Chinese Outward Investment in Hong Kong: Trends, Prospects and Policy Implications
Summary (2 min read)
- OECD DEVELOPMENT CENTRE Working Paper No. 113 (Formerly Technical Paper No. 113) CHINESE OUTWARD INVESTMENT IN HONG KONG: TRENDS, PROSPECTS AND POLICY IMPLICATIONS by Yun-Wing Sung Research programme on: Reform and Growth of Large Developing Countries July 1996 OCDE/GD(96)53 5.
- Over the last decade, China has been the leading investor among developing countries and Hong Kong is the foremost destination of Chinese investment.
- China’s outward investment has been grossly understated in official statistics due to avoidance of China’s foreign exchange controls.
- This paper tries to appraise those investment flows both quantitatively and qualitatively.
- It examines the many estimates of Chinese investment in Hong Kong, tracing their sources and bases of estimation.
- Most of these estimates are found to be crude guesses with very little empirical support.
- While China has attracted much public attention as a host of foreign direct investment, less attention has been given to the fact that China has been the leading foreign investor among developing countries.
- While Hong Kong has been the number one investor in China since the inauguration of China’s open policy in 1979, consistently accounting for roughly 60 per cent of the foreign investment in China, Chinese investment in Hong Kong had been less notable, as China was short of capital.
- Rapid economic development in China changed the picture.
- The BOC Group confined themselves to China-related banking business such as trade financing and handling remittances.
- In a nutshell, China’s investments in Hong Kong were designed to handle, transport, and finance China’s exports to Hong Kong, and also to handle remittances and visitors.
II. CHINESE INVESTMENT IN HONG KONG: AN APPRAISAL
- There are no accurate estimates of Chinese investment in Hong Kong.
- The BOC Group is the second largest banking group in Hong Kong after the Hong Kong Bank Group.
- The Hong Kong government started to survey external investment in Hong Kong manufacturing in 1984, and data on Chinese investment was provided from 1985 onwards, as China’s presence in Hong Kong manufacturing was too big to be ignored with the 1984 acquisition of Conic Investment, the largest electronics company in Hong Kong.
- Before 1970, there were only three investments (Tien Chu Chemicals, Nanyang Tobacco and one other), but these were large and worth a total of US$311 million at original cost.
- Organisation and Operation of Chinese Companies in Hong Kong Chinese companies are controlled by the Chinese government through the appointment of mainland cadres to top positions.
III. THE DETERMINANTS OF CHINESE INVESTMENT IN HONG KONG
- In the open-door era, economic factors are paramount in Chinese investment in Hong Kong, though political factors are still important, as will be detailed later.
- In 1992, the three traditional giants among Chinese companies in Hong Kong, namely, China Merchants, China Travel Service, and China Resources reorganised themselves into holding companies and became listed on Hong Kong’s stock exchange.
- This implies that once a location acquires a comparative advantage in trade, the advantage feeds upon itself, and more trading firms will come making it even more efficient in trade (Sung 1991: 28-42).
- More and more Chinese trading firms will establish themselves in Hong Kong with the continuing reform and decentralisation of China’s trading system.
- 31 “To stabilise Hong Kong Chinese capital”, the NCNA has on several occasions asked the BOC to extend loans to friendly Hong Kong magnates in financial crises.
IV. PROBLEMS AND PROSPECTS
- China’s investment in Hong Kong has been an important component of China’s open-door policy.
- Though Chinese investment in Hong Kong benefits China and Hong Kong tremendously, there are also costs.
- In the long run, the loss of control may be a blessing in disguise as planners are forced to abandon unworkable regulations and push on with reforms.
- China’s myriad links with Hong Kong, cultivated partly as a result of Chinese investment in Hong Kong, led to a thriving black market in foreign exchange in China that forced planners to devalue and unify the exchange rate.
- The estimate of Chinese investment in Hong Kong is likely to be biased downwards as there is an incentive for China’s local authorities and enterprises to establish unofficial subsidiaries in Hong Kong to evade controls on foreign trade and foreign exchange.
- 1 The author was also a speaker at that seminar, and has kept a copy of Mr. Xiangnan’s speech.
- The balance sheet of the BOC covered its global operations, though its Hong Kong Branch is certainly the most important.
- Table 36 from Review of Maritime Transport 1990, UNCTAD, U.N.: New York, 1991.
- Some articles give the higher figure of 8 per cent which is exaggerated as they forgot to allow for the fact that China often owns a fraction of the shares.
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