Two Cities, Two Systems?

Is Hong Kong’s importance as a financial center fading, or is the city just moving toward a new role? Merging with Shenzhen could make it a part of a financial mega-exchange that would dominate the Asian market.

In 1997, Hong Kong reverted to Chinese sovereignty as a Special Administrative Region (SAR). China promised Hong Kong a 50-year autonomy. "One-country, two systems", as Deng Xiaoping put it.

Measured by purchasing power parity, Hong Kong's GDP per capita today is $38,200. With its 6.9 million people, it is almost as prosperous as Switzerland. This success is linked to China's soaring economic growth, Hong Kong's tax incentives and role in global trade.

Despite Asia's 1997 financial crisis, the technology sector slowdown, and SARS, Hong Kong's economic engine has been humming. Now its role is shifting.



In the past, Hong Kong was the gateway to mainland China. Now the mainland is giving rise to challengers of its own. Since the opening of the Baiyun airport in Guangzhou, just one hour away via a high-speed ferry, the region has been growing as an air transportation hub for the region. Despite 25 million tourists in Hong Kong last year, the growth levels are highest in nearby Macau, which is exploding into China's Las Vegas.

It was shipping that initially made Hong Kong, which is still the world's second-biggest container port by output and third-biggest air-cargo hub. Ever since Yangshan, a massive deepwater port off the southern coast off Pudong, opened its first phase in 2004, Shanghai's role has risen rapidly.  

With high approval ratings, Hong Kong's chief executive, Donald Tsang, was re-elected last March. Still, Hong Kong is coping with the ongoing debate on electoral democracy and a number of other challenges, including pollution and poverty, over-reliance on premiums from land sales for fiscal revenue and competition from the mainland's rising commerical centers.

Slower world GDP growth will restrain Hong Kong's economic growth, but it will still remain at about 6 percent. The Closer Economic Partnership Agreement with mainland China allows Hong Kong firms preferential access to China's markets, including in the services sector. The SAR also remains a globally important trade entrepot.

"Hong Kong's best years are fading into history," a shipping industrialist says. "If Hong Kong understands how to succeed with China, it can redefine itself and continue to prosper."



Today, Hong Kong is the financial hub for the Pearl River Delta (including Shenzhen, Zhuhai and neighboring parts of Guangdong province) with its population of 65 million. This huge economic engine has enjoyed an annual growth rate of 17 percent for the past quarter-century. That may not be enough.

In the quest for scale, high-tech trading and lower trading costs, some of the largest global rivals of Hong Kong's stock exchange have engaged in strategic alliances, including the NYSE and Euronext, the proposed tie-up between NASDAQ, Bourse Dubai and Nordic OMX.

In September, Hong Kong bought back a stake of almost 6 percent ($1.5 billion) in the HK exchange. It was a prelude for closer ties with the mainland's two rapidly expanding exchanges in Shanghai and Shenzhen and might eventually lead to share swaps, said financial secretary John Tsang.

Different legal systems and regulatory regimes pose substantial, perhaps insurmountable obstacles. Still, the financial vision has commercial muscle. On paper, the Hong Kong, Shanghai, and Shenzhen exchanges would create a huge mega-bourse with a $5.3 trillion market capitalization that would eclipse the regional leader Tokyo Stock Exchange, now at $4.5 trillion.


Hong Kong-Shenzhen Metropolis

Since Shenzhen was established as China's first economic zone in 1979, the former fishing village has exploded into a prosperous city of 9 million. Its GDP per capita is almost $10,000- a figure that Hong Kong first surpassed in 1987.

Now the Hong Kong government is considering plans that could eventually lead to merging the adjacent cities into a single economic powerhouse. Shenzhen and its neighbors lack Hong Kong's financial sophistication and global mindset, whereas the SAR could take advantage of Shenzhen's integration with the rest of China and its role as a technology hub.

"Hong Kong should not only be a major Chinese city," said Hong Kong's first chief executive, Tung Chee Hwa, in his 1999 policy address, "but could become the most cosmopolitan city in Asia, enjoying a status comparable to that of New York in North America and London in Europe."


Dr. Dan Steinbock serves in the India, China and America Institute. Focusing on issues of international business and international relations, he resides in the United States, China and Europe.