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DSG Asia The Current and Future Economic and Business Environment of Hong Kong Presentation to The Asia-Pacific Student Entrepreneurship Society Simon Ogus August 24 th 2003 simon@dsgasia.com; www.dsgasia.com DSG Asia Independent Asian Economic & Political Analysis

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DSGAsia

The Current and Future Economic and Business Environment of Hong Kong

Presentation to The Asia-Pacific Student Entrepreneurship Society

Simon Ogus

August 24th 2003

simon@dsgasia.com; www.dsgasia.com

DSGAsia

Independent Asian Economic & Political Analysis


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The scramble for the China market is nothing new

German cartoon circa 1900

DSGAsia

Independent Asian Economic & Political Analysis


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Where we once were, and where we may be going

DSGAsia

Independent Asian Economic & Political Analysis


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China today - the America of the 19th Century?

Disinflation driven by technological change is wonderful for income growth - not so deflation

Source: Friedman and Schwarz, CEIC

DSGAsia

Independent Asian Economic & Political Analysis


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Disinflation driven by technological change and supply side shocks causes major shifts in relative pricing

DSGAsia

Independent Asian Economic & Political Analysis


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Is the world’s love affair with China’s 2.6 billion armpits justified?

  • Cyclically, the risks seem far less acute than most elsewhere. Domestic demand remains well underpinned

  • The medium term macro policy framework is excellent. Unlike many others the PRC has a logical and deliverable game plan

  • However, central edict and local practice remain different issues. Inequality, corruption and demographics pose the greatest threats

  • China’s monopsonistic position allows it to access a cost of capital way below the level its risk profile would imply

  • Under WTO, behaviour could become worse not better

  • Hong Kong-Shanghai is not a zero sum game

DSGAsia

Independent Asian Economic & Political Analysis


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Hyper-competitive exchange rates mean that Asia will continue to win market share in global trade

DSGAsia

Independent Asian Economic & Political Analysis


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Foreign firms producing for export in China quite like a “cheap” RMB. In any case, Beijing ain’t budging

DSGAsia

Independent Asian Economic & Political Analysis


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The region will shadow the dollar and continue to rack up FX exchange reserves. Gold should benefit

DSGAsia

Independent Asian Economic & Political Analysis


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Entrepreneurship at its best…. and its worst! exchange reserves. Gold should benefit

“The best money you ever make is

from dancing on someone else’s grave”

Anon.

DSGAsia

Independent Asian Economic & Political Analysis


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SARS: Exponential Fear, Square Root Recuperation exchange reserves. Gold should benefit

  • The impact of SARS on domestic demand will be transient

  • Production disruption will be minimal

  • Tourism and business travel will take longer to recover

  • A sense of proportion is needed. 170,000 people die of ordinary pneumonia in China each year

DSGAsia

Independent Asian Economic & Political Analysis


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Why have Hong Kong’s entrepreneurs traditionally prospered?

  • Institutions: strong legal and financial systems, minimal bureaucratic and government interference

  • Location: geographically at the heart of Asia, quasi-monopoly as China’s window on the world

  • Openness: to goods, capital, people and ideas, high degree of civil liberties

  • Mindset: people have a refugee mentality, are self-driven, and have low expectations of government

  • Opportunity: you can pretty much do what you want to do

DSGAsia

Independent Asian Economic & Political Analysis


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Which of these endowments seem to be at risk? prospered?

  • Institutions: perception of institutional erosion, increasing government and bureaucratic obfuscation

  • Location: China quasi-monopoly status is disappearing

  • Openness: increasing introspection, anti-immigrant stance

  • Mindset: an entitlement mentality has been building

    However….

  • Opportunity: you can still pretty much do what you want to do. This is why Article 23 has been so vehemently opposed

DSGAsia

Independent Asian Economic & Political Analysis


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Hong Kong’s entrepreneurs are responding admirably to a brave new world

  • Estimates suggest that Hong Kong companies are earning USD12-30 billion p.a. in the PRC – 7-18% of GDP

  • 100-200,000 Hong Kong residents are now living and working in China – 3-6% of the labour force

  • Inward FDI also continues to grow strongly. Overseas company registrations have risen 41% since the handover. US FDI alone has risen 68%

  • China is doing its bit. Tourism is surging, CEPA and QDII/QFII will be helpful

    The problem is that none of this is creating many local jobs

DSGAsia

Independent Asian Economic & Political Analysis


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Hong Kong’s Port is in Terminal ( brave new worldsic) decline but trade-related incomes will continue to grow

DSGAsia

Independent Asian Economic & Political Analysis


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Hong Kong and Singapore are creating jobs but there is a skills mismatch in both economies

DSGAsia

Independent Asian Economic & Political Analysis


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There is no easy solution to the skills mismatch skills mismatch in both economies

  • Import more skilled workers – the new Mainland professionals scheme is a strong step in the right direction

  • Encourage lower-skilled workers to relocate back over the border. Public housing and welfare reform is essential

  • Radically overhaul of the education system. Enhance language skills, alter mindsets and methodologies

  • Re-assign budget priorities and clamp down on tax avoidance

DSGAsia

Independent Asian Economic & Political Analysis


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Hong Kong and Singapore: too many civil servants, too much dependence on property

DSGAsia

Independent Asian Economic & Political Analysis


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Hong Kong’s Phantom Structural Crisis dependence on property

  • Hong Kong’s ‘structural’ problems are fixable – a lack of visionary leadership and political will is the real problem

  • Clamping down on tax and subsidy cheats could go a long way to balancing the budget. Civil service reform would also help

  • Immigration, education, environmental and property market reforms are all achievable. Vested interests have to be told the party is over

  • The irony is that unaccountable governments do not have to try to be liked. Populist authoritarianism is a continued recipe for inaction

  • Nevertheless Hong Kong will adjust despite the government!

DSGAsia

Independent Asian Economic & Political Analysis