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"Hong Kong in China's WTO Era -- Building a New Partnership"

ADDRESS BY THE CHAIRMAN OF THE TRADE DEVELOPMENT
COUNCIL, DR VICTOR K. FUNG, AT A LUNCHEON FOLLOWING
THE 40TH ANNUAL GENERAL MEETING OF THE HONG KONG
FEDERATION OF INDUSTRIES, SHANGRI-LA HOTEL, 5.7.00

Introduction

It is a great pleasure to be here. I'd like to focus my remarks today on China's impending accession to the World Trade Organisation (WTO) which I believe is the biggest opportunity in Hong Kong's history.

While the US Senate has still to approve permanent normal trade relations (PNTR) status for the mainland, indications are that China's WTO accession can be most likely be accomplished before the end of this year.

Accession will be a defining moment in terms of the mainland's further integration with the world economy and for Hong Kong's pivotal role in that process. With China's WTO accession we have scope to interact more broadly and deeply with the mainland economy on our own behalf and with global partners.

We are starting from a position of strength. Hong Kong is the mainland's most important entrepot, handling over 40 per cent of China's trade. We are also the mainland's largest source of foreign direct investment.

In these next minutes I will outline what I believe are the key opportunities and challenges of China's WTO accession. I will also suggest how Hong Kong companies might respond in a strategic way and explain where the Trade Development Council can help.

Proposed changes

It is useful briefly to recap what will change with China's WTO accession The world's biggest potential consumer market will gradually open to global business. Companies manufacturing in the Chinese mainland will be able to sell domestically without restriction. They will also be able to create their own distribution services and networks. It will be possible to import most products into any part of the mainland.

Exports from China will have more secure and predictable access to overseas markets and China can use WTO dispute mechanisms to redress discriminatory trade practices. This will enable Hong Kong companies using the mainland as production base to plan longer term with customers.

China's service sector will open to international participation in all major sectors including wholesale and retail, freight forwarding and logistics, advertising, telecommunications and the Internet, banking and financial services, professional services and tourism.

Opportunities for Hong Kong

For the first time, Hong Kong will have a "domestic" market - one of continental scale. China's accession will end long-standing constraints on how we interact with the mainland economy. Under existing trade rules Hong Kong can only trade with our natural hinterland in a rather unnatural way, in other words as an "overseas" partner.

With China's WTO accession it will be possible for Hong Kong and other overseas companies to be major stakeholders in mainland entities across a wide range of sectors. They will have access to the mainland market as domestic entities enjoying national treatment.

Hong Kong-invested factories will be able to distribute and sell their products more freely on the mainland. This has profound implications. Think of how the world's large exporting economies - Germany and Japan, in particular - evolved. They catered to large domestic markets before they went overseas. This enabled them to leverage economies of scale as exporters - and thus to be more competitive.

Hong Kong in a sense has done it the other way round, having established an export base in the mainland from scratch without the benefit of a "domestic" market. The prospect of Hong Kong now adding China as a "domestic" market will, as the saying goes, be "like putting wings on a tiger".

Hong Kong also stands to reap gains as an international service hub. It is estimated China's trade with the world will double in the first five years after accession. This rapid expansion will need strong service support. Yet services today account for less than 40 per cent of the mainland's GDP, compared with 85 per cent for Hong Kong. We have a unique opportunity to help fill the gap for services while participating in the growth of China's own service sector.

By providing more value-added services, Hong Kong can play an expanded role as a base for multinational corporations (MNCs) to manage businesses in the mainland. We anticipate an inflow of new entrants to the Chinese market, including smaller MNCs. Many are unused to working in an overseas market of China's size and complexity. This is Hong Kong's strength.

Challenges

With expanded opportunities will come bigger challenges. WTO entry will not automatically translate into a blank cheque for China's market access to the rest of the world. For example, even after the abolition of trade restraints the US can introduce safeguard measures against textiles and clothing imports from China until 2009, four years after the WTO's global abolition of quotas.

Competition will intensify on all fronts and across all sectors. China's WTO accession and the further opening of its market will trigger a global race for market share involving much bigger players than is presently the case. Hong Kong's "first mover" advantage will rapidly come under challenge.

China's trading environment will become more transparent as mainland enterprises conform to international practices. This will encourage more overseas companies familiar with China trade and with established business networks in the region to source directly from the mainland.

A recent TDC survey found that 80 per cent of overseas buying offices based in Hong Kong plan to increase their sourcing from indigenous mainland suppliers. More than half indicated they would move their actual operations to the mainland, attracted by market proximity and a lower cost base. However, close to 90 per cent said they would still keep their controlling headquarters in Hong Kong.

As suppliers to overseas customers, Hong Kong companies will face rising competition from indigenous mainland manufacturers whose products are fast catching up in terms of quality and value for money. Competing on price alone will no longer be an option for most Hong Kong companies in China's WTO era.

Strategic responses

We need to act now -- both on the opportunities and the challenges. The moves we make in these next few years of China's market opening will be crucial to building and holding onto market share. We must raise our sights above the daily routine of business and develop longer-term strategies that allow us to evolve a broader partnership with the mainland.

It is important we commit to China as a domestic market as well as an export platform. This change of mindset is already happening. In a recent TDC survey of Hong Kong companies producing in the mainland, half the respondents said they intend to expand sales in the mainland. Given existing barriers only a quarter of respondents presently sell to that market - and even then their sales are limited.

I believe we should start in our immediate hinterland where Hong Kong's mainland production is concentrated and our advantages are strongest - the Pearl River Delta. We need to gain a deeper understanding of how Hong Kong and the Delta region can leverage their combined advantages in the new competitive scenario. Already this is receiving attention. Various business groups are sponsoring detailed studies on how the economic partnership between Hong Kong and the Pearl River Delta can be expanded. Meanwhile the Delta region is well established as a domestic distribution and logistics hub for southern China and further afield. We should use it as our springboard.

Distribution will be the key for Hong Kong companies to compete in China's market. Local manufacturers producing there should explore strategic alliances with Hong Kong service providers. Soon they will be able to support our manufacturers with expanded service networks in the mainland, including logistics and distribution.

Hong Kong companies should also take advantage of the expanding mainland presence of US, European and Japanese firms experienced in managing nation-wide distribution systems. Many Hong Kong firms are already well established as suppliers to these multinationals.

We should broaden Hong Kong's production strategy to one of maximising value. For many years we have been successful overseas by minimising the costs of our mainland production. The prospect of competing successfully with mainland manufacturers in China's domestic market diminishes rapidly at the lower end of production. Hong Kong companies should therefore identify market niches higher up the scale and focus on creating more value.

We should differentiate our products and services through brands, the marketing of image and through reliable after-sales service. With China's accession conditions for brand development in the mainland will be increasingly favourable. The mainland's intellectual property regime will improve and marks will be better protected.

We should target markets in central and western regions. While the coastal strip is China's most attractive consumer market it will also be the most contested as products and services flow into the mainland from around the world. Hong Kong, especially our small and medium-sized enterprises, will score an advantage by building early market leads in major inland cities such as Wuhan and Chengdu. These and other "second-tier" markets accounted for 60 per cent of the mainland's imports last year, valued at nearly US$100 billion.

At the same time we should develop partnerships with high-tech mainland entities to broaden our product range. The Pearl River Delta region, in particular Shenzhen, has attracted a rich pool of research and development talent from across the mainland. Hong Kong entrepreneurs can work with these scientists and product engineers to develop high-tech toys, medical electronics, IT and digital products, automotive and aircraft parts and health supplements based on Chinese herbs and other natural ingredients.

We should adjust our competitive strategies towards overseas markets in recognition that mainland suppliers, too, will benefit from improved market access for China-origin exports. In particular we should accelerate our move up the value chain from OEM (original equipment manufacturing) to ODM (original design manufacturing). As quotas and other restrictions disappear this will be essential for industries such as textiles and apparel.

We should place information technology and the Internet at the centre of our business strategies in this new and more competitive era. In just two years Internet usage in Hong Kong has increased nearly fivefold to 2.3 million people. In the Chinese mainland it has surged from 600,000 in 1997 to 4 million last year and is forecast to reach 33 million by 2004.

With our huge production base in the mainland and further afield in Asia, our expanding service networks and an exceptional physical infrastructure, Hong Kong is strongly positioned to become the chief fulfilment centre for e-commerce orders placed in this region. Over the past 20 years we have perfected our export supply chain management techniques. Now we can "flip" these skills and apply them to import supply chains for customers selling to the Chinese mainland.

The Internet is obviously the key to more efficient management and integration of our production and supply chains. It enables Hong Kong to interface with overseas customers as a 24-hour online sourcing hub. We should take advantage of the cluster of mainland IT talent in the Pearl River Delta jointly to develop Chinese and English-language software to accelerate this process.

We need integrated business plans with longer time frames. We should look at combining Hong Kong's existing manufacturing advantages in the mainland with our growing service strengths there. We should also develop more partnerships in the mainland with indigenous and overseas manufacturers and service providers.

For me, the inescapable conclusion is that Hong Kong should respond as broadly as possible to China's WTO entry. We have a chance to build a new partnership and take our economic relationship with the mainland to a new level. I believe we can only do so if we think bigger; if we adopt a more matrixed approach.

TDC's strategic response

The TDC has been preparing for this day for many years. We have built a network of 10 offices in key mainland business centres and a databank of 100,000 mainland business contacts, with coverage of all major regions, from the coast to the interior.

We have developed close working relationships with mainland economic agencies that are sources of authoritative information on how China's WTO commitments will unfold. We have recently strengthened our in-house research and analysis team just to keep track of this complex process. You can follow it by visiting our trade portal tdctrade.com or our publication China Business Alert.

We are organising more than 50 events in the mainland this year for Hong Kong companies, placing strong emphasis on brand-name promotion at both wholesale and retail level. Many of these high-profile events are in leading department stores in second-tier markets in central and western regions.

We are also helping Hong Kong service industries to position themselves for the opening of that sector. For example we are organising expositions and conference on Hong Kong's design and marketing services and in real estate management.

Given the broad implications of China's accession we are developing new approaches that facilitate trade promotion and trade matching on a 360- degree basis, for example, encouraging Hong Kong manufacturers and service companies to team up and cross-promote.

Conclusion

As you can see, I am very excited about the prospect China's WTO accession holds for Hong Kong. Certainly, there will be challenges. We are no stranger to these.

Think back to the 1970s when Hong Kong was almost priced out of world markets by competition from others with more land and labour. What saved -- and transformed -- us then was the mainland's first economic opening in 1978. It allowed Hong Kong to move labour-intensive manufacturing to the mainland and to develop as an advanced service economy.

With China's WTO accession there is a second economic opening. We have a chance to replicate this success on a much bigger scale and in ever more sophisticated ways that will continue to transform our economy. The mainland will be much more than a manufacturing partner of Hong Kong. It will also, potentially, be the biggest consumer of our products and services.

Everywhere in Asia there are strong signs of economic rebound. World trade is growing at an estimated 6.5 per cent this year. Hong Kong's external economy is doing extremely well, with export growth of nearly 20 per cent in the first five months of this year over last. The beneficial effects of this encouraging trend will very soon make themselves felt in Hong Kong's domestic economy.

I believe China's WTO accession will be a powerful catalyst in this process. It will set in motion Hong Kong's next economic transformation, creating new ways to add value, new jobs and new sources of wealth. This is a moment we have all been waiting for. It is up to us, now, to seize the opportunity.

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Content provided by Hong Kong Trade Development Council