Hong Kong really wants U.S. business, but Secretary for Transport and Housing Eva Cheng couldn't help getting in a couple of digs at this country's economic plight. Speaking in San Francisco recently as part of a 10-member delegation promoting Hong Kong's logistics capabilities, she reported that she'd been delayed at Los Angeles International Airport. "You really need high-speed rail between L.A. and San Francisco," she said, adding that Hong Kong has already begun building its own 16,000-kilometer network.

Then there was the reference to President Obama's $50bn infrastructure plan, announced earlier this year. Cheng said Hong Kong has been engaged in a similar effort, yet "we did one more thing - we paid for all these [projects] from reserves from surpluses accumulated through years of prudent public finances."

Ouch. Just two more reminders of the immense gap in economic performance between the U.S. and China. While Hong Kong hasn't been immune to the turmoil plaguing the U.S. and Western Europe, it continues to enjoy an unemployment rate of around 3.2 percent, and expects economic growth of between 5 and 6 percent this year.

Nevertheless, with mainland China experiencing even more impressive growth over the past decade, and rapidly building up an extensive network of ports, airports, highways and rail, one has to ask the question: Is Hong Kong still relevant?

For decades, Hong Kong advertised itself as the indispensable gateway to China. Even while under British administration, it was aggressively building up its port and airport to handle trade between the mainland and the rest of the world. At the same time, Hong Kong's status as a business and financial center was unrivaled.

What Hong Kong didn't have any longer was a strong manufacturing base. In the first indication that the mainland was determined to siphon off the colony's resources, Guangdong Province of southern China became the premier location for low-cost production of every imaginable consumer item. Hong Kong, with its limited land and skyrocketing real estate prices, could no longer sustain the thousands of factories (some would call them sweatshops) that were the original source of its economic "miracle."

That left the administrative region, which China took back from the British in 1997, with its world-beating infrastructure of port and airport. In recent years, however, mainland China has been impinging on that area as well. Today, it boasts some of the world's largest containerports, including Shanghai, Shenzhen, Guangzhou, Ningbo and Qingdao. Many ocean carriers now sail directly from these mainland ports to the U.S. and Europe. So who needs Hong Kong?

Secretary Cheng didn't seem fazed by the question. Last year, she pointed out, Hong Kong International Airport handled 4.13 million tons of cargo, a new record. The Port of Hong Kong, third-busiest in the world, saw 23.7 million twenty-foot equivalent units of cargo moving across its docks in 2010. A fifth of China's external trade in goods still passes through Hong Kong, and some 90 percent of the region's re-exports are generated by trade with China.

Cheng believes Hong Kong's logistics community has been strengthened by the Closer Economic Partnership Agreement (CEPA) with the mainland. The pact gives Hong Kong-based service providers preferential treatment in 44 sectors, including logistics. (Odd that it should be described as a "free trade" agreement.) Overseas logistics providers who want to crack the China market would do well to partner with one of their local counterparts.

Hong Kong hasn't slowed its pace of logistics development. It's looking at the possible creation of a 10th container terminal (even though the head of Hong Kong's Container Terminal Operators' Association has said that the facility isn't needed at this time.)  A third general air cargo terminal is already under construction, as is the Hong Kong-Zhuhai-Macao Bridge. That US$10.7bn endeavor will create the world's largest bridge and tunnel combination, linking Hong Kong by road to the western section of the Pearl River Delta. The project could be seen as be an answer to those who predict that the growth of manufacturing in the western delta will further lessen shippers' dependence on the Port of Hong Kong.

Hong Kong Legislative Councillor Miriam Lau, who represents the Transport Functional Constituency and was also a member of the delegation visiting San Francisco, cited one big advantage that Hong Kong still has over the mainland: "a strong rule of law." U.S. high-tech manufacturers have complained loudly about China's cavalier attitude toward the protection of intellectual property. That's not a concern in Hong Kong, Lau claimed, with its common law legal system and built-in protections for international brands. Cheng added that Hong Kong boasts "a very transparent customs regime."

C.C. Tung, chairman and chief executive officer of Orient Overseas (International) Limited, said Hong Kong expects to play a major role in China's attempt to develop its domestic consumer market. The growth of a Chinese middle class, accompanied by higher wages across the board, is central to the nation's plan to reduce its reliance on exports.

Without question, Hong Kong will have to keep changing in order to maintain its place in the global business community. It has done so before. A former British colony that once fashioned itself into a manufacturing juggernaut now relies on services for more than 90 percent of its economic activity. As mainland China continues its march toward world dominance, Hong Kong will have to find ways to fit in. Maybe the U.S. can learn a lesson or two from that.

- Robert J. Bowman, SupplyChainBrain

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