong Kong and the rest of the world. Schemes such as the Closer Economic Partnership Arrangement (CEPA) and the 'Individual Visit Scheme' for Mainland visitors are examples of initiatives that have improved these flows.

The Action Agenda is full of ideas that will further improve this connectivity. In the area of merchandise trade, it is recognised that a seamless Hong Kong-Mainland network of roads and railways is the key. The current mode of truck-based land transportation places great limitations on extending Hong Kong's cargo catchment area on the Mainland. The Agenda calls for a forward-looking perspective to develop transport infrastructure, explore the feasibility of freight rail development, reduce trucking costs and lower licence fees for river trade vessels.

Proposals concerning the free flow of people and talent also reflect the 'connectivity' guiding principle. A world-class city should not be concerned about people coming in or going out. Indeed, mobility of people is a key characteristic of many of the fastest-growing cities across the globe. The Action Agenda calls for an entry policy that would facilitate passenger flows - for example, by allowing Mainland visitors heading for Macau under the Individual Visit Scheme to enter Hong Kong on a visa-free basis, and to permit overseas visitors to the Mainland to travel to Hong Kong without having to obtain an additional visa.

Proposals to establish 'Greater China law firms' to allow qualified lawyers to practice both on the Mainland and in Hong Kong and to introduce the mutual recognition of the qualifications of accountants are bold moves but should be examined from the perspective of whether they can improve connectivity.

Among the "three international centres", further development of the financial centre is considered the most important. Achieving this will require greater connectivity between the financial platforms of Hong Kong and the Mainland as ongoing economic reform and sustaining growth in the latter have generated strong overseas interest in its financial sector. A large number of proposals call for relaxing rules to allow Hong Kong financial institutions to have a greater commercial presence on the Mainland as well as increasing the accessibility of the Hong Kong market to Mainland financial institutions and enterprises (Table 1).

Table 1. Proposals to Facilitate Flow of Companies

Hong Kong Financial Institutions on the Mainland
	Increase the allowable maximum share ownership in Mainland financial institutions
	Banking:
		Possible to offer RMB services without prior operation requirement
		Able to distribute RMB bonds and investment funds
		Lower level of operational funds required to set up branches
	Securities house, investment banks and fund management companies:
		Permitted to establish wholly-owned subsidiaries
		Able to participate in corporate bond issues and IPO business under same conditions and requirements as Mainland companies
	Insurance:
		Permitted to establish specialised health insurance companies
		Pension providers able to offer corporate annuity business
		Permitted to offer foreign currency denominated life insurance business
Mainland Financial Institutions in Hong Kong
	Mainland financial institutions able to establish treasury centres in Hong Kong
	Mainland insurance companies able to set up asset management companies in Hong Kong
	Mainland companies listed on overseas stock markets able to set up captive companies

Equally important are calls for the proactive engagement of Hong Kong in the Mainland's policy formulation as regards designing its financial strategies. Connectivity between regulators is critical as the implementation of many proposals in Hong Kong's financial services sector will require collaboration with Mainland regulators who have been carefully pushing forward financial reforms in China to achieve both progress and stability.

Inner Hub

The 'hub' principle complements 'connectivity'. Facilitating improved two-way flows of funds, people, services and corporations will inevitably increase competition in the local arena as well as outflows of resources and activities. But the key to a successful metropolis lies not in restricting these flows, but in maintaining a competitiveness that encourages the retention of core business activities that can help strengthen its position as a global hub.

In an increasingly globalised world, competition now operates at an international level. Corporations and individuals are no longer protected by political, administrative or geographical boundaries. This has already been well demonstrated in the manufacturing sector and will be repeated in the services industry. Thus, logistics competition will be among container terminals, airports and air-cargo terminals in the region. Financial services competition will not be limited to financial centres in Asia - as evidenced by a report recently released by the City of New York which warns that it is beginning to lose out to London and Hong Kong.¹

Over time, the high cost of living in a major city such as Hong Kong will inevitably lead to low value-added services which are not customer-facing migrating out of the territory to seek cheaper locations. Hong Kong should therefore focus on becoming a hub for high value-added services that meet the demands of local, Mainland and overseas corporations and individuals.

Bold suggestions under the Action Agenda that support this strategy include permitting the 'free walk' of foreign exchange from the Mainland to invest in Hong Kong, the 'free walk' of RMB funds from Hong Kong to the Mainland, and establishing Hong Kong as the pilot centre for offshore RMB financial business. Before the government announcement of the Action Agenda items, the Central Government announced that Mainland financial institutions would be allowed to issue RMB bonds in Hong Kong. Currently, this may not be very significant in material terms since the amount of RMB funding (mainly RMB deposits) in Hong Kong is rather small at the moment. However, it signifies recognition by the Central Government of the role of Hong Kong as a testing ground for offshore RMB transactions.

It is understood that before the Mainland completely relaxes its capital controls, RMB financial business in Hong Kong will continue to be highly restricted and related services will only operate on a trial-run basis. However, these limited activities serve an important strategic function by strengthening Hong Kong's future position as a key hub for RMB transactions when global demand for RMB assets takes off.

The ability to retain a 'critical mass' of talent, funds and companies in key sectors is essential. This critical mass will establish Hong Kong as the obvious and preferred location for conducting business in these sectors. Based on government statistics, a total of 3,845 overseas companies had regional operations in Hong Kong as at 1 June 2006. The top five investment banks and four of the top five legal advisers in Asia have their regional headquarters and primary decision-makers based in the territory.

Conclusion

Hong Kong needs to connect with the Mainland to ensure the sustaining growth of the economy. Building greater connections, particularly with neighbouring provinces, in terms of freedom in movement of goods, funds and people is now making progress through various programmes and policies such as CEPA, the Qualified Domestic Institutional Investor and Qualified Foreign Institutional Investor schemes and RMB financial services in Hong Kong. This connectivity is essential if the services sector in Hong Kong is to expand to serve a larger market. But enhanced 'connectivity' with the Mainland should also result in activities and events taking place in Hong Kong if the city is to remain a key metropolis of China. This latter challenge requires Hong Kong to strive for the betterment of its infrastructure and systems, environment, and other factors that helped it attain its present leading status, so that it will continue to be a 'city of choice' for enterprises, people and funds from around the world.

MAJOR ECONOMIC INDICATORS