Hong Kong Bonds With China Delta - Wall Street Journal

By TE-PING CHEN

HONG KONGâ€"Hong Kong and its neighboring Pearl River Deltaâ€"south China's industrial hub in Guangdong provinceâ€"are moving toward tighter integration, aided by new transportation links and efforts by both sides to bolster stronger economic ties.

For the former British colony, the push for tighter relations reflects the need to boost competitiveness and to better capture booming domestic demand in the world's second-biggest economy. Meanwhile, markets in China, as with other parts of Asia, are racing to catch up to Hong Kong's well-established financial institutions and sound regulatory regimes.

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Mainland Chinese tourists visit a Hong Kong shopping mall. Increased travel between Hong Kong and south China's Guangdong province is part of a broad effort to bolster integration.

Proponents of greater integration say better linkages will allow the region to capitalize on Hong Kong's high-end financial services and Guangdong's manufacturing and services, to become a so-called megalopolis. "We each have our own value that we can bring," says Roy Chung, who heads the Federation of Hong Kong Industries. 

On the eve of the 15th anniversary of the city's hand-over to China, Beijing is announcing a raft of policies to further bolster Hong Kong's role as a regional financing center and main offshore hub for its tightly controlled currency, the yuan. The measures are being presented as Chinese President Hu Jintao kicked off a three-day visit to the city on Friday, his first in five years, where he will preside over the swearing-in of incoming Hong Kong leader Leung Chun-ying. 

The Chinese government also is supporting the city's efforts to lead development of yuan-conversion and other core services as part of a pilot project in a coastal area of western Shenzhen, at the heart of the delta. The move could benefit Hong Kong's robust services industry, particularly in finance and banking, providing them with greater access to Chinese enterprises in southern China.

Analysts warn that if Hong Kong doesn't do more to capitalize on China's growth and work more closely with its neighbors, the city risks getting left behind. Mr. Leung, the city's new chief executive, noted in his election platform that by some estimates, the city's economy will be ranked just seventh in China by 2015, eclipsed by second-tier cities such as Suzhou and Tianjin.

Massive infrastructure efforts are speeding the integration process, among them projects such as the Hong Kong-Zhuhai-Macau Bridge that, when completed in 2016, will be the world's longest seaport bridge, spanning 18 miles. Hong Kong also is being linked up to China's massive high-speed rail network.

Still, some critics worry that Hong Kong's identity risks getting subsumed into the region. Many residents feel besieged by the waves of mainland Chinese who come to the city to shop, sight-see and buy property. In February, a group of residents paid for a full-page ad in newspapers calling such mainlanders "locusts." The move provoked widespread reaction, including criticisms among mainland Chinese bloggers that Hong Kong people don't regard themselves as Chinese.

Since Hong Kong returned to Chinese rule in 1997, it has continued to operate with distinct political, legal and economic systems.

"For the first few years [Chinese authorities] were very cautious not to touch Hong Kong too much," said Pansy Yau, economist at the Hong Kong Trade Development Council.

But with a subsequent economic downturn, exacerbated by the Severe Acute Respiratory Syndrome, or SARS, outbreak in 2003, Beijing launched a number of policies to help the city, including looser restrictions for mainland Chinese visitors. Last year, some 28 million such visitors traveled to Hong Kong, a boon to the tourism industry and luxury retailers, with most of the tourists originating from prosperous, neighboring Guangdong.

It wasn't that long ago when Hong Kong, a city of seven million, was the only major financial and industrial center near southern China. While China was still closed to most of the world, Hong Kong flourished from the 1960s as a major trading center and manufacturing powerhouse, exporting consumer goodsâ€"ranging from electric fans to toysâ€"to Western markets, including the U.S.

It was a common sight at the time for many Hong Kong residents, most of whom are immigrants from China, to carry cartloads of consumer goods and other daily necessities on trains back to their relatives in Guangdong, who were living under harsher conditions.

When China began implementing market reforms from the late 1970s, Hong Kong manufacturers were the earliest to move their factories over the border to Guangdong to capitalize on cheap and plentiful labor.

The fact that Hong Kong and Guangdong residents share a common Chinese dialectâ€"Cantoneseâ€"helped to expedite business, as well as social ties between the regions. 

The number of China-Hong Kong marriages has soared. The number of such marriages registered in Hong Kong quadrupled from 1996 to 2010. Every day, some 17,000 backpack-toting children cross from Guangdong to attend school in Hong Kong, where the quality of education is perceived as being better.

More integration with the Pearl River Delta is "almost inevitable," says Tsang Shu-ki, senior research fellow at Hong Kong Baptist University's business school. "We depend on China for almost every basic necessity," he says, among them food imports and the vast majority of its water supplies, which are piped from Guangdong.

For the past decade, the value of bilateral merchandise trade between Hong Kong and Guangdong has risen by an average of 17% a year, according to Hong Kong's government. Last year, it stood at US$193 billion. Today, Hong Kong manufacturers employ some 10 million workers in Guangdong, nearly 10% of the province's population.

Though Hong Kong has long been seen mostly as a portal for companies entering mainland China, increasingly, capital has flowed in the other direction. Since 1993, mainland-related enterprises have raised more than 3.2 trillion Hong Kong dollars (US$413 billion) in equity funds in Hong Kong.

Mr. Leung, who takes office Sunday, says Hong Kong needs to develop its relationship with mainland China, both economically as well as culturally. "We are not tenants of a small island, we are one family," he said shortly after winning office in March.

"We may have different backgrounds, but our next generation has a common future," he said. Beijing has said that Hong Kong's independent political, legal and economic systems are guaranteed to last at least through 2047.