BOOK REVIEWS

Hong Kong: A World Platform for Greater Value-added Services?

The decline in manufacturing industry in Hong Kong—22% of gross domestic product (GDP) in 1987, 6.5% in 1997—is nothing new and has been much debated. Less talked about are the structural changes in the service sector since the interweaving of the economies of Hong Kong and southern China. In less than two decades, services—which are the main source of employment in Hong Kong—have gone from 64% of GDP (1981) to 85.2% (1997). This accounted for 54% of the work force in 1986 and 85% in 1998. But within the tertiary sector another more subtle development has asserted itself since the end of the 1980s: the rise in support professions for relocated industry—finance, insurance, real estate and, above all, business services. Are the marked increase in strategic services and the falling off in trade related services the beginning of a structural transformation of the Hong Kong economy? Are these signs of Hong Kong’s accession to the status of global metropolis or, more mundanely, of its increased dependence on the Chinese hinterland?

The Census and Statistics Department groups together in the category of “services” four large professional families: 1. trade (wholesale and retail), import-export, hotels and restaurants; 2. transport, storage and communications; 3. finance, insurance, real estate and business services; 4. personal, social and community services. Let us follow the development of a “marker” of the sophistication of a metropolitan economy, the category “finance, insurance, real estate and business services”. The first three of these professions are easily categorised. Let us note however that the sheer size of real estate in the mid-1990s contributes atypically to the over-representation of this whole category. The last section (business services) brings together composite activities: machinery and equipment rental, legal services, auditing and accounting, data processing, engineering and technical services, and advertising.

This is what makes the integrated chain, which runs through production to transport, through infrastructure to marketing, through quality control to legal advice, so complex. The size of this “cluster” of services almost doubled between 1985 and 1997 in its contribution to GDP; its share of jobs and service exports almost tripled. Let us compare it from four different angles with a more traditional logistic—one which brings together transport, warehousing and communications: the respective contributions of these two sectors to GDP (Graph 1), to the value-added per employee (Graph 2), to employment (Graph 3), to service exports (Graph 4), and to the level of foreign direct investment in Hong Kong (Graph 5).

The decline in manufacturing, or more precisely its delocalisation to southern China has generated an enormous demand for logistical services, finance, insurance and professional services. Hong Kong is no longer merely the door to the Chinese market but the favoured location which provides international operators with a wide range of highly value-added services. And it is logistics that link together information technology, demand forecasting and freight processing, production planning, and stock and transport management.

Likewise, the growth in employment in the service sector since 1985 (see Graph 2) must not be allowed to conceal the spectacular increase in the category of “finance, insurance, real estate, and business services” which, by 1995, overtook services connected with the physical handling of freight (transport, warehousing and communications).

With an enormous consumption of high technology in services—more than in manufacturing—Hong Kong is already delocalising the services with lower added value to China: warehousing, quality control, etc. (see Graph 3). But since it cannot remain competitive across the whole range of activities, choices will have to be made, and the decisions will in all probability favour expertise-intensive services: finance and brokering, which will remain the prerogative of the Special Administrative Region (SAR). Hong Kong’s position in the freight industry will therefore decline and will be taken over by China, as can already be seen in the growth of offshore trade, which is linked to the rising importance of the ports on the Pearl River Delta.

This change is clearly perceptible in the export of services (see Graph 4). The growth in the “transport” category is slowing: 45.06% of the total services export in 1980, 38.25% in 1990, and 34.76% in 1997. The fall, which was noticeable between 1980 and 1990, was even more pronounced between 1990 and 2000 due to the impact of the increased traffic taken over by Shenzhen. High value-added services (insurance, finance, business services and others such as advertising, etc.), on the other hand, have grown from 32.54% of the total exports of services in 1980 to 40.79% in 1997.

Although it is possible, even if it is not easy, to obtain sector by sector details on service exports, we know nothing about their geographic distribution. Hong Kong’s ability to collect statistical data is still underdeveloped. This dimension would, however, make it possible to provide much information about China’s preponderance and Hong Kong’s capacity for exporting services beyond its hinterland.

When it comes, finally, to considering the position of finance, insurance, real estate and business services in direct investment in Hong Kong, the picture is clearer still. It is dominated overwhelmingly (in excess of 93% in 1997) by the non-manufacturing sector. It is revealing that, here again, our “marker” surpasses, by a considerable margin, the other sectors which receive foreign direct investment in services: banks and deposit-taking companies, holding companies and other financial institutions, insurance, real estate and business services (HK$487.5 billion in 1997) constituted two-thirds of the total amount of foreign direct investment in Hong Kong (see Graph 5).

Is the penetration of strategic services enough to make Hong Kong, as the authorities would like, a world marketplace, comparable to the command centres of the world economy—London, New York and Tokyo? No doubt the answer is yes if one bears in mind indicators such as the weight of services in the economy, the low level of manufacturing industry—which does not however, seem to have been compensated, as in Japan, by an increase in technological intensity—the ability to drive and co-ordinate subcontracting networks, and the rise in exports of services. The answer is no if one is to judge by the level of market capitalisation, far below Tokyo’s, the underdevelopment of the money-bond market and, above all, the lack of strong bases for innovation, i.e. R&D centres. As well as the uncertainty stemming from the ever closer relationship with the mainland—what would happen if Shenzhen were to become, like Beijing, Tianjin, Shanghai and Chongqing, a municipality under the direct supervision of the central government?—that is surely one of Hong Kong’s most vulnerable areas in its ambition to become a global service centre. Not to mention the competition of other Asian centres: Singapore, Taiwan, and later perhaps, Shanghai.

Long deriving its prosperity from warehousing, Hong Kong used to draw most of its economic power from re-exports. Infrastructure, transport and storage were its driving force. The city is now becoming, under the impulse of China’s own takeoff, a service-based economy, whose function is both the control of a vast subcontracting network (delocalisation of manufacturing industry and of some services) and the export of services with high added value. Here the driving force is high technology. But Hong Kong is only just beginning to realise that it is behind in this field. The transition from an economy based on warehousing to a high technology- and expertise-intensive economy requires the constitution of a critical mass of professionals, who will not be able to be trained in time by the educational infrastructure of the SAR alone.

Translated from French original by Michael Black