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Economic benefits to China and impact on Hong Kong firms
China Economic Review 11 (2000) 414 ± 418
Economic benefits to China and impact on Hong Kong firms Leonard K. CHENG Department of Economics, HKUST, Clear Water Bay, Kowloon, Hong Kong, People's Republic of China
China's 14-year effort to enter the WTO is a testimony to the WTO membership's importance to its economy. If Deng Xiaoping's economic reform and open-door policy marked the opening of specific Chinese regions and sectors to foreign participation, then China's accession to the WTO will mark the beginning of its full integration with the world economy.
1. Economic benefits to china There are three major economic benefits to China from its WTO membership. 1.1. Greater stability in external economic relationships WTO membership will give China more stable external economic relationships because it will reduce disruptions in foreign trade and investment that are caused by adverse policy shifts on the part of the Chinese and foreign governments. WTO membership will not eliminate trade and investment frictions between China and other member economies, but these frictions can be better managed. WTO's trade rules and dispute settlement mechanism are a significant improvement over mutual threats and brinkmanship. More stable access to foreign markets will attract foreign investors that use China as their export platform. Likewise, foreign investors interested in selling to the Chinese market will be encouraged by China's market opening measures, protection of intellectual property rights, and improvement in China's legal system and overall business environment. Foreign direct investment (FDI) of both types will bring capital, technology, management, information, and production and distribution networks that link China to the global economy.
E-mail address: [email protected] (L.K. Cheng). 1043-951X/01/$ ± see front matter D 2001 Elsevier Science Inc. All rights reserved. PII: S 1 0 4 3 - 9 5 1 X ( 0 1 ) 0 0 0 2 9 - 3
L.K. Cheng / China Economic Review 11 (2000) 414±418
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1.2. A clearer direction and greater speed for economic reform From the experience of many countries that undergo economic reform, external pressure and obligation may help to counter the opposition of powerful domestic interest groups. In the case of China, state-owned enterprises are a powerful force against China's march toward a market economy. With the status of international treaties, the bilateral and multilateral agreements underlying China's accession to the WTO commit the country to a wholesale reform of its economic system and the restructuring of its national economy. Together, they constitute a road map for China's economic reform in the coming decade. With WTO membership, there will be greater competition between Chinese firms and foreign firms, especially in China's own market. A large-scale restructuring of industries will be based primarily on China's comparative advantages and disadvantages vis-aÁ-vis other economies. The natural resource-intensive industries, capital-intensive industries, and technology-intensive industries are in China's comparative disadvantages and will tend to suffer. In contrast, labor-intensive industries are in China's comparative advantage and will prosper. In addition, the country may have a niche in some of the skill-intensive industries and would use measures permissible under WTO rules to promote some technology-intensive industries. When firms are rewarded and disciplined mainly by market forces, the ownership structures of firms in China will reflect the structures' relative efficiency in organizing production and delivering goods and services to consumers. Over time, the more efficient ownership structures will be adopted while the less efficient ones will diminish in importance. How fast the ownership structures will change depends on the role played by the four stateowned commercial banks relative to the non-state-owned banks and other sources of capital. It will also depend on the state-owned banks' attitude toward firms with different ownership structures. In addition, the ownership structures also depend on the government's willingness to privatize the government-owned national and regional monopolies. In any event, sectoral restructuring based on comparative advantages will lead to improved efficiency in resource allocation across industries and market-driven ownership changes will result in improved efficiency in resource allocation across firms. Because rules sanctioned by the WTO will be translated into national laws and regulations, WTO membership will contribute to regulatory reform and the building of modern economic institutions. Avoidance of systemic failures requires that the best practices in regulation be adopted. To the extent that WTO membership helps to speed up the enforcement of existing laws and the development of an improved legal system, honest foreign investors and Chinese companies alike will benefit. 1.3. A brighter prospect for long-term growth In the long run, dynamic gains from increased competition resulting from China's WTO membership will be even more important than the static efficiency gains. Increased competition on level playing fields will reward efficient and innovative firms, regardless of whether they are local or foreign, private, or public. As the other side of the same coin, competition will weed out inefficient firms and technological laggards. The protection of
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L.K. Cheng / China Economic Review 11 (2000) 414±418
intellectual property rights in combination with intensive market competition will help to build an engine of economic growth driven by technological progress. 1.4. Short-term costs Against the above economic benefits, there are significant short-term adjustment costs in the form of bankruptcy of domestic companies and increased unemployment. But bankruptcy of hopeless firms is not all bad because they will release resources for existing efficient firms to expand and new firms to develop. A safety net for the unemployed in the form of a social security system and a health care system beats supporting inefficient firms. Even if workers are paid the same wages without producing goods that do not meet consumer demand, that would be less costly to society. Many industries in China have suffered from over capacity. More stable external economic relationships would mean that foreign markets can be relied upon to utilize the excess capacities, provided that the quality of goods does meet the demand of foreign consumers. Moreover, the development of products to meet the Chinese consumers' new or latent needs will generate many gainful jobs. In particular, the opening of the service industries to foreign investors will create many new jobs that can partially offset the loss of jobs by bankrupt stateowned enterprises. A challenge to the Chinese government is to manage the short-term problems sufficiently well, that over time, the longer-term benefits will gradually outweigh the short-term costs. 2. Impact on Hong Kong firms The impact of China's accession to the WTO on Hong Kong firms depends on the firms' characteristics. Most important of all, it depends on (a) whether a firm is in an industry that is in Hong Kong's comparative advantage or disadvantage, and (b) whether the firm is well-managed or poorly run. To simplify our discussion, let us distinguish between Hong Kong firms that operate primarily on the Chinese Mainland and firms that operate primarily in Hong Kong. 2.1. Hong Kong firms that operate primarily on the Chinese Mainland Since China's export markets will become more stable as a result of China's accession to the WTO, Hong Kong firms that use China as their export platform can be expected to expand. In contrast, firms that produce in China in order to circumvent tariffs and non-tariff barriers imposed by China on its imports will experience increased pressure from import liberalization. Some of these firms may not survive at all. The opening of service industries (including banking, insurance, securities, distribution, telecommunications, tourism, and entertainment) will provide opportunities to Hong Kong
L.K. Cheng / China Economic Review 11 (2000) 414±418
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firms, but the extent to which they are able to turn the opportunities into actual profits remains to be seen. On the one hand, Hong Kong has experience and generally enjoys a comparative advantage in these industries relative to China. On the other hand, service providers from North America, Western Europe, and Japan tend to enjoy an even stronger advantage in most of the service industries based on advanced technology and superior managerial skills. 2.2. Hong Kong firms that operate primarily in Hong Kong A consequence of China's WTO membership is that the production of labor-intensive and low-technology products will shift more completely to the mainland. That will be true also for textile and clothing products if the export quotas under the Multi-Fiber Agreement are completely phased out in 2005. Therefore, for goods and services produced in Hong Kong to have a fighting chance, they must have a high value-added and a substantial technological element. Firms that engage in the shipment and transshipment of cargoes will definitely benefit in the short-run from the expansion of China's exports and imports. In the longer run, however, the ocean shipping and container cargo-handling companies will face increasing pressure from the container port of Yantian close to the Hong Kong±Shenzhen border. Nevertheless, increased competition from Yantian and other Chinese ports will not imply the demise of Hong Kong's container port. Despite Yantian's emergence as a close competitor, Hong Kong will still remain China's largest container port for decades to come, but its profit margins inevitably will suffer. Hong Kong firms in the air passengers and cargoes business will also benefit. More so than the container port, the preeminence of the Hong Kong airport will unlikely be seriously challenged by any airport on the Chinese Mainland. Chinese firms need to raise investment funds in preparation for greater competition against foreign firms, whereas foreign investors need to raise funds for expansion in China or entry into the Chinese market. As an international financial center, Hong Kong is well positioned to raise funds for both. Regardless of whether funds to be raised are in the form of bonds, stocks, or bank loans, the financial industries in Hong Kong will benefit. It is expected that Hong Kong's position as an international financial center will be further strengthened as a result of China's WTO membership. Nevertheless, much of the benefits may accrue to financial firms from the advanced countries rather than Hong Kong's local firms. There are conflicting predictions about Hong Kong's intermediary role after China becomes a member of the WTO. Because WTO membership means China will become less dissimilar when compared with the market economies, there will be less need for foreign firms, especially large multinational firms, to use Hong Kong firms as their intermediary. However, for smaller multinational firms that have not yet invested in China but are considering doing so after China enters the WTO, they may need to seek help from Hong Kong's traders and investors. It remains to be seen how important the demand generated by these smaller multinationals will turn out to be. In contrast, Hong Kong firms will definitely benefit from the establishment of subsidiaries in Hong Kong by Mainland Chinese firms for the purpose of doing business in foreign countries. When everything is considered, it is not clear whether Hong Kong's role as a business hub and as an intermediary between China and the rest of the world will be strengthened or
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weakened after China enters the WTO. There is no doubt that business professionals (including accountants, lawyers, consulting engineers, etc.) will benefit from an increase in foreign trade and investment activities in China. However, such an increase in demand for the professionals' services does not necessarily translate into a larger market share for the Hong Kong firms, because the professionals may well be employed by foreign firms.
Economic benefits to China and impact on Hong Kong firms Leonard K. CHENG Department of Economics, HKUST, Clear Water Bay, Kowloon, Hong Kong, People's Republic of China
China's 14-year effort to enter the WTO is a testimony to the WTO membership's importance to its economy. If Deng Xiaoping's economic reform and open-door policy marked the opening of specific Chinese regions and sectors to foreign participation, then China's accession to the WTO will mark the beginning of its full integration with the world economy.
1. Economic benefits to china There are three major economic benefits to China from its WTO membership. 1.1. Greater stability in external economic relationships WTO membership will give China more stable external economic relationships because it will reduce disruptions in foreign trade and investment that are caused by adverse policy shifts on the part of the Chinese and foreign governments. WTO membership will not eliminate trade and investment frictions between China and other member economies, but these frictions can be better managed. WTO's trade rules and dispute settlement mechanism are a significant improvement over mutual threats and brinkmanship. More stable access to foreign markets will attract foreign investors that use China as their export platform. Likewise, foreign investors interested in selling to the Chinese market will be encouraged by China's market opening measures, protection of intellectual property rights, and improvement in China's legal system and overall business environment. Foreign direct investment (FDI) of both types will bring capital, technology, management, information, and production and distribution networks that link China to the global economy.
E-mail address: [email protected] (L.K. Cheng). 1043-951X/01/$ ± see front matter D 2001 Elsevier Science Inc. All rights reserved. PII: S 1 0 4 3 - 9 5 1 X ( 0 1 ) 0 0 0 2 9 - 3
L.K. Cheng / China Economic Review 11 (2000) 414±418
415
1.2. A clearer direction and greater speed for economic reform From the experience of many countries that undergo economic reform, external pressure and obligation may help to counter the opposition of powerful domestic interest groups. In the case of China, state-owned enterprises are a powerful force against China's march toward a market economy. With the status of international treaties, the bilateral and multilateral agreements underlying China's accession to the WTO commit the country to a wholesale reform of its economic system and the restructuring of its national economy. Together, they constitute a road map for China's economic reform in the coming decade. With WTO membership, there will be greater competition between Chinese firms and foreign firms, especially in China's own market. A large-scale restructuring of industries will be based primarily on China's comparative advantages and disadvantages vis-aÁ-vis other economies. The natural resource-intensive industries, capital-intensive industries, and technology-intensive industries are in China's comparative disadvantages and will tend to suffer. In contrast, labor-intensive industries are in China's comparative advantage and will prosper. In addition, the country may have a niche in some of the skill-intensive industries and would use measures permissible under WTO rules to promote some technology-intensive industries. When firms are rewarded and disciplined mainly by market forces, the ownership structures of firms in China will reflect the structures' relative efficiency in organizing production and delivering goods and services to consumers. Over time, the more efficient ownership structures will be adopted while the less efficient ones will diminish in importance. How fast the ownership structures will change depends on the role played by the four stateowned commercial banks relative to the non-state-owned banks and other sources of capital. It will also depend on the state-owned banks' attitude toward firms with different ownership structures. In addition, the ownership structures also depend on the government's willingness to privatize the government-owned national and regional monopolies. In any event, sectoral restructuring based on comparative advantages will lead to improved efficiency in resource allocation across industries and market-driven ownership changes will result in improved efficiency in resource allocation across firms. Because rules sanctioned by the WTO will be translated into national laws and regulations, WTO membership will contribute to regulatory reform and the building of modern economic institutions. Avoidance of systemic failures requires that the best practices in regulation be adopted. To the extent that WTO membership helps to speed up the enforcement of existing laws and the development of an improved legal system, honest foreign investors and Chinese companies alike will benefit. 1.3. A brighter prospect for long-term growth In the long run, dynamic gains from increased competition resulting from China's WTO membership will be even more important than the static efficiency gains. Increased competition on level playing fields will reward efficient and innovative firms, regardless of whether they are local or foreign, private, or public. As the other side of the same coin, competition will weed out inefficient firms and technological laggards. The protection of
416
L.K. Cheng / China Economic Review 11 (2000) 414±418
intellectual property rights in combination with intensive market competition will help to build an engine of economic growth driven by technological progress. 1.4. Short-term costs Against the above economic benefits, there are significant short-term adjustment costs in the form of bankruptcy of domestic companies and increased unemployment. But bankruptcy of hopeless firms is not all bad because they will release resources for existing efficient firms to expand and new firms to develop. A safety net for the unemployed in the form of a social security system and a health care system beats supporting inefficient firms. Even if workers are paid the same wages without producing goods that do not meet consumer demand, that would be less costly to society. Many industries in China have suffered from over capacity. More stable external economic relationships would mean that foreign markets can be relied upon to utilize the excess capacities, provided that the quality of goods does meet the demand of foreign consumers. Moreover, the development of products to meet the Chinese consumers' new or latent needs will generate many gainful jobs. In particular, the opening of the service industries to foreign investors will create many new jobs that can partially offset the loss of jobs by bankrupt stateowned enterprises. A challenge to the Chinese government is to manage the short-term problems sufficiently well, that over time, the longer-term benefits will gradually outweigh the short-term costs. 2. Impact on Hong Kong firms The impact of China's accession to the WTO on Hong Kong firms depends on the firms' characteristics. Most important of all, it depends on (a) whether a firm is in an industry that is in Hong Kong's comparative advantage or disadvantage, and (b) whether the firm is well-managed or poorly run. To simplify our discussion, let us distinguish between Hong Kong firms that operate primarily on the Chinese Mainland and firms that operate primarily in Hong Kong. 2.1. Hong Kong firms that operate primarily on the Chinese Mainland Since China's export markets will become more stable as a result of China's accession to the WTO, Hong Kong firms that use China as their export platform can be expected to expand. In contrast, firms that produce in China in order to circumvent tariffs and non-tariff barriers imposed by China on its imports will experience increased pressure from import liberalization. Some of these firms may not survive at all. The opening of service industries (including banking, insurance, securities, distribution, telecommunications, tourism, and entertainment) will provide opportunities to Hong Kong
L.K. Cheng / China Economic Review 11 (2000) 414±418
417
firms, but the extent to which they are able to turn the opportunities into actual profits remains to be seen. On the one hand, Hong Kong has experience and generally enjoys a comparative advantage in these industries relative to China. On the other hand, service providers from North America, Western Europe, and Japan tend to enjoy an even stronger advantage in most of the service industries based on advanced technology and superior managerial skills. 2.2. Hong Kong firms that operate primarily in Hong Kong A consequence of China's WTO membership is that the production of labor-intensive and low-technology products will shift more completely to the mainland. That will be true also for textile and clothing products if the export quotas under the Multi-Fiber Agreement are completely phased out in 2005. Therefore, for goods and services produced in Hong Kong to have a fighting chance, they must have a high value-added and a substantial technological element. Firms that engage in the shipment and transshipment of cargoes will definitely benefit in the short-run from the expansion of China's exports and imports. In the longer run, however, the ocean shipping and container cargo-handling companies will face increasing pressure from the container port of Yantian close to the Hong Kong±Shenzhen border. Nevertheless, increased competition from Yantian and other Chinese ports will not imply the demise of Hong Kong's container port. Despite Yantian's emergence as a close competitor, Hong Kong will still remain China's largest container port for decades to come, but its profit margins inevitably will suffer. Hong Kong firms in the air passengers and cargoes business will also benefit. More so than the container port, the preeminence of the Hong Kong airport will unlikely be seriously challenged by any airport on the Chinese Mainland. Chinese firms need to raise investment funds in preparation for greater competition against foreign firms, whereas foreign investors need to raise funds for expansion in China or entry into the Chinese market. As an international financial center, Hong Kong is well positioned to raise funds for both. Regardless of whether funds to be raised are in the form of bonds, stocks, or bank loans, the financial industries in Hong Kong will benefit. It is expected that Hong Kong's position as an international financial center will be further strengthened as a result of China's WTO membership. Nevertheless, much of the benefits may accrue to financial firms from the advanced countries rather than Hong Kong's local firms. There are conflicting predictions about Hong Kong's intermediary role after China becomes a member of the WTO. Because WTO membership means China will become less dissimilar when compared with the market economies, there will be less need for foreign firms, especially large multinational firms, to use Hong Kong firms as their intermediary. However, for smaller multinational firms that have not yet invested in China but are considering doing so after China enters the WTO, they may need to seek help from Hong Kong's traders and investors. It remains to be seen how important the demand generated by these smaller multinationals will turn out to be. In contrast, Hong Kong firms will definitely benefit from the establishment of subsidiaries in Hong Kong by Mainland Chinese firms for the purpose of doing business in foreign countries. When everything is considered, it is not clear whether Hong Kong's role as a business hub and as an intermediary between China and the rest of the world will be strengthened or
418
L.K. Cheng / China Economic Review 11 (2000) 414±418
weakened after China enters the WTO. There is no doubt that business professionals (including accountants, lawyers, consulting engineers, etc.) will benefit from an increase in foreign trade and investment activities in China. However, such an increase in demand for the professionals' services does not necessarily translate into a larger market share for the Hong Kong firms, because the professionals may well be employed by foreign firms.