Hong Kong begins to slip as Shanghai grows economically

Hong Kong's skyline in the early hours yesterday. As Hong Kong wraps up five years under Chinese sovereignty, Shanghai seems to be growing stronger while the former British colony is becoming weaker. PHOTO: AP

The writing seemed to be on the wall.

In May, Intel Corp unveiled a US$100 million expansion of its Shanghai microchip plant. The next month, Hong Kong announced record unemployment.

One loss was the other city's gain. Or so some believe these days.

Hong Kong, once the doorway to China and one of Asia's dynamic "Little Dragons," finds itself in a deep economic funk. In an era when China is growing more open, the former British colony looks like it's struggling for relevance -- and to preserve its openness and autonomy five years after it came under Chinese rule.

Hot its heels is Shanghai, the former European-run port looking to reclaim its historic role as Asia's business capital. Double-digit economic growth rates, shiny new factories and a skyline sprouting space-age skyscrapers all give the city the luster of a success story.

"We think the excitement about Shanghai is merited," said Lim Seng Jin, a spokesman for French telecommunications giant Alcatel, one of several global companies to move their Asian headquarters to Shanghai in recent years. "Shanghai is China's premier business city."

Siemens, the giant German engineering firm, also is leaving Hong Kong for Shanghai, planning to move its Asian headquarters in July.

Shanghai on the way up, yes. But are the two cities, both offering windows into China, the world's largest potential market, really trading places?

Not anytime time soon, say observers. Hong Kong is struggling, but it still has big advantages over its mainland rival.

One its courts and legal system, which remain impartial and reliable. Another is press freedoms and unfettered access to global information. A third: a currency that -- unlike the Chinese yuan -- is freely traded on world markets.

These make Hong Kong the place to be for banks, publishers and other finance and service companies.

For all its glitter, Shanghai is still ruled by a communist regime that severely restricts access to information. Chinese courts are easily swayed by local officials, who occasionally detain foreign-based businessmen in commercial disputes.

"It will be some considerable time before Shanghai eclipses Hong Kong, if it ever does," said the British consul general in Hong Kong, Sir James Hodge. "Hong Kong has huge advantages, which Shanghai doesn't yet possess."

The strengths and roles of the two cities are so different that looking at them is an apples-and-oranges comparison.

Shanghai emerging as the region's manufacturing powerhouse. Its biggest asset is unfettered access to China's 1.3 billion people -- an almost unlimited reservoir of cheap labor, and increasingly prosperous consumers.

Foreign investors are pouring in, including US chipmaking giant Intel, which announced in May that it will double the current workforce of 1,500 at its Shanghai factory to start building its most advanced Pentium4 microprocessors.

But as a financial center, Hong Kong is the market of choice.

Hong Kong's modern, well-managed stock market is about twice as big in terms of value as Shanghai's, which is plagued by constant scandals and poor accounting standards.

Shanghai where smaller mainland companies, many of them state-run, come for money. Hong Kong is where China's corporate elite woo foreign investors.

Still, uncertainty looms over Hong Kong.

After decades of success as a manufacturing and trading center, the territory is making a painful transition to a knowledge-based economy. Proof of that was in June's announcement of a record 7.4 percent jobless rate.

But the bigger fear is that the freedoms that set it apart from the mainland, and made it attractive to do business, have slowly eroded since it came under Beijing's rule on July 1, 1997.

Hong Kong has denied entry to well-known critics of the communist Beijing government, and many say its lively press is being muzzled, particularly in coverage of the mainland.

"There are real concerns Hong Kong is losing its particularity," said Jasper Becker, a veteran foreign correspondent in Beijing and author of several books on China.