Shanghai and Hong Kong - Economic partners or regional rivals?

I wrote this piece for Dhaka Tribune. It got published in the Op-Ed section on 09 September 2013. 

The relation between China and Hong Kong are more like a single parent and an adopted child who feels he was better treated in his previous foster home.

In spite of being rich in terms of wealth and capabilities, Hong Kong is currently being haunted by doubts about its future. The International Monetary Fund in 2010 noted that the prospects of Hong Kong are dominated by the new monetary policy easing in the US, and also domestic recovery, which is partially driven by the mainland’s spillovers. Both these factors fuelled the price of properties in Hong Kong in last five years and might pose to be a major financial risk in the coming years.

A recent annual IMF survey stated that Hong Kong is no longer the world’s most competitive economy. Another survey found that Hong Kong slipped from the second position to fifth as China’s most competitive region in 2012.

As part of export trade, Hong Kong’s hi-tech sector has shrunk since it was integrated with the mainland. Due to these factors, perception among social activists, traders, businessmen and consumers in Hong Kong towards the policies taken by Shanghai are not upbeat at the moment. They feel that policy makers seating in Shanghai are taking decisions that are biased towards the mainland and are rigid to many extent.

Global economic integration and historical colonialism explains the different paths of Shanghai and Hong Kong as rising global financial centres. Shanghai was the major international finance and trade centre in East Asia until the 1920s and was eroded with the 1930s turmoil.

On the other hand, Hong Kong benefited from global integration in the 1940s. Most of the foreign firms moved to Hong Kong from Shanghai after the World War II and the civil war in China. Gradually Hong Kong became the home for elite entrepreneurs of the mainland.

A steady industrialization took place in Hong Kong due to low cost labour. Textile and manufacturing industries grew in quick time. The living standard got a big boost as a conscience. Hong Kong being the financial lifeline of China enjoyed yet another extraordinary decade during 1980s due to mainland China’s closed financial sector. Even the 1997 financial woes did not affect it too much.

Policymakers of Shanghai now plan to make the city as one of the world’s leading trade, shipping and financial centres by the end of 2020. This plan has also been approved by the China State Council in early 2013.

The Shanghai mayor recently announced the plan to develop mainland’s first free-trade zone, which will also be accompanied by financial reforms.

Given that the currency, bond and equity market of China has expanded significantly over the last ten years, new reforms are expected shortly to allow commercial banks to further grow in terms of lending, fragmented bond market, loan portfolios. It is also expected that Shanghai will open its doors for foreign financial institutions and investors by the end of 2014.

It is more or less Shanghai’s responsibility to ease the stance and make sure that no hard feelings exists among the residents and economic players of Honk Kong. Shanghai needs to increase leadership in terms of consumption led growth.

Conversely, Hong Kong should not see Shanghai’s development plan to transform as a free trade zone as a threat. It should rather view Shanghai’s development as a signal for meeting new economic challenges.

Hong Kong still relies heavily on its traditional sectors including finance, trade, logistics, professional services and tourism. It is now time for Hong Kong to innovate and upgrade its economic strengths.

In order to sustain its expensive living standards and high prices, high-end advantages needs to be boosted. It is capable of offering broader and deeper finance and trade services, the result lays on how well these are implemented.

The future of Hong Kong depends heavily on how it adjusts to Shanghai’s new growth plan. The two should work like economic pairs rather than regional rivals in order to achieve maximum economic growth.

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