To prove its value to China and to confirm its role as a world city, Hong Kong must go beyond its fixated focus on the Pearl River Delta (PRD) region.

It is true that Hong Kong has benefited greatly from its investment in the export-oriented industrial processing in the PRD region and helped the region to transform itself from a sleeping provincial economy into one of the most dynamic industrial economies in the world.

The structural changes brought by the recent financial crises in the developed countries, however, seem to show that the golden age of industrial processing has gone. China, both its government and the general public, will no longer tolerate low wages and high social costs of processing trades. Consumption demands from Hong Kong's traditional trading partners, the USA, EU and Japan, are faltering as financial problems in those areas deepen. Exports from industrial processing have indeed recovered lately, but there is no guarantee that another round of financial crises will not come to dampen demands for exports again, and more importantly, processing orders have come in smaller lots and at lower prices, making them hardly profitable for Hong Kong manufacturers in the PRD region. The recent exacerbation of wages caused by a labor shortage plus the rising costs of environmental protection and conservation have challenged fundamentally the low-cost, low-price business model of industrial processing. Local governments have proposed relocation and upgrading, but few Hong Kong manufacturers have the resources, financial and most importantly human, to make the radical shift in either direction.

What could Hong Kong manufacturers do: Wait for the end to come and close their plants, or work more progressively to find new markets for their existing products? Probably the easiest way out of the current difficulty is to discover new markets, beyond the traditional triad of the USA, the EU, and Japan.

Emergent markets should be the best targets. However, countries in Southeast Asia, South Asia and even in Latin America and Eastern Europe are industrializing fast and are poised to compete with China in the international market. It would be difficult for them to invite exports of labor-intensive goods made by Hong Kong manufacturers from China. Other countries, like those in Africa, lack purchasing power. This leaves only emergent resource-rich economies. In Asia, that includes Myanmar, but there is the problem of US sanctions. There are the west and north of China, and Russia, especially its energy and resource rich Far Eastern regions, and the emergent countries in Central Asia that are benefiting from huge local reserves of oil, gas, uranium and other resources. These are Kazakhstan, Uzbekistan, Turkmenistan. Further west, there are the countries of the Caucasus. Other potential markets include Kashgar in Xinjiang, Manzhouli in Inner Mongolia and Suefeihe in Heilongjiang (the first two have been designated as border special economic zones by the Central Government in 2010). All three have long been the trading hubs for goods from inner China to Russia along the Trans-Siberian Railways and Central Asia along the revived Silk Road. It is difficult to estimate the volume of trade, as most has been carried out through informal transactions across the borders. But given the huge development potential of resource economies in Russia and Central Asia and the cheaper Eurasian transport links (with several proposed Eurasian railway projects being discussed eagerly and with great enthusiasm from China to promote its high-speed rail technologies), they would be major trade routes for Chinese goods to the regions and to Europe in the coming years. Already in these border cities the most popular goods are those coming from Guangdong and Zhejiang.

Hong Kong should take the lead in China to bring its quality labor-intensive goods produced in the PRD region originally for the lower income groups of the developed countries to these emergent markets with great potential. Not only would this compensate for the loss of market demand from the triad, but it also could become a catalyst to transform the export order-dependent industrial processing economy to one with a renewed integration of product development, production, marketing and trade. The emergent markets in Russia and Central Asia are easy markets in the sense that there is little competition, except from smaller firms producing less competitive goods in Zhejiang and also in Guangdong. There might be political risks, but Hong Kong manufacturers and traders have the support of the great powers, Russia and China, who are capable of maintaining order and stability in the region. The recent disturbance in the Fergana Valley (involving not only Kyrgyzstan but also Uzbekistan) is a historical problem but could still be contained when all the great powers concerned become more interested in stability rather than regime change.

To play safe, Hong Kong manufacturers and traders could start first in the two new border special economic zones in Kashgar and Manzhouli. Both are well protected and supported by the different levels of governments in China. Labor-intensive consumer goods produced by Hong Kong firms in the PRD region should be able to command a very good market in the border regions and beyond, especially when their prices reflect mostly costs of manufacturing and trading rather than the huge profit margins that used to be taken up by foreign retailing and discounting multinational corporations from the triad.

The author is head of China Business Centre, Hong Kong Polytechnic University.

(HK Edition 06/18/2010 page2)