China’s economy will be like a giant 747 with Shanghai and Hong Kong acting as its two main engines, if Hong Kong can reinvent itself to balance Shanghai’s growing prosperity, according to Ming K. Chan, an authority on Hong Kong and Asian development.


Singapore, which once threatened to become another business rival to Hong Kong, is hampered by its authoritarian political regime, Chan said during a lecture on Nov. 26 sponsored by the Wharton Graduate Association Asia Club and the University of Pennsylvania’s Center for East Asian studies.


Hong Kong people are upset,” noted Chan, who is a research fellow at Stanford University’s Hoover Institute. “There is a lack of confidence and a hint that Hong Kong’s days are numbered unless Hong Kong reinvents itself.”


Chan recalled that when the British handed Hong Kong over to the Chinese government in 1997, there were many predictions that Hong Kong’s special status as a freewheeling business city would wither under control by the mainland. Beijing, however, has been true to its promise to create one country with two systems. Hong Kong’s problems these days are not political, Chan said, but economic.


Hong Kong suffered during the Asian economic meltdown when neighboring nations devalued their currencies, thereby making their products more competitive against Hong Kong’s. Beijing, in an effort to prove itself a good global economic citizen, backed the Hong Kong currency and has maintained its peg to the U.S. dollar.


As a result, unemployment in Hong Kong currently stands at nearly 7% and growth is projected at about 2% this year. By contrast, unemployment in Shanghai is 1% and the Chinese economy continues to grow at a rate of 7% to 8% a year, said Chan. “Hong Kong did not devalue, but precisely because [of that], unemployment grew. Since then, Hong Kong has been in an economic downturn.” 


Meanwhile, China’s continuing push to globalize and develop a market-based economy has contributed to the growth of Shanghai, which Chan said now has skyscrapers and restaurants to rival those in Hong Kong. “In terms of five-star luxury, Shanghai has arrived,” he noted. Indeed, Shanghai is returning to its rightful place as a key Chinese business capital. Prior to Communist control of the city, Shanghai had enjoyed a long history as a gateway for China’s main export products, including silk, tea and porcelain.


Now, with more openness in China, Hong Kong – which once had thrived as the “alternative model” – is losing its special appeal as a free-market port. “Given the 1997 economic crisis and international political panic, and the American economic slowdown since 9/11, the Hong Kong economy has been going downhill,” Chan said. “Thank God there is the Chinese market. Without the People’s Republic, Hong Kong would be swimming in hot, hot, hot and very dirty water.”


China’s Premier City on the Coast

This situation has created “three kinds of unhappy, panicky sentiments” in Hong Kong. First, people there fear that increasing economic dependence on China will lead to increasing political control by Beijing. Second, the rise of the Chinese economy has meant that Hong Kong is no longer the draw it once was for talent and investment in the region. Finally, Chan noted, a growing percentage of political leaders in Beijing have ties to Shanghai, causing people in Hong Kong to worry that those leaders will grant Shanghai economic favors.


Moreover, half of Hong Kong’s top 50 business leaders, Chan added, have Shanghai connections and many have returned there to invest. Because of Communism, Shanghai was unfairly “excommunicated from the world of western industrial capitalism. Now that China is more than just waking up, Shanghai is reassuming its normal position as the premier city on the China coast … Suddenly lots of Hong Kong people are waking up in the morning” and starting to wonder whether “they have a job in Hong Kong or will have to work for someone in Shanghai.”


The threat that Singapore, another port nurtured by the British, would eclipse Hong Kong has subsided in the past two years, said Chan, adding that Singapore was able to gain economic ground because as a city-state it could focus national resources and make swift policy decisions. But Singapore’s lack of democratic institutions has hurt its plan to become a great business center.


Since Sept. 11, 2001, Singapore – which is surrounded by the Islamic Malay Peninsula – has also curtailed global business activity. The port in Singapore makes a good entry point for potential terrorists, Chan said, noting that he would not be surprised to learn that the persons responsible for the bombings in Bali had connections to Singapore. “Singapore would like to be Hong Kong,” said Chan. “But Shanghai is actually a greater force.”


Not a Zero Sum Game

According to Chan, Hong Kong’s booming economy in the years leading up to the handover was created artificially by the British and the Chinese governments who pumped money into the city because neither wanted to be blamed for any decline in Hong Kong. “The British did not want to depart and leave Hong Kong in a miserable state and the PRC wanted to preempt any possibility of economic collapse.”


Now, however, Hong Kong is under pressure. As China prepares to enter the World Trade Organization, Chan suggested, its economy will become even more open and attractive to direct investment from outsiders who in prior years would have cracked the market using Hong Kong as a bridge.


Hong Kong has been attempting to reposition itself as a service center; currently only 15% of its economy is manufacturing-based, Chan said. But Hong Kong does not have the workforce to successfully convert itself “into a full-fledged, high-skilled, high value-added service hub – not just for China but for the western part of the Pacific rim.”


On the plus side, Hong Kong, according to Chan, still has one of the best court systems in the world, and like Singapore, it boasts a relatively corruption-free bureaucracy. Unlike Singapore, Hong Kong enjoys a free press and an open society, although Chan said Hong Kong could benefit from sharper, Singapore-style decision-making.


Hong Kong should not be looking over its shoulder at Shanghai in paranoia, Chan concluded. “Shanghai is rebounding to what it ought to be. It is not a zero-sum game based on Hong Kong’s demise. China is big enough to fly on two engines.”