It used to be said that highly flexible economies like Hong Kong’s didn’t “do” five-year plans. But given the impressive achievements of the Chinese mainland’s economic reforms, Hong Kong would do well to reconsider that idea.
Hong Kong’s advantages, with its fine natural port and international levels of trade and finance, are well-suited as a platform for the mainland. It has attracted investment and capital and served as a mighty anchor for the entire country’s export drive.
Hong Kong’s economy has flourished by keeping pace with the mainland’s economic development – and it’s been in lock step for years. The many opportunities offered by the mainland market have also provided early opportunities to key Hong Kong industries, including banking, logistics and professional services.
While manufacturing now accounts for only 2.5 per cent of Hong Kong’s economy, local manufacturers have not vanished, but simply changed position. They have seized the moment, taking full advantage of the Pearl River Delta’s (PRD) proximity and low production costs. They have expanded vigorously while fuelling the growth of Hong Kong’s services sectors and export trade.
The 12th Five-Year Plan (FYP), which runs until 2015, is designed to deepen the mainland’s economic reforms, introducing fundamental changes to the country’s development model. Under the FYP, strategic adjustment of the economy will get underway. The FYP will boost domestic consumer demand, raise the contribution of the services sector and lift the level of urbanisation.
The mainland intends to develop one of the world’s largest domestic markets and, at the same time, construct seven strategic emerging industries, as well as a services sector and a sustainable economic model. Those seven key industries are green technology; next-generation information technology; biotechnology; high-end equipment manufacturing; alternative energy; alternative materials; and alternative-energy vehicle industries. Hong Kong’s future may well depend on its ability to capitalise on these opportunities, and keep pace as the mainland moves to another level of reform.
Changing Consumer Patterns
As many leading commentators have noted, the world’s economic centre of gravity is shifting to Asia. So, too, is consumption growth. Personal consumption in Asian countries has risen markedly over the past 10 years; on the mainland alone, total personal consumption as a percentage of world consumption climbed to five per cent in 2009 from 2.8 per cent in 2000.
The scale of the mainland’s personal consumption is only one-sixth that of the United States, but the increase in its share will produce significant effects. For example, the mainland became the world’s largest car consumer market and the second-largest luxury market in 2009, attracting large-scale development by many retailers and brands from Europe, the US and Japan, as well as South Korea and Taiwan.
Hong Kong companies have always considered the mainland a manufacturing heartland, producing goods mainly for export. But with the expansion of the mainland consumer market, spending power is rising, and Hong Kong should adjust to take advantage of it.
Consumer awareness and concepts are maturing on the mainland, giving Hong Kong companies new opportunities to develop domestic sales, build sales channels and establish brand names that will magnify value-added goods and services.
HKTDC surveys have found that mainland middle-class consumers have a particularly good impression of Hong Kong products, rating them highly for quality and design. Hong Kong is seen as a fashion centre, giving it an edge over mainland markets. Fast-growing mainland towns and cities are conducive to better-run regional distribution networks, helping solve the scattered distribution channel problems of the past. On a broader level, urbanisation continues to drive opportunities for investment and employment growth, raising people’s incomes and spending power.
Judging from consumer figures in the coastal cities, urbanisation will bring changes in the demand for goods, and the development of towns and cities will stimulate consumption of services. These services will include catering and entertainment. And urbanisation will create demand for other services such as property management, cold chain logistics, mass transportation and garbage disposal.
China’s young population is likely to peak in 2011, with the overall labour force expected to decline from 2015 on. The continuing arc of the mainland’s urban growth, increases in employment opportunities in the central and western regions, and rural workers’ lower incentive to seek employment outside their home provinces are other developing trends.
All this will mean continuing labour shortages in the PRD, which already faces other challenges, particularly rising production costs and competition from inland provinces and cities. These factors should see increased investment by multinationals and large Chinese enterprises in the central and western regions, gradually resulting in the formation of new manufacturing clusters.
Whether approached from the point of view of the production chain or from domestic sales considerations, there is but one conclusion: there will be increasing incentives for Hong Kong manufacturing enterprises to move inland from the PRD.
Nevertheless, there may well be renewed interest in the PRD or, more broadly, on the mainland, for Hong Kong services. Much depends on their level of expertise and applicability. The expertise to steer high-end industrial chains, set up regional headquarters, R&D and distribution centres and form services sectors in major coastal cities pose strong competition to Hong Kong’s professionals in these areas.
Indeed, it’s worth considering whether Hong Kong’s services can cope with the development needs of the mainland’s seven strategic emerging industries. In any case, Hong Kong companies should brace themselves for these changes as early as possible.
Under the FYP, advanced technology and innovation will serve as a cornerstone for changing China’s economic development model. Hence the seven strategic emerging industries all focus on fostering and developing scientific and technology content.
In certain technology areas, the mainland is level with or even ahead of mature economies. But in terms of overall scientific research activity, it lags behind advanced countries. As a result of the technology gap, the mainland still needs to bring in key technology to support its industrial development.
For instance, if the mainland achieves its target of building a resource-efficient, environmentally friendly society, it would need a lot of environmental technology. According to a United Nations research report, the mainland needs 62 key specialised and general technology to undertake energy-saving and emission-reduction tasks. But in about 70 per cent of these areas, it still has not mastered the core technology and will have to rely on imports.
Hong Kong is the mainland’s window for procuring technological products and possesses extensive experience in assembling technological cooperation overseas. Coupled with well-regarded intellectual property rights laws, the city is able to introduce foreign technology through technology transfers, licensing and other means. Hong Kong’s diversified financial services, such as venture capital funds, can also provide the necessary capital for mainland technology projects.
During the FYP period, increasing numbers of mainland companies will seek listings and funding in Hong Kong as the mainland transforms its manufacturing industries and steps up its “going out” strategy.
The Framework Agreement on Hong Kong/ Guangdong Cooperation, signed last year, will likely be used to help implement various pilot cooperation projects. The Agreement suggests setting up a financial cooperation zone, with Hong Kong as a leader. In addition, Hong Kong is emerging as an offshore renminbi centre. Both initiatives would be favourable to Hong Kong’s continuing development as an international financial centre.
China’s 12th five year plan and Hong Kong…..17 03 2011