Monday, June 1, 2020

Hong Kong: The Post Pandemic Gateway to China and Southeast Asia

hong kong

A window of business and trade opportunity has opened up for the region.

 

By Minesh Pore and James Kwan

 

Hong Kong has long been stylized as the connective membrane between China and the rest of Southeast Asia. In light of the COVID-19 crisis, the region is confronted with unique opportunities that it can capitalize on. Hong Kong could potentially become a leading global launchpad for successful startups, and a leader in Southeast Asian emerging businesses with the right strategic moves.

 

Hong Kong’s trade links with China were bolstered after the early 1970s. China started opening up to the world economy after former President of the United States Richard Nixon’s week-long diplomatic visit to the country in 1972, popularly referred to as “the week that changed the world.” Business in China, whether it was the financial sector, commodities, or anything else, was routed through Hong Kong, and the region took on more importance as the ’80s and ’90s passed by.

 

A Strategic Upper Hand

 

International prospects of trade with China are cloudy, and not because of the pandemic alone. It is highly probable that international trade with China is going to take a hit once the pandemic is under control. In addition, a string of recent fraud cases, including that of Luckin Coffee, have left investors wary of Chinese businesses, prompting many to forgo international IPOs and list closer to home.

 

As economies recover, regulatory constraints within China could clamp down on the country’s trade relations as it tries to support local business. Strictures on capital flows in and out of China have demonstrated much the same effect in the past. Furthermore, travel from and to China may continue to face restrictions even after the pandemic has abated. The shift in China’s reputation worldwide, as it reels under a crashing economy, may have a lasting impact on trade relations.

 

But the Chinese population will still have purchasing power, and Hong Kong can re-emerge as a premier retail destination to satisfy that appetite for consumption, gaining back the traction it lost after pro-democracy protests paralyzed the city’s retail districts for almost six months in 2019.

 

Owing to its strategic location and business capability, Hong Kong is poised to turn the situation around by providing access to the Chinese market. It will continue to have remote access to China after COVID-19, even though the rest of the world might have closed its doors.

 

This is hardly a novel advantage. Just like in the ‘80s, business can be routed to China via Hong Kong in contemporary times as well. The difference is that today, Hong Kong also has access to considerable technological and human capital.

 

Hong Kong’s advantages as a potential innovation hub, for instance by using blockchain for supply chain or retail tech solutions, make an even stronger case for this scenario. That technology will come from the SME sector – from startups and innovators that have set up camp in the region.

 

Additionally, the local population of Hong Kong possesses a combination of skill sets that can provide the right fuel to make this happen. They are well-versed in the legal and trade languages of the world, from Silicon Valley to the Greater Bay Area, and education and Internet penetration levels here are far better than the rest of Southeast Asia.

 

Ready For The New Normal

 

The years of corporate reliance on Hong Kong as a trade and capital route into China have led to the region developing diverse and elaborate financial service infrastructure. In fact, eighteen Southeast Asian startups, including some from Singapore, raised funds on Hong Kong stock exchanges last year.

 

The Hong Kong market also has just right size, pricing hierarchies, and infrastructure to pilot solutions cost-effectively. With a population of a little over 7 million, the cost of reaching the end consumer is much less in Hong Kong because of the size of the market.

 

As a small-market open economy, Hong Kong is also well poised to absorb any post-COVID-19 benefits of economic recovery in the U.S., the E.U., Japan, or even China . All of these countries are leading world economies with which Hong Kong has bilateral connections.

 

The government’s trade and banking regulations are also quite favorable – for instance, the government offers tax discounts on profits up to HK$2 million for companies as well as unincorporated businesses. Additionally, the Hong Kong Science and Technology Park, the Express Rail Link, and the availability of a shipping port all boost Hong Kong’s case.

 

Chinese companies have routed vast amounts of business through Hong Kong, such as hundreds of billions worth of financing raised via Hong Kong exchanges, or investments in the Chinese onshore bond market via the Hong Kong-based Bond Connect.

 

The opportunity to capitalize further on this, in a world staggering under the pressures of the COVID-19 outbreak, is by leveraging Hong Kong’s resources to establish strong relations with the rest of Southeast Asia. COVID-19 could be the catalyst to turn the tables in its favor for good.

 

Given all that is mentioned above, this challenge may not be easily won. The real competition for Hong Kong is Singapore, in terms of infrastructure and openness to new businesses. Singapore is home to some of the world’s most successful startups such as Grab, and has a progressive attitude towards emerging technologies.

 

This is where Hong Kong’s location advantage becomes prominent: Singapore does not have the same geographical benefits with China as Hong Kong does. It acts similarly to Singapore in being a bridge to Southeast Asia, but it has the critical advantage of also being a connector to mainland China.

 

The ASEAN Connection

 

Japan, U.S. and the United Kingdom are in the process of reducing manufacturing dependence on China, due to the double whammy landed by the U.S.-China trade war and the COVID-19 outbreak.

 

Tech giants Apple, Google and Microsoft are also looking to shift their production base outside of China. Indonesia, Vietnam and Thailand stand to benefit from this transition.

 

Vietnam is gaining visibility during these volatile times. 46% of U.S. imports worth $31 billion that were shifted out of China were absorbed by Vietnam. The country exported manufactured goods worth an additional $14 billion to the U.S. in 2019 as a result.

 

Hong Kong has good trade relations with all these three countries, and others in the Association of Southeast Asian Nations (ASEAN), particularly in terms of reduced or waived customs duties for Hong Kong exporters.

 

Along with Vietnam and Thailand, it has implemented a free trade agreement (FTA) with Laos, Myanmar, Singapore, and Malaysia. Another FTA is slated to come into force in the Philippines in May this year. The agreement promotes removal of tariffs and non-tariff trade constraints, as well as better access for intra-regional service providers.

 

ASEAN was also Hong Kong’s second largest merchandise trading partner in 2018. Additionally, Singapore, Malaysia and Thailand were the region’s top three ASEAN trading partners in 2018, with Singapore facilitating a lion’s share of the trade.

 

Both the Malaysian and Vietnamese economies are expected to rebound strongly next year. Additionally, ASEAN countries have diversified trade networks internally, and with the U.S., the E.U., and China. Any of these economies that pick up will have a positive spillover on ASEAN economies.

 

Southeast Asia as a market is ready for outflows from China, and nations in this region are well connected with each other and with Hong Kong. It is imperative that Hong Kong seize this moment to reinforce its connections with its Southeast Asian neighbors.

 

Hong Kong has long been acknowledged as one of the world’s most open economies, an international financial trading hub and, prior to the pro-democracy protests, the economic capital of Southeast Asia. If everyone plays their cards right, Hong Kong could make headway through massive opportunities, putting it ahead on the leaderboard.

 

Header image by SHUJA OFFICIAL on Unsplash

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