When Chinese President Xi Jinping (習近平) wanted to deliver a political message to Hong Kong as protesters demanding free elections were threatening to take to the streets, he summoned the tycoons who dominate the territory’s economy.
The words from the Chinese leader at the Sept. 22 meeting in Beijing were uncompromising, but not surprising. He would not entertain any demand for full universal suffrage in Hong Kong, according to two people who attended.
Just six days later, pro-democracy activists made good on their threat, unleashing more than two months of street demonstrations.
Illustration: Tania Chou
However, while Xi’s message that day in the Great Hall of the People failed to deter the protesters, in speaking directly to the territory’s business and professional elite, he was showing where Beijing believes real power in Hong Kong resides.
It is here, in the territory’s business sector, that China is inexorably tightening its grip on the former British colony.
Even as Beijing struggles to tame Hong Kong politically, Chinese companies are consuming ever bigger chunks of the territory’s key sectors, including real estate, finance, power, construction and the stock market.
Many of these industries have for decades been dominated by the business titans who attended the meeting with Xi. People like Asia’s richest man, Li Ka-shing (李嘉誠), casino and hospitality billionaire Lui Che-woo (呂志和) and palm oil magnate Robert Kuok (郭鶴年). Now they are witnessing a mainland business invasion of the territory.
One of the most telling signs of change is the space Chinese companies lease in Central district, the heart of Hong Kong’s financial center. Such firms now account for more than 50 per cent of new leases signed for offices there, according to a September report from Hong Kong-based brokerage CLSA. That is up from 20 percent in 2012, the report said.
The trend is the same in all major business districts. Mainland occupancy of 25 key Grade A office buildings, or prime office space, in the Central, Admiralty, Sheung Wan and Wan Chai districts increased from 13 percent in 2008 to 21 percent early last year, according to commercial real-estate services firm CBRE.
“We do expect more mainland financial firms moving into Hong Kong,” said Simon Smith, senior director of research and consultancy at real-estate services provider Savills PLC in Hong Kong. “They like landmark properties, high-profile buildings. They often like naming rights if it’s available.”
‘PRICE IS NOT AN ISSUE’
The office directory at Hong Kong’s 88-floor International Finance Centre has a growing number of Chinese companies on the list. Among them is China Development Bank International Holdings Ltd, which held its opening ceremony in 2011 and serves as the offshore investment firm of China Development Bank, the nation’s biggest policy lender.
“If you go to the International Finance Centre now and compare it to five years ago, it’s very easy to see that there are many more Chinese enterprises represented,” said property analyst Nicole Wong (王艷), an author of the CLSA report.
In a market accustomed to stratospheric land prices, state-owned Chinese developers this year stunned long-established local property giants with winning bids exceeding auction forecasts by up to 20 percent. Of the six available plots sold since mid-2013 in Kai Tak district — one of Hong Kong’s largest developments of residential and commercial complexes — two went to China Overseas Land and Investment (COLI) and one to Poly Property Group.
“Price is not an issue for them,” said a former senior executive of a Hong Kong-listed developer who was responsible for bidding at land auctions before he left the company in June. “That’s why they offered prices that surprised everyone.”
A spokesperson for Poly said the company had no comment. COLI did not respond to questions sent by e-mail.
While it was predictable business ties would expand after the 1997 handover, Beijing has made it clear that economic integration is central to reinforcing its sovereignty over Hong Kong, which is ruled under the “one country, two systems” model that affords the territory’s 7.2 million residents broad personal freedoms. Part of Beijing’s vision is to draw Hong Kong into a Pearl River Delta mega-economy that would also include the giant southern Chinese cities of Shenzhen and Guangzhou, just across the border.
In 2011, a chapter was dedicated to Hong Kong for the first time in China’s five-year blueprint for national economic development. The 12th Five-Year Plan, covering the years from 2011 to this year, lays out how Beijing wants to connect Hong Kong with the Pearl River Delta’s increasingly prosperous middle class consumers.
‘LIKE NEW YORK’
Under the plan, Hong Kong would be a leader for the region in shipping, trade, services and distribution. In finance, Hong Kong would serve as an offshore market for the yuan.
New transport links from Hong Kong now under construction, including a high-speed rail to Guangzhou and a bridge across the Pearl River Delta to the Chinese city of Zhuhai, near Macau, would allow the rapid movement of commuters and visitors.
“It will be like New York where you have people working in Manhattan and living on Long Island, or in New Jersey, and commuting in to work every day,” said Hong Kong entrepreneur Allan Zeman, who developed the Lan Kwai Fong pub and restaurant area popular with expatriates. “People who can’t have a home here [in Hong Kong] will live in Shenzhen and be able to come here in 10 minutes.”
China’s construction behemoths, including state-owned China State Construction International Holdings Ltd, are also grabbing market share. Hong Kong permanent secretary for Development (Works) Wai Chi-sing (韋志成) said in an interview that while Chinese firms accounted for less than 15 percent of public works contracts by value in the mid 1990s, they now accounted for more than one-third.
While Chinese companies are rapidly expanding into Hong Kong, Western banking and financial institutions still have a strong presence in the territory. For example, Global bank HSBC Holdings PLC employed more than 28,000 people in Hong Kong at the end of 2013.
For Beijing, growing economic clout has not been mirrored by increased popular support. Frustrated by Hong Kong residents’ lack of identification with China 17 years after the handover, China has at times resorted to covert means to bolster its control. For instance, earlier this month, Reuters reported that retired Hong Kong policemen were part of a mainland-led surveillance operation to tail leading pro-democracy figures in the territory.
Although the street protests ultimately petered out, at their height they drew tens of thousands of people, presenting Xi with his most serious popular challenge since he took power two years ago.
While the protesters have demanded full universal suffrage, Chinese authorities insist that only a handful of Beijing-vetted candidates can stand in the next elections for the territory’s political leader in 2017.
Hong Kong chief executive Leung Chun-ying (梁振英) got the backing of Xi and Chinese Premier Li Keqiang (李克強) during a visit to Beijing on Dec. 23, according to reports in China’s state-run media.
A Hong Kong government spokesman said in an e-mail response that economic integration with China has been mutually beneficial, citing the growing number of mainland companies listed on the Hong Kong stock exchange and the territory’s role as the largest offshore yuan center.
The Hong Kong and Macau Affairs Office in Beijing did not respond to questions from Reuters.
NOT ALWAYS AMICABLE
Rather than foster understanding, growing economic integration has at times raised tensions. One source of friction is the real-estate market where wealthy Chinese have bought up property in Hong Kong, helping to push up home prices that are already out of reach for many of the territory’s residents.
“One might have assumed that the inflow of mainland money, companies and people here, and the favorable economic policies of the mainland would have increased emotional integration rather than just economic integration, but it has not,” Hong Kong University of Science and Technology chair professor of social science David Zweig said. “For the rich people here, the heart has followed the [Hong Kong] dollar, but for the middle class and for students, it has not.”
That has been evident, at times, on the streets of Hong Kong. While the growing influx of Chinese tourists has been good news for the territory’s retailers — the number of Chinese visitors catapulted from 28 million in 2011 to 40.7 million in 2013 — interactions between Chinese and Hong Kong residents are not always amicable. In one incident that made headlines earlier this year, locals got into a scuffle with a Chinese couple who had allowed their toddler to urinate in the street.
“Hong Kong without the mainlanders would be a very small city,” Zeman said, explaining the business elite’s attitude to the growth in tourism. “Ocean Park and Disney without the mainlanders would be nowhere. They would be losing money.”
Zeman developed Ocean Park, one of the territory’s main amusement parks.
When Xi met the delegation of tycoons and professionals on the eve of the demonstrations, he gave no indication he was worried, according to one delegation member who gave Reuters an account of the Chinese leader’s remarks. Instead, Xi appeared to signal that the territory’s troubles were relatively minor compared with other problems in his in-tray.
Before commenting on Hong Kong, Xi gave some of the richest men on earth a tour of China’s foreign policy challenges. He told the tycoons that China was now a major force in the world and most of his attention would be focused on ties with bigger nations including the US and Russia, the delegate said.
When he eventually turned to Hong Kong, Xi said Beijing had no intention of altering any of its policies and urged the tycoons to support the territory’s chief executive. He also said the Hong Kong economy was falling behind those of Taiwan, Singapore and South Korea.
DOWNPLAYING THE PROTESTS
In an interview last month, another delegate, former Hong Kong Law Society president Ambrose Lam (林新強) said Xi had ruled out any departure from the guidelines already laid out for the territory’s political future. Without citing the Chinese leader directly, Lam said he did not think the protests were a big issue for the Chinese leadership.
It would have been different if they had happened 30 years ago, when Hong Kong’s economy was more important to China, he said. However, the territory’s GDP is now only 3 percent of China’s, he added. At the time of the handover in 1997, it was almost one-fifth.
Still, summoning the territory’s business leaders suggests Beijing might be more concerned than it is prepared to acknowledge. The territory’s business leaders were also called to the capital in the aftermath of a 500,000-strong protest in 2003 when China attempted to introduce controversial new security laws. The proposed laws were withdrawn and then-Hong Kong chief executive Tung Chee-hwa (董建華) was eventually forced to resign.
As China ponders how to contain demands for political change, its economic footprint in Hong Kong continues to expand. In retail banking, subsidiaries of Chinese banks operate nearly 500 branches in Hong Kong, accounting for about 40 percent of the total number of branches, according to figures from financial service research company SNL Financial.
Hong Kong’s financial system has also become more intertwined with the mainland, especially as it has emerged as the premier hub for offshore yuan business. The market in so-called dim sum bonds, bonds denominated in yuan, but issued outside of China, is rapidly closing on its Hong Kong dollar counterpart.
The bonds, named after a popular Hong Kong cuisine, were first issued in 2007. Since then, the outstanding value of dim sum bonds has soared to about 700 billion yuan, according to industry estimates. That is nearly 60 percent of the value of Hong Kong dollar bonds, according to data compiled by the Asian Development Bank.
Chinese companies have long been making inroads into the local stock market. They now account for 54 percent of the companies traded on the Hang Seng Index.
CHINESE GRID GIANTS
As part of Beijing’s plan for the Pearl River Delta, Guangdong and Hong Kong would seek to integrate their transport, energy and power grid infrastructure. For its part, the Hong Kong government is pushing to boost electricity imports from China to reduce pollution and the dominance of two local utilities backed by powerful families, say industry experts who have been involved in consultations with the government.
Hong Kong’s grid is not interconnected with China Southern Power Grid, which supplies electricity to Guangdong and four other southern provinces. Plugging Hong Kong into the Chinese grid would create competition for the territory’s dominant local utilities — CLP Holdings, backed by the wealthy Kadoorie family and billionaire Li Ka-shing’s Power Assets Holdings — and further strengthen Hong Kong’s ties with China. The two local firms have enjoyed guaranteed returns for decades under what is known as the Scheme of Control.
However, Chinese grid giants are making inroads. China Southern Power Grid last year bought a 30 percent stake in CLP’s power unit Castle Peak for US$1.6 billion, while State Grid Corporation of China spent about US$1.2 billion buying into the local initial public offering of HK Electric Investments, a spinoff of Power Assets, early last year.
Hong Kong’s Environment Bureau said in an e-mail response that importing electricity from China was one of two options under consideration. CLP and Power Assets did not respond to questions sent by e-mail.
One area where Chinese have yet to make headway is the territory’s elite clubs. With the exception of some clubs like the Aberdeen Marina Club and the Jockey Club, which offer hefty debentures, it is difficult for newcomers like Chinese to get membership as some of these establishments have waiting lists as long as 20 years.
However, at places like the Ladies Recreation Club and the Hong Kong Golf Club, members say there is definitely more Mandarin being spoken.
“Mainlanders haven’t quite got in any meaningful way into the clubs, but it is only a matter of time,” said a Hong Kong resident who is a member of three clubs.
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