By Hong Liang (China Daily)
Updated: 2007-08-07 07:11

There are reasons for Hong Kong to feel optimistic these days. The stock market is gaining momentum, the government has reported a higher-than-forecast budget surplus, and an international credit rating agency gave Hong Kong its strongest ever vote of confidence.

The credit rating upgrade is in recognition of the city's strong economic fundamentals, according to financial secretary John Tsang.

Things certainly didn't seem so assured a few months ago when many Hong Kong economists and business leaders were fretting about the erosion of competitiveness, especially in capital intensive economic sectors, in the face of rising challenges from mainland cities, particularly Shanghai and Shenzhen.

The question to ask is what constitutes Hong Kong's economic fundamentals? Industry was out many years ago. With the wholesale migration of manufacturing activities to the mainland, domestic exports have slipped into economic oblivion. Re-exports of goods made on the mainland, the main engine of economic growth in the 1990s, is fast dissipating as more and more shipments are diverted to ports in Shenzhen and other cities in Guangdong province.

Meanwhile, the mainland stock market's boom has greatly boosted Shanghai's standing as a credible source of capital and raises the question of Hong Kong's long-term relevance to the mainland's economic development. The media on the mainland and in Hong Kong has greatly blown up the expectation that Shanghai will overtake Hong Kong in the amount of capital raised in initial public offerings and the issuance of other instruments.

But we don't believe that such developments have in any way shaken Hong Kong's economic foundation, which rests securely on the bedrock of a dynamic free enterprise system, preserved and disciplined by the rule of law. That system will not perish as long as we have a relatively corruption-free government that is efficient and accountable, and an independent court of law that is seen by the public to dispense justice fairly, equitably and without undue delays.

To be sure, Hong Kong's container ports, no matter how efficient they may be, can never hope to compete with facilities in Shenzhen in terms of cost. Also, Shanghai has never been shy about its bid to become China's premier financial center. But there is nothing to stop Hong Kong from leveraging its existing advantages to benefit from these developments.

It is clear that Shanghai's bid to be an international financial center is dependent on the renminbi becoming fully convertible. For various reasons, that process is expected to be long and gradual. It leaves plenty of time for Hong Kong to expand and consolidate its role as an international financial center and to explore with Shanghai on developing business opportunities on a complimentary basis.

The latest economic indicators have pointed to the fact that the transformation into a high-value-added, knowledge-based economy is producing results. But market forces have produced a number of unpleasant side-effects that have manifested in the widening wealth gap.

Understandably, tough legislations to maintain a more balanced course of development could distort the market forces at play. But the Hong Kong government can certainly afford a more generous housing program to ease the pain of a growing number of families hit by dwindling income.

E-mail: jamesleung@chinadaily.com.cn

(China Daily 08/07/2007 page10)