Struggling Hong Kong Shaken by Shanghai`s Rise

“By not moving forward, you lag behind.”

Chinese Prime Minister Wen Jiabao said this to Hong Kong April 11, warning against the city`s complacency over its ranking as the world`s fifth-largest international financial center.

Hong Kong responded sensitively, with its media saying Wen`s "astonishing" comment created a sense of crisis in the city-state and that it "made sense.”

This year, Hong Kong is facing huge challenges ranging from the global financial crisis to full exchanges between China and Taiwan and the sudden emergence of Shanghai as a major competitor.

○ 3 major exchanges and Shanghai`s emergence

China and Taiwan began three major exchanges at the end of last year: direct trade, logistics, and people-to-people and postal exchanges. Direct charter flights between the two countries grew from just once only on traditional holidays to 108 times a week.

Hong Kong has been hit by exchanges in tourism, trade and transportation. Citibank Hong Kong said in a report that 30 percent of Chinese tourists who visit Hong Kong are now going to Taiwan.

Transit trade connecting China and Taiwan is being hit hard. Full exchanges across the Taiwan Strait will cost Hong Kong 0.2 percent (2.5 billion yuan) of its GDP. The loss is expected to rise to one percent of GDP by 2012.

Another fear of Hong Kong is the plan to make Shanghai an international financial and maritime hub by 2020 as announced by the Chinese government late last month.

Making Shanghai into a global financial center has long been an ambition of China, but it is different this time. In the early 1990s, the Shanghai city government released a similar plan to make the city the center of global finance by 2030.

This time, the Chinese central government has accepted this ambition and the plan`s implementation has been advanced by a decade.

This plan is stoking fear in Hong Kong. The China Daily said April 15, “Hong Kong is finding Shanghai increasingly uncomfortable.”

Others downplay Hong Kong`s fear, however, saying that given China`s size, it needs two international financial centers.

Kwan Chaojao, a former economics assistant professor at Chinese University of Hong Kong, told the daily Takungpao, “There is no role sharing in the international financial city.”

Experts suggest that Hong Kong must increase its level of globalization to avoid conflict with Shanghai, pioneer new areas in global finance, and diversify industries through tourism and education.

○ Worst growth in a decade

The Hong Kong branch of the Korea Trade-Investment Promotion Agency said global economic institutes last year forecast Hong Kong would see negative growth of 1.1 percent this year. Now they say the forecast is minus three percent.

The first quarter of this year is expected to see Hong Kong`s worst growth in a decade, with one institute predicting negative 6.4 percent.

Unemployment has reached a three-year high of 5.4 percent.

There is good news, however. Chinese Prime Minister Wen announced six measures Saturday to help the Hong Kong economy such as reviewing bond issuance of the yuan in Hong Kong. As Beijing seeks to globalize the yuan, the Hong Kong financial market will be positively influenced by these measures.

mungchii@donga.com