Shenzhen nuzzles closer to Hong Kong By Olivia Chung, Asia Times Online
Dec 7, 2007

HONG KONG - After plenty of talk about Shenzhen and neighboring Hong Kong joining hands to form a twin-city metropolis, Shenzhen has incorporated the idea into its development blueprint for the period to 2020. This is the first time the booming city in China’s Guangdong province has taken economic integration with Hong Kong into consideration in its long-term development plan.

The draft blueprint, drawn up in late November and to be sent to the State Council, China’s cabinet, for approval, says Shenzhen and Hong Kong should turn themselves into a twin-city financial, trade and shipping hub.

One of the priorities set in the blueprint is to build a common capital market, with Shenzhen’s financial institutions going international through Hong Kong while more financial institutions in the former British territory could set up branches in Shenzhen as their springboard to expand business in the mainland. The two stock exchanges could cooperate more closely to attract dual-listing of enterprises home and overseas, the plan suggests.

As rosy a picture as the blueprint depicts, analysts say there are heavy barriers to be overcome before the plan can be actually executed. For example, the Chinese currency is still not fully convertible, which greatly restricts capital flow between Shenzhen and Hong Kong. Legal systems in the two places are also radically different, so to build a common capital market some common legal basis must be established.

Nevertheless, the blueprint indicates that a substantial step has been taken toward this long-term goal.

Officials and academics in Shenzhen have advocated integration with Hong Kong for many years, though it was not until August this year that Hong Kong reacted positively, when a report by the Bauhinia Foundation Research Center, a Hong Kong think tank seen as closely linked to the government, said a Shenzhen-Hong Kong metropolis could outperform London, Paris, Chicago or Los Angeles by 2020.

Hong Kong Chief Executive Donald Tsang also said in October in his policy address that the territory will go all out to develop the Shenzhen-Hong Kong twin-city international metropolis.

The Shenzhen blueprint focuses on six major areas - improving co-operation on financial systems, building a Shen(zhen)-(Hong) Kong Innovation Rim, improving cross-border transportation, and enhancing co-operation with Hong Kong in the high-technology and high-end service industries.

To build the Shen-Kong metropolis, the Shenzhen government reiterated in its newly released draft regulation on developing the financial industry that it was willing to become ''the backyard'' of Hong Kong as the region’s international financial hub. The draft regulation was aimed at boosting Shenzhen’s financial sector into ''a strategic pillar industry'' of the city after high-technology.

According to the draft, Shenzhen will create a multi-tier capital market, including a main board, a small and medium-sized enterprise board, a growth enterprise market, an over-the-counter market and a bond market.The draft also said the development of Shenzhen’s financial market must be based on financial co-operation between Hong Kong and Shenzhen with the ultimate aim of it becoming ''an organic part of the Shen-Kong metropolis and international financial center'', as the backyard of Hong Kong as an international financial hub.

''The gradual realization of a collaboration of financial industries of Shenzhen and Hong Kong is not only a domestic demand for innovation for Shenzhen financial industry, but also an aspiration to become an international financial center by Hong Kong, which cannot achieve it on its own,'' the draft said.

''With its condition, Hong Kong, on its own, finds it very hard to become a world-level financial center,'' Julia Leung Fung-yee, executive director (external) of the Hong Kong Monetary Authority, said during a meeting in Hong Kong with Tang Jie, vice director of the Standing Committee of the Shenzhen Municipal People’s Congress. ''Only if it enters into an alliance with the mainland, can it achieve its goal with a combined scale and efficiency.''

The creation of a mega-metropolis would be a win-win situation for the cities, according to Zhang Yuge, a senior researcher with the China Development Institute, a Shenzhen-based non-government think tank. Covering 3,200 square kilometers and with a combined population of about 20 million, ``it could improve infrastructure, trade and finance'' despite the different political systems agreed to under the ''one country, two systems'' policy that undwrote the 1997 handover by Britain of Hong Kong to Beijing.

Tuan Chyau, professor of department of decision sciences and managerial economics of Chinese University of Hong Kong, said that faced the risk of being marginalized, Hong Kong should work for closer economic co-operation with Shenzhen so the two cities could complement each other with their peculiar competitive advantages.

The mainland, with its runaway development, is not only taking on Hong Kong as a center for logistics and trade; it is attracting Hong Kong’s business and talent.

In the past, Hong Kong acted as a springboard to attract international investors to China and as a fund-raising center for mainland companies. Now international firms can go directly to the mainland and large Chinese state-owned companies are encouraged to list at home following the successful dual-listing cases of the mainland companies such as the Industrial and Commercial Bank of China in the A-share market on the mainland and the H-share market in Hong Kong.

''A-share companies'' refers to those domestically listed firms, which foreign investors are not allowed to buy. H-share companies are incorporated on the mainland and approved for listing in Hong Kong.

The mainland’s strong economic growth and successful reform that has led to the flotation of state holdings has been augmented by a flood of funds into Shanghai and Shenzhen’s stock exchanges, helping to create conditions that could lead to overseas-registered mainland companies, the red chips, and even foreign companies listing in the mainland. At present, the Chinese government is considering changing listing regulations to let red chips take this path.

One reason behind the red chips’ eagerness to return home to raise more funds is the high valuations A shares are generating. The Shanghai Composite Index, which tracks yuan-denominated A shares and hard-currency B shares, surged 176% in the 12 months to mid-November, with A shares trading at an average price of more than 40 times their earnings and leaving their H-share counterparts trailing at big discounts.

State-owned enterprises including red chips now account for a bigger percentage of the volume at the stock exchange of Hong Kong than local blue chips. A possible single listing in the A-share market by state-owned companies or return of the red chips to list in Shanghai could trigger an exodus of funds from Hong Kong that could destabilize growth in the territory.

By the end of November last year, 85 red chips with a combined market value of HK$2 trillion were listed in Hong Kong, accounting for 21% of the exchange’s overall market value.

Some commenators have suggested a merger between the Hong Kong and Shenzhen exchanges, a move soon declined by Hong Kong academics and officials, who pointed out that the Hong Kong stock exchange is a listed company while the stock exchange of Shenzhen is owned by the Chinese government.

Instead, a single trading and listing platform jointly established by the Hong Kong exchange and the exchanges of Shanghai and Shenzhen had recently been suggested, in which A and H shares could be freely traded on the three exchanges although they have different shareholding and company structures.

That would touch on the issues of the convertibility of the yuan and restrictions imposed by the mainland on the mobility of users and providers of financial services, Tuan said.

''Besides, there are many technical issues to deal with, for example the listing, settlement and regulatory regimes of the three exchanges are different; investors inside and outside the mainland are also not allowed to trade in each other’s markets,'' he said.

Even so, if a single market between Hong Kong, Shanghai and Shenzhen exchanges is establshed, it could become one of the most actively traded markets in the world, he said.

According to the South China Morning Post, the combined market turnover of Hong Kong, Shanghai and Shenzhen reached US$1.03 trillion in the first seven months of the year, trailing the New York Stock Exchange (US$12.95 trillion), Nasdaq (US$7.03 trillion), London (US$4.26 trillion) and Tokyo (US$3.61 trillion).

In what was seen as a step towards moving forward the concept of closer links between the area's exchanges, the Hong Kong government recently increased its shareholding in the city's exchange to 5.88% from 4.41% to become the single largest shareholder while continuing to talk with the mainland about the idea.

The victory of the pro-democracy camp in December 2 by-elections in Hong Kong added a twist to the debate, with Anson Chan, a passionate advocate for democracy, winning a seat in the city's Legislative Council. Chan, who held the city's second-highest post, and other senior officials trained by the British administration, were opposed to closer economic ties with the mainland when the subject was raised a couple of years before the 1997 handover.

In anticipation of the nod from the state council, Shenzhen Mayor Xu Zongheng is scheduled to visit Hong Kong before the end of the year to flesh out the proposed merger. But Hong Kong observers say the scheme would require a meticulous scrutiny in order to win public backing.

"Economic integration is certainly most welcome but Hong Kong people don't want to see any political synergies," says Joseph Cheng, professor of political science at the City University of Hong Kong. "Political integration could endanger Hong Kong's rule of law and could flatten our lifestyles".

Other researchers say Hong Kong and Shenzhen have moved towards a unified management in areas like shipping, for example, even before a formal proposal has been approved.

"We already have a merger in a sense," says Michael DeGolyer of the Hong Kong Baptist University who works on the Hong Kong Transition Project examining the changes since the handover. "Hong Kong and Shenzhen ports are in fact merged because they are owned by the same company."

While he believes Hong Kong people tend to see the proposed integration in a constructive way - as a unified solution to common problems like pollution - he is emphatic they would not tolerate any imposed changes to the existing political system.


Olivia Chung is a senior Asia times Online reporter. With additional reporting from Inter Press Service.

Labels: Hong Kong

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