For years the business world in Asia has buzzed about a looming showdown between Hong Kong and Shanghai for the title of economic heavyweight champion of China. The bout is now in its middle rounds, and it's a slam-bang fight. Hong Kong is still ahead on points, but Shanghai is coming on strong and may be headed for a late-round KO. In fact, Shanghai, once the biggest financial center in all Asia, looks intent on regaining that title too. The fear in Hong Kong business clubs is that the former economic hub could become, in most China watchers' words, just another Chinese city.
Comparatively staggering Hong Kong real estate prices are one reason for the migration: rents in the city are running roughly $3 to $11 U.S. per sq. ft. But much more important are the clear signals coming from Beijing that anyone wanting to do serious big business with the communist government had better be prepared to shift to the mainland metropolis. Chinese President Jiang Zemin's national government has been a major exponent of Shanghai's new Pudong economic center, some 135 sq. mi. of former marshland that is the transplanted economic heart of the new Shanghai. Having invested around $185 billion in Shanghai's renaissance, China's rulers clearly want to see the rest of the world acknowledge the primacy of their choice.
This is an ominous sign for Hong Kong, a city of 7 million that was long viewed as the gateway to the communist mainland. But since the takeover of Hong Kong by China in 1997, more and more multinational corporations have seen the calligraphy on the wall. AIA Insurance, an American insurance company, moved its China headquarters to Shanghai last year; Philips Electronics did the same in April; and HSBC Group, the banking complex, followed in May. Dozens of other companies plan to make the jump soon, according to a survey by the American Chamber of Commerce in Hong Kong. The Shanghai chamber says it is signing up more than 50 new members every month. Foreign investors have poured $27.7 billion into the city in the past 10 years, while Shanghai's gross domestic product has grown at an average of 10% a year, compared with 3.7% average growth for Hong Kong. "Hong Kong was never really a gateway to China; it was a window," says Andy Xie, executive director of Morgan Stanley Dean Witter in Hong Kong. "But why would you want to go through the window when the door is wide open?"
But don't cry for Hong Kong yet. The city still has unique strengths and will no doubt retain an important role in the region, but it will be more of a niche player. It can still bank on its reputation as a freewheeling international city with a sound judicial system and guarantees of autonomy under the terms of the takeover. Those qualities could help preserve the territory's financial supremacy. The city's low business-tax rates, which hover around 16%, still attract foreign investors and entrepreneurs. In Shanghai, corporate taxes fall below 33% only for denizens of Pudong. Perhaps most important, Hong Kong remains Asia's banking center and a must stop for anyone in the region seeking corporate financing. Chinese banks, on the other hand, are still tightly controlled by the state, and this won't change for a long time. So financial firms will have to remain in Hong Kong. "Hong Kong could still live on as the financial center," says Thomas Chan, head of Hong Kong Polytechnic University's China Business Center. "But its corporate and industry sectors are dying."
In fact, Hong Kong is energetically trying to retain control of its future by transforming itself into the cyberhub of Asia. The government has backed a $1.7 billion project to develop 64 acres of reclaimed land into an infotech center. So far, however, the project has drawn as much controversy as acclaim. Critics regard it as specifically enhancing the interest of Richard Li, scion of the super-rich Li family, because Richard drew up the plan. Even critics acknowledge, however, that diversification is a good idea. "Hong Kong needs more than one pillar industry to sustain its economic glory, and infotech is a new one," says Dong Tao, a senior China analyst for the Credit Suisse First Boston bank. But Shanghai too is trying to seize the commanding heights of the information age: each year the city produces 4,000 computer-science graduates to supply the demand of the growing Internet market.