By CC Tung

Introduction
One of the more popular topics of discussion in town these days is that of the competition between Hong Kong and fast growing Shanghai. As a person born in Shanghai but having resided in Hong Kong for many years, I personally find the topic inherently interesting especially as my company is based in Hong Kong but has extensive business activities in Shanghai.

I will begin with a brief look at the two cities, their respective competitive advantages and the competition between them. I believe, however, that a discussion on Hong Kong and Shanghai would be incomplete without looking specifically at the two hinterlands served by the respective cities, the Yangtze River Delta and the Pearl River Delta. Given the growing competition between these two regions, I will make some comparison between the two deltas, and conclude by offering my thoughts on Hong Kong and our fellow cities in the Pearl River Delta.

Hong Kong and Shanghai – A Comparison
As a regional service centre, Hong Kong has the advantage of a more established track record of professionalism, application of the rule of law, and a higher level of business sophistication. It is not only the most important gateway to Mainland China but also functions as a commercial and financial centre for the Asia Pacific Region as a whole. By comparison, Shanghai is one of the most important gateways to central China and also serves as the premiere domestic capital market to mainland China.

For many multinational companies, Shanghai has and will continue to become their focal point for mainland China business. Indeed, Shanghai is well positioned and equipped to fulfill this function as a location for national headquarters, especially to those large manufacturing MNCs. Hong Kong, however, with its much more international outlook, will continue to be the preferred location for regional headquarters with wider responsibilities and activities including finance and logistics.

What about Hong Kong and Shanghai role as Transportation and Logistic hub? Both cities have placed a heavy emphasis on the investment in and development of container handling facilities to serve their respective cargo catchment areas. Indeed, Hong Kong and Shanghai does not compete with each other in this sector. In terms of competition, Hong Kong's main rivals are those container terminals in neighboring Guangdong province across the border while Shanghai competes with its own regional rivals such as Ningbo.

The area of air cargo is also similar in nature to that of containerized transportation. The air cargo terminals of the two cities again serve different catchment areas. Shanghai is the hub for eastern China while Hong Kong dominates the south. Interestingly, the two hubs face very different challenges in maintaining and expanding their respective leading positions in their markets. While Shanghai is trying to expand its international coverage in order to provide a more comprehensive air cargo network, Hong Kong is trying to expand its coverage within Mainland China so as to complete its already establish international network.

Hong Kong has a large, strong and experienced pool of entrepreneurs and management professionals who are internationally sophisticated in their outlook with good access to other international markets and information. Shanghai on the other hand, has a strong pool of technically trained engineers together with a well-educated, skilled and hungry workforce. Whilst Shanghai has made great efforts to further its international network and information reach, it remains far behind Hong Kong in this respect. Its advantage is however, that it does posses an excellent technical workforce and a cluster of academic institutions that provide a better base for research and development activities.

Whilst it is true that Shanghai is also investing heavily into becoming a trade, finance, and logistics hub which, on the face of it, should imply direct competition with Hong Kong, I would challenge this inevitability and advance that Hong Kong and Shanghai do not and will not directly compete with each other. The reasons are evident:

Firstly, each city has its own hinterland. Pearl River Delta companies are most likely to continue to use Hong Kong as their primary resource centre regardless of developments in Shanghai. This is true in reverse for Yangtze River Delta companies. In other words, the customer bases of the two cities are different and therefore discourage direct competition. Indeed, Hong Kong cannot replace Shanghai as a hub for Yangtze River Delta Companies, and Shanghai certainly cannot replace Hong Kong position as leader of Southern China. Even in the areas of financial services, Shanghai’s role as center for domestic capital markets and Hong Kong’s more international role will not overlap in the foreseeable future.

Secondly, whilst Hong Kong boasts an economy dominated by the service sector, it is unlikely that Shanghai will abandon its entire industrial base. The Shanghai government recently announced the six pillar industries for Shanghai. While their emphasis on financial services, logistic services, and information technology may mirror those of Hong Kong, they have also retained automobile manufacturing and industrial machinery and equipment manufacturing as two of the pillars. It is evident that Shanghai will keep a degree of manufacturing and industrial roles for the city going forward.

Thirdly, due to the fact that Hong Kong and Shanghai today possess different skill sets and areas of expertise, the two cities in fact possess a potentially powerful partnership that will be of mutual benefit. The Hong Kong businessman is bringing valuable international business experience to the manufacturing and consumer sector in Shanghai, while Shanghai-based companies continue to come to Hong Kong for more sophisticated financial structuring and capital raising exercises. Indeed, the development of Shanghai is being partly fuelled by investments from Hong Kong. Hong Kong not only serves as Shanghai’s largest investor accounting for some 30% of FDI into China, but also supplies Shanghai with its management expertise and business experience.

The two cities do not in reality compete directly with each other. While there are areas of overlap, there are, in fact, more areas of mutual benefit and there is room for better coordination. However, while the cities if taken in isolation do not compete directly with each other, their respective hinterlands of the Pearl River Delta and the Yangtze River Delta, are very much in competition.

The Two Deltas
It is indeed important to realize that Hong Kong and Shanghai in isolation could not achieve what they have today, or what they aspire to be tomorrow. It is only by close collaboration and integration with their respective hinterlands can both cities attain their true and full potential. The combination of a sophisticated and professional hub, a skilled and cost effective manufacturing centre and a maturing consumer base creates a competitive and efficient regional centre for growth and prosperity. In a nutshell, the formation and maturing of the Pearl River and Yangtze River Deltas has not only contributed to the overall development of China, but also to the continued development of Hong Kong and Shanghai.

The development of the Pearl River Delta began in 1978 as China started to open its doors to overseas investors. Since 1978 about 30% of total foreign investment into Mainland China went to the Pearl River Delta area. While it was not the cheapest place in China for manufacturing activities, it became certainly the most efficient, professional and therefore cost effective. Per capita GDP in the region is more than 3 times the national average and twice that of Guangdong province as a whole. Even excluding Hong Kong and Macau, the Delta accounts for 7% of the nation’s GDP with 2.5% of the nation’s population. The Pearl River Delta area is economically vital to Southern China.

The development of the Yangtze River Delta began in 1984 when the cities of Shanghai, Ningbo and Wenzhou were declared open to foreign investment. In 1990, the Chinese government further declared Pudong New Zone and several more cities in the Yangtze River valley open to overseas trade and investment. Today, with an area consisting of some 15 cities in Shanghai proper, Zhejiang and Jiangsu Provinces, the Yangtze River Delta accounts for 19% of the Mainland’s GDP and approximately 10% of her population. The Delta has established itself as a credible manufacturing base and also as a potential consumer market. While Pearl River Delta and Fujian province has traditionally been the target of Taiwanese investment, Yangtze River Delta is becoming an increasingly popular investment destination for the industrial migration from Taiwan into China. It has overtaken Fujian Province in attracting such cross strait investment. By 2000, Shanghai and the two provinces together also accounted for close to 30% of the nation’s FDI.

Competition between the Deltas: A Healthy Phenomenon
Indeed, unlike the metropolis of Hong Kong and Shanghai, the two deltas do compete with each other. With China’s emergence as both a leading manufacturing power and a substantial consumer nation in its own right, foreign and domestic investors will continue to increase and enlarge their investments in China. With improving infrastructure and maturing urban economies all around Mainland China, especially in the coastal provinces, the competition for foreign and local fixed asset investment has become more intense. In a world where investment is liquid and efficient, the ability to attract fixed asset investment is not only critical to the continued success of the respective delta. From the point of view of each respective delta, every new dollar invested in one delta implies the loss of one potential dollar invested in the other.

Indeed, this competition will continue and become increasingly focused and fierce. Such competition, however is not necessarily bad for the Pearl River and Yangtze River Deltas. Competition, with which we are so familiar in Hong Kong, is the key to higher product quality and increased production and cost efficiency. Lack of competition leads only to complacency and in turn, higher costs and lower efficiency. At the end of the day, competition forces us to produce a better product at a more competitive price.

Furthermore, I do not think that such competition should be discouraged. Such competition is in fact healthy. On the macro level, it will raise the overall competitiveness of both deltas and, more importantly, of China as a whole as against other manufacturing areas around the world. On the micro level, it will bring about a better and more cost efficient product for all end users. The only caveat is of course to ensure healthy and constructive competition rather than destructive competition. Destructive competition is typically price driven. It ignores product quality, be it goods or services, and very often leads to declining standards. Constructive competition on the other hand, raises the level of the product. But it requires continued investment, initiative and a strong degree of customer/user focus. I believe that the Pearl River and Yangtze River Deltas can utilize the inevitable competition and drive themselves further up the value chain.

For Hong Kong and the Pearl River Delta: How To Maintain The Edge
For those of us here in Southern China, we should be mindful of the challenge from Yangtze River Delta. Much continues to be said about the competition between Hong Kong and the ports just across border. I, for one, welcome such competition. Hong Kong, afterall, is a free market economy. Competition ultimately leads to increased efficiency. I would very much discourage heavy-handed government intervention, or any other short-sighted measures in response to such competition. The more interesting discussion to me, however, is on whether Hong Kong and other businesses in the Pearl River Delta can better integrate themselves to create a seamless logistic supply chain originating from the manufacturing facilities and ending on the shelves of the customer in the US, Europe or Asia. Hong Kong is already a world class financial & trading hub. Better integration with the Delta will complete the formation of a high quality, full service, and professional business center encompassing the entire area. The Pearl River Delta will be that much more attractive to investors as a result and Hong Kong, Shenzhen and the Delta as a whole would gain from increased economic and investment activities.

The Pearl River Delta today retains a leading position over Yangtze River Delta. After all, PRD have a more established infrastructure, a 25 year track record of business operation, and close proximity to Hong Kong which itself is more established and better positioned in the international business community. One particular factor of success which I believe to be critical, but yet unheralded, is the tremendous effort by various authorities in the Pearl River Delta in maintaining the necessary working relation with each other. One must not underestimate the complexity of multi jurisdiction cooperation. Let’s us not forget that Pearl River Delta actually consists of one provincial government, one Hong Kong government, and numerous municipal authorities like Guangzhou, Shenzhen, Zhuhai, Donguan, Shunde..…etc. In addition, there are various disciplines within these jurisdiction including customs, border control, port authorities, transportation, and industrial concerns. The fact is that all these parties have been working with each other for some 25 years. This is no easy feat, nor can it be duplicated overnight.

Indeed, Yangtze River Delta is relatively young. With ten times the area, almost three times the population to that of PRD, and in addition, the involvement of the Shanghai Government, two provincial government and a largest number of municipal authorities, the success of YRD will also hinge on the ability of these parties to grow and develop together.

Those of us in PRD must however continue to improve ourselves. I believe that further success would come from even greater cooperation between the Hong Kong government and Guangdong Provincial government. Certainly, the recent government sponsored CEPA points to this direction. We need strong provincial government leadership in this endeavour. For the various local government within the Delta, I urge that all measures be taken to evaluate investment environment. Capital is always liquid. Competition for fixed asset investment can come from within Mainland China or that of foreign countries. It is critical that the investment environment is attractive enough to lure domestic and international investors. This evaluation should be a continuous and unending exercise. For the Hong Kong government, I believe that more effort must be made to improve our position as the virtual and physical hub for the region. To this end, we must upgrade our own physical infrastructure to ensure better connectivity with the entire Pearl River Delta, with a view towards harnessing potential of the entire Delta, not just for the sake of Hong Kong proper. It is critical for Hong Kong government, working under the "One Country Two Systems" concept, to further integrate Hong Kong into the Pearl River Delta system, and ensure even more efficient flow of people, goods and services between the border.

Ladies and Gentlemen, it is important for Guangdong Province, Hong Kong, Guangzhou, and other cities across the Pearl River Delta to realize that we are not engaged in a zero sum game with each other. We need to work together with a higher degree of cohesiveness and, and ensure greater cooperation across the border. Unilateral action and uncoordinated growth will damage the overall competitiveness of the Pearl River Delta as a primary economic hub of Mainland China. Conversely, better coordination, linkage and reduced bottlenecks will benefit the Pearl River delta as a whole and bring further prosperity and growth opportunities to all of us.