Urban China and meaning for HK

22 November 2013

The Third Plenary Session of the 18th Central Committee of the Communist Party of China has now convened and issued its main statements. The consensus is that they prefigure a period of a different kind of reform from that which has been occurring since 1978. The processes of marketization will increase, State-owned companies are going to be placed in a structure where they are open to more competition, and China is going to accelerate its advance towards becoming an urban economy. What does that mean for Hong Kong, which is going to be set right beside this immense project as it unfolds in the ensuing years?
One issue explicitly referred to in the plenum's communique of Nov 12, which directly bears on Hong Kong, is the aspirations clearly stated by the central government to create a more advanced finance sector. It is now clear that this doesn't mean trying to build up Shanghai so that it can start siphoning off international attention from Hong Kong. What it does mean is that the leadership now see the need for a diverse economy, and having two centers instead of one, where the strategic and business focus are different, is a rational aim.
For Hong Kong, the tactic now is to work out, quicker than others, what sort of finance sector the mainland market needs. The clues are again in the plenum with talk of a China where more people will live in cities, and where the service sector will become increasingly important. It is a China where enterprises, whatever their final ownership, will need access to more flexible and more varied capital. And it is going to be a China that needs regulation and predictability in the finance sector.
The establishment only a few weeks before the plenum of a Free Trade Zone in Shanghai created great excitement inside and outside China. But while the commitment now is clearly to make finance a key sectoral priority of this government, what is less clear is the road map to do this. Opening of the capital account would be one bold move, but a risky one. The yuan is being traded in Hong Kong and other centers across the world, but in liberal amounts. It is fair to say that the volumes of this trade are now set to increase, perhaps dramatically. How Hong Kong positions itself to engage with this is important. This is a massive opportunity, but one where other finance centers such as London and Taipei are vying to play a role in.
The plenum also gives some clearer idea of China as a global economic actor. Chinese companies are now going to need to internationalize more rapidly than ever before, and to seek markets, brands and technology abroad in ways far deeper than before. The Chinese mainland is now the sixth-largest outward investor. Much of this investment has been through Hong Kong. But now, as foreign capital becomes less important for its growth model and export orientated growth starts to dwindle, the key new area for expansion is to have a generation of Chinese innovative companies with their own technologies and brands that can compete globally.
This is a vast undertaking. Innovation is a word used frequently both by the current central leadership and that which preceded it. There is a 15-year innovation plan, starting from 2007. Money has increased rapidly in recent years in research and development, and in trying to find areas where Chinese companies, State or non-State, can become global players. Despite all of this, the sorts of transformative technologies and management philosophies of companies from South Korea or Japan remain elusive for China. Huawei, the one Chinese company in the high-tech sector which has worked a lot abroad in the last decade, is also largely misunderstood and hampered by security and other claims. The battle for Chinese companies to have high-value strategic partnerships with companies and partners abroad is an important one, and ongoing. Hong Kong has a role to play here, and the language in the decisions of the plenum issued on Nov 15 makes clear this strategic focus won't let up.
The participants at the China Daily Hong Kong Forum on Tuesday on the plenum have to finally work out what an urban China with perhaps 70 percent of its population living in cities will mean, economically, socially and politically. An urban China like this has never existed before. In fact, no society has ever undertaken this sort of rapid urbanization on such a scale. The mixture of sustainability, growth and equity challenges are vast.
Hong Kong has a role in partnering some of these transformations - but it also has to contemplate a country which will become more diverse in terms of its intra-provincial differences, more dynamic in terms of its internal economic mixture and more demanding in terms of what its citizens want from government. This is the dizzying potential which is partially mapped out from the plenum earlier this month. The challenge now is for the nation, Hong Kong, and the rest of the world to work out how to achieve all of this in such a short period of time without major risks and instabilities.
The author is executive director, China Studies Center, and professor of Chinese Politics, University of Sydney; team leader of the Europe China Research and Advice Network (ECRAN) funded by the European Union; and associate fellow, Chatham House, London