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Page 1: The Hong Kong advantage - Hong Kong Economic and Trade ... · PDF fileThe Hong Kong advantage INTERVIEW WITH TC CHAN JP ... generations for Shanghai to catch up with Hong ... international

FIRST

HONG KONG

The Hong Kong advantageINTERVIEW WITH TC CHAN JPCOUNTRY OFFICER, HONG KONG AND HEAD OF GREATER CHINA, CORPORATE & INVESTMENT BANKING, CITIGROUP

TC CHAN obtained his MBA degreefrom the University ofHawaii in 1979 and his CPAin the same year. In his 25years with Citigroup, MrChan has held seniorpositions in Treasury,Operations, ProductManagement, FinancialControl, Sales & Trading andCountry BusinessManagement. As a native ofHong Kong, Mr Chan isactively involved incommunity service andprofessional organisations.He is the Chairman of theAdvisory Committee onHuman ResourcesDevelopment in theFinancial Sector of theHKSAR, sits on the Boardand Executive Committee ofthe Hong Kong CommunityChest and serves as aCouncil Member of the HongKong PolytechnicUniversity. He wasappointed as Justice of thePeace in 2002.

How do you see the outlook for the Hong Kongeconomy in the medium term?Last year the economy grew at around 8 per cent as itrecovered from the effects of the SARS epidemic of2003. A lot of people expected to see a slowdown thisyear as a result, but it hasn’t happened. In fact our in-house forecasts are for overall growth to be around 5.8per cent for 2005, which is in line with the forecasts ofother banks and trade associations.

In the second quarter, we saw 6.8 per cent growth inHong Kong. What that indicates is that given thechange in government policy both in Hong Kong andChina post-SARS, we are beginning to see a more sta-ble base from which Hong Kong could springboard toa higher trend growth in future years.

Hong Kong is a relatively mature economy. ItsGDP is roughly US$25,000 per capita – second toJapan and roughly on a par with Singapore – so it’s notan emerging market per se, where growth rates are ex-pected to be much higher. Hong Kong has alreadyreached OECD levels in terms of its GDP and so nor-mally one would expect to see a long-term growth ratein the order of 3-3.5 per cent, like in the United States.But we believe that, given Hong Kong’s special roleand the very accommodating policies of both theHong Kong and Chinese governments, we can expectto see a slightly higher growth rate, around 4-4.5 percent over the next few years.

That view has been supported firstly by the extentto which Hong Kong has provided the capital markets,financial and banking services to China, as evidencedby the large number of mainland IPOs that we haveseen here recently. Hong Kong is uniquely placed tobenefit from those kinds of cross-border, capital mar-kets activities.

WTO rules require China to open up its financialsector and other segments of its economy by 2007, sothe clock is ticking. China has already been focusingon introducing market reforms in a number of sectorssuch as banking, insurance, logistics, retail, trading –all of which are likely to see a large degree of changethat could affect the way they run their business andthe way they structure their corporations, from gover-nance to financial management, risk control and so on.So Hong Kong, with its highly developed financial andbusiness infrastructure is extremely well placed toserve China’s needs in this respect.

What sets Hong Kong apart from its regionalcompetitors in this regard?It has a number of unique qualifications: firstly, itsphysical location. It seldom takes more than three orfour hours to fly anywhere in Asia, which is a great ad-vantage for a company like ours that has its regionalhub and headquarters here, because although we havean in-country presence in the each of the 15 or so mar-kets in which we do business, we base our regionalprofessionals here in Hong Kong and fly them outwhere they are needed. So, if Taiwan has a big deal thatrequires equity capital markets professionals, we wouldsend a team from Hong Kong instead of building ateam in that country. In that respect Hong Kong isuniquely placed to serve this purpose.

Secondly, if you look at the various regulatoryregimes in the region, I would say that Hong Kongand Singapore really stand out. We both follow theBritish system, with all that that entails, such as therule of law, property rights, repossession laws, bank-ruptcy and so on – so we don’t need to build fromscratch as we do in places like China.

A lot of people compare Hong Kong with Shanghai,pointing out that Shanghai has been growing at twicethe rate of Hong Kong over the past few years, and thequestion that’s commonly asked is: when will Shang-hai take over Hong Kong’s role as the pre-eminent re-gional financial centre? In my view, it will take twogenerations for Shanghai to catch up with HongKong, because the physical infrastructure is easy tobuild; over the last ten years they have converted thepaddy fields of Pudong into a really impressive finan-cial centre for China. But to be a really successfulinternational financial centre – or even a local financialcentre like Tokyo – you need to have the rule of law,you need to have a deep talent pool, you need to havea relatively free system of capital flow, informationflow and, of course, a market. Of the market there’s nodoubt, because China is seen by many people to be themost important market over the next few decades. Butin terms of the other elements, Shanghai has a lot ofcatching up to do before it can challenge Hong Kongas the pre-eminent financial centre.

I think most people see Shanghai as a place for thefuture, more as a market than as a hub. As a regionalhub here in Hong Kong, we hire a lot of expensivepeople who in turn contribute to the tax base of Hong

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Kong. If the global banks were only set up here to goafter local business in Hong Kong we wouldn’t needall these highly paid professionals in capital markets, intrading, investment banking, even in commercialbanking. So Hong Kong benefits from that role, notonly in an economic sense but also culturally.

How does the presence of bankers benefit HongKong in cultural terms?

In the sense that it has made Hong Kong one of themost cosmopolitan, international, global cities in thispart of the world. It’s not quite up there with Londonor New York, but it’s close.

We still have some catching up to do in terms build-ing up our cultural values, we still don’t have anythingto compare to Broadway or the West End, but it willcome. We seldom paid attention to our cultural her-itage in the past, but as Hong Kong people are gettingricher you will certainly see us catching up with thecultural aspect of society.

Eventually, as well as being the indisputable finan-cial hub for Greater China, I hope that Hong Kongcan build its capacity as an educational centre, becauseit has the potential to provide curricula that are moreglobally oriented, offering exposure to different multi-nationals and I think the business community can playan important role in this regard.

In addition, I think we need to capitalise on our po-tential as a tourism and travel destination. We need todiversify, to build up our convention facilities, invest ingolf courses, resort hotels and shows – the whole pack-age. Look what they’ve achieved in Las Vegas; back inthe ‘50s and ‘60s it used to be a vice den where peoplejust went for gambling. But over the last 20 years theplace has completely transformed itself into a destina-tion for family vacations, great shows, great restau-rants, great golfing and now a lot of big companieshold their annual general meetings there. Hong Kongshould have that aspiration.

As Citigroup’s head of Greater China for Corporateand Investment Banking business, how do you seethe process of economic integration between HongKong, Taiwan and the Mainland moving forward?

Hong Kong started moving its manufacturing acrossthe border, beginning in the late ‘70s, the 1980s reallysaw a fundamental transformation of Hong Kong’seconomy from SME-type manufacturing to a service-based economy, which gave rise to the property sectorand all that. Hong Kong has been very successful inthe transformation in the last two decades. HongKong businessmen have done well from the propertymarket in particular; most of the foreign investment inChina’s property and construction sectors has comefrom Hong Kong.

As for Taiwan, it was opened up to allow its busi-nessmen to invest in the Mainland in 1992. China ben-efits a lot from Taiwan’s know-how; its expertise in IT,in auto parts manufacturing, petrochemicals, all kindsof traditional industries – food processing, garmentsand shoes.

I would also say that the most successful investors inMainland China have been from Taiwan, and a lot ofpeople have missed this fact. Hong Kong people havealso done well but the most successful ones have beenthose from Taiwan. Taiwan people are very focused onmanufacturing, using China as a manufacturing hub– the global factory, so to speak – and what they man-ufacture in China is generally exported to America, toEurope, to developed economies, essentially. And inthis process they have reaped great economic benefits.

If you look at the number of jobs that these invest-ments from Hong Kong and Taiwan have created, it’sstaggering; I’m talking about tens of millions of jobs,which is hugely important for China. These invest-ments have also helped in creating wealth and build-ing the know-how for China to constantly migrateupwards in terms of its manufacturing, production andeconomic process as well as further enhancing the eco-nomic development of the region. Mainland compa-nies also take advantage of Hong Kong’s capitalmarkets and financial infrastructure for fund raisingand in turn create value and jobs for Hong Kong.

Is there not a danger that as political relations im-prove between China and Taiwan, Hong Kong maylose its privileged position as middleman?

Well, there’s always a risk. I mean right now, if youwant to go from Taiwan to China you have to gothrough Hong Kong and they estimate that about 10per cent of all traffic going though our airport is due tothis lack of a direct link between them. So we’re goingto lose some of that business. But at the same time,every change in the market or in policy will bring withit some advantages and some disadvantages, and interms of investment flow I see things differently.

Hong Kong still has a big advantage over Taipei orShanghai as a financial centre, so if you assume thatthere would be more investment from Taiwan intoChina and more wealth creation by these Taiwanesebusinessmen as a result, what are they going to do oncethey make their money? They’re not going to shifttheir money back to Taiwan, they’re not going to keepit in China, they’re going to move the money to HongKong because it’s a financial centre. This money thencreates high value-added jobs in the financial servicessector, which is exactly the kind of jobs that HongKong needs in order to sustain our economic vibrancyand transform ourselves into a true world city likeLondon or New York. F

In my opinion,it will take twogenerations forShanghai tocatch up withHong Kong asa financialcentre