DSGAsia

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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_at_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
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Independent Asian Economic Political Analysis
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Where we once were, and where we may be going
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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
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Independent Asian Economic Political Analysis
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Disinflation driven by technological change and
supply side shocks causes major shifts in
relative pricing
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Independent Asian Economic Political Analysis
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Is the worlds love affair with Chinas 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
• Chinas 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

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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
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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 aint
budging
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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

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Independent Asian Economic Political Analysis
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Entrepreneurship at its best. and its worst!
The best money you ever make is from dancing on
someone elses grave Anon.
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Independent Asian Economic Political Analysis
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SARS Exponential Fear, Square Root Recuperation

• 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

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Independent Asian Economic Political Analysis
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Why have Hong Kongs entrepreneurs traditionally
prospered?

• Institutions strong legal and financial systems,
  minimal bureaucratic and government interference
• Location geographically at the heart of Asia,
  quasi-monopoly as Chinas 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

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Independent Asian Economic Political Analysis
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Which of these endowments seem to be at risk?

• 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

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Independent Asian Economic Political Analysis
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Hong Kongs 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

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Independent Asian Economic Political Analysis
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Hong Kongs Port is in Terminal (sic) decline but
trade-related incomes will continue to grow
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Hong Kong and Singapore are creating jobs but
there is a skills mismatch in both economies
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Independent Asian Economic Political Analysis
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There is no easy solution to the skills mismatch

• 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

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Hong Kong and Singapore too many civil servants,
too much dependence on property
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Hong Kongs Phantom Structural Crisis

• Hong Kongs 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