【2010.8.10 华尔街日报】'One Economy,' Yes. But Keep 'Two Systems'

rhapsody

Closer integration with China shouldn't come at the expense of Hong Kong's competitive advantages.

http://online.wsj.com/article/SB ... 22342176390122.html

By MARK MICHELSON

One of Hong Kong's most important competitive advantages is its "one country, two systems" relationship with mainland China. The territory offers Chinese companies and foreign investors a meeting place that's technically within China but that features a much greater degree of legal transparency, well-established financial markets and openness. Yet it would be a mistake for businesses to take the durability of this model for granted. Greater commercial integration with the mainland—which would be good for businesses—could easily veer off track.

At issue are efforts by government officials on both sides of the border to more closely integrate Hong Kong's economy to that of the Pearl River Delta region. The delta boasts a total population of around 50 million and average growth of 11% during the past two decades, making it one of the most affluent areas in China. Although its factories were hit hard by the global slowdown, by one estimate the region still accounts for 10% of China's gross domestic output and about 30% of the country's exports. Many of those factories are owned outright by Hong Kong companies or entrepreneurs, or are joint ventures between mainland companies and Hong Kong firms. Many of the products pass through Hong Kong's port on the way to overseas markets.

One recent example of how closer cross-border cooperation can work in practice is DuPont Apollo, a Hong Kong-based subsidiary of DuPont. The company in 2008 invested in a new thin-film photovoltaic research and development facility in Hong Kong to develop solar-panel technology, which it will manufacture at a new plant in Shenzhen. This is the first project under the auspices of the "Shenzhen-Hong Kong Innovation Circle," an agreement between the two cities to promote high-tech projects, including potential funding support for R&D.

Despite already extensive ties, further integration remains a work in progress. The Closer Economic Partnership Arrangement, signed in 2003, opened the door to tariff-free exports of Hong Kong-made products to the mainland. It also reduces or removes geographical, financial and ownership restraints for Hong Kong-based service providers in 42 sectors. Companies based in Hong Kong, regardless of nationality, may take advantage of CEPA if they meet basic criteria.

But now some businesses are bumping up against the limits of that agreement. The degree of access to the mainland market varies considerably among the sectors. Transport and logistics companies generally have benefitted more than financial services firms, due to regulatory controls and restrictions in the financial sector. Also, some technical requirements related, for example, to how a Hong Kong-based subsidiary of a foreign parent is structured, may prevent that firm from qualifying for CEPA benefits.

So officials in Hong Kong and Beijing have crafted a new Framework Agreement on Hong Kong/Guangdong Cooperation, which was signed in April and endorsed by China's State Council. This new deal promises, for example, to explore specific arrangements for bank financing and issuance of yuan bonds in Hong Kong by Guangdong enterprises; to advance the yuan cross-border trade-settlement pilot scheme; and to support Hong Kong securities companies in setting up joint-venture securities investment consultancies in Guangdong.

Yet, while the announcement of the new agreement called it "a significant embodiment of the principle of 'One Country, Two Systems,' " the emphasis clearly and not surprisingly seems to be on the "one country" part. Achieving objectives like promoting "joint socio-economic development in Hong Kong and Guangdong to create a new world-class economic zone" or a "world-class metropolitan cluster" in South China are admirable. But as integration develops, will compromises need to be made involving legal matters, business practices or information flows that could weaken what has been a significant Hong Kong advantage for many investors here?

The danger is that the two sides could go too far, too fast, and forget that the "two systems" element is equally important to businesses. For example, during the past few months, there have been public suggestions in Hong Kong to extend the proposed use of mainland Chinese accounting standards for mainland companies listed in the territory to all Hong Kong companies. Over the long term improvement to, and wider acceptance of, Chinese standards would benefit the country's companies as they move overseas. But in the short run, potential shortfalls in accounting rules, and periodic mainland accounting scandals, would make investors nervous if those standards were more widely used in Hong Kong. This and other challenges are likely to increase down the road.

What would the healthy kind of economic integration look like? It would contain much of what is described in the Hong Kong-Guangdong Framework Agreement. But the importance of maintaining the rule of law, access to information, low level of corruption and the other attributes that make Hong Kong more than just "another big city in China" should be more explicitly emphasized with specifics regarding how they are to be reinforced and strengthened as integration proceeds. This may result in more incremental, less rapid progress toward a Greater Pearl River Delta "megalopolis" than some business leaders want. But in the end it will be the kind of integration that will be more sustainable and beneficial to this region.

Mr. Michelson is chairman of the IMA Asia CEO Forum in Hong Kong.