Riding the Dragon—The Swire Group Beyond 1997

I have heard protectionist voices in the industrial West talk in almost millennial terms about the threat to the U.S. of being swamped by products from China and the wider Asia-Pacific region, ranging from textiles and garments to shoes, bicycles, leather goods, consumer electronics, and a wide range of chemicals and metals. What they are ignorant of is the vast and growing demand for these products--and many more besides--inside China's own market and those of the increasingly prosperous nations of East and South-East Asia.

For example, just look at China's 1993 trade figures: exports grew by eight per cent to U.S.$92 billion. But, imports grew by 30 per cent to U.S.$104 billion. In spite of governmental efforts to cool the economy, imports continue to grow by about 18 per cent each year, and the country is still running a trade deficit.

Just pause for a moment and ponder a fact so obvious that we tend to take it totally for granted. China's economy of 1.2 billion people has been growing at an average of about 10 per cent since it began to open its market in 1978. It is already, by world bank reckoning, perhaps the world's fourth-largest economy. It is forecast to grow by an average of nine per cent per year in the coming decade. Growth of a continental economy of this size, at this pace, is creating immense new demand. It constitutes not so much an export threat as an unprecedented opportunity.

China's dynamism has been a significant factor in stimulating unprecedented growth across the Asia-Pacific region, which has been sustained over the past decade at about three times the growth of the developed world. Already, the region accounts for a quarter of world trade. It is estimated that this will rise to 40 per cent by the year 2000.

There are over one million Chinese millionaires (in local currency terms). Not surprisingly, China is now Asia's second largest consumer market (after Japan), with retail sales growing by 26 per cent last year, to pass U.S.$215 billion.

Like the leaders of many other large developing countries, China's leaders have opted to harness international investment, technology, and market know-how to the maximum possible extent. Hong Kong alone can count more than 100,000 joint ventures across the mainland of China--one third of these in the Pearl River delta area which is close to Hong Kong. They have played a massive role in modernising the economy and creating new and skilled jobs.

There is no better example of the diverse benefits of foreign investment than China. Over 1992 and 1993 alone, a total of 132,000 foreign ventures were approved. Actual foreign investment during those two years amounted to U.S.$37 billion. Foreign-linked companies already in operation employ over six million workers.

Looking to the future, China's investment needs are simply awesome. Only in the past couple of months, Beijing has revealed that it needs U.S.$12 billion to modernise its petrochemicals industry, and U.S.$13 billion to build 13,000 km of new railway line. One hundred million new telephone lines to be installed by the year 2000 are expected to cost U.S.$100 billion. To double the nation's power generation capacity by the year 2000 will cost between U.S.$65 billion and U.S.$200 billion. To build or upgrade 100 airports and to buy up to 1,200 aircraft will cost about U.S.$90 billion by the year 2010. Similar sums will be needed to build expressways, ports and mass transit systems.

The continuing development of the Chinese economy matters considerably to the whole international community, but to us in Hong Kong, it is increasingly the key to our future economic success.

And this takes us to the third myth. While it is not wrong to imagine Hong Kong as a passenger on the giant Chinese dragon, the economic reality is that Hong Kong has become a dragon to be reckoned with in its own right--one that can look beyond 1997 with considerable confidence.

We already play a vital role in China's economic modernisation:

Chinese products, most of them originating in Guangdong province and Hong Kong's Pearl River delta hinterland, last year accounted for about 35 per cent of Hong Kong's total trade. China, in turn, channels an estimated 60 per cent of its total exports through Hong Kong, an activity that has transformed Hong Kong's Kwai Chung container terminal into the busiest container terminal in the world--handling about 900,000 containers a month.

Hong Kong accounts for two-thirds of total external investment in China--about U.S.$186 billion. At the same time, Chinese companies are probably the largest foreign investors in Hong Kong. Staggeringly, Hong Kong accounts for 23 per cent of China's total GNP.

The number of mainland Chinese companies establishing headquarters, offices and trading companies in Hong Kong has surged in the past decade. Today, long-standing Chinese companies such as China Resources, China Merchant Steam Navigation and China Travel have been joined by new mainland giants such as Guangdong Enterprises, Guangzhou Investment, and Citic Pacific--which has become an important joint-venture partner to the Swire Group in sectors ranging from aviation to bottling.

So far, then, state-owned Chinese companies have listed on the Hong Kong stock exchange, which is in the process of becoming an important capital-raising base for privatising mainland corporations. The territory is China's principal capital market. Chinese investors now have a significant role in Hong Kong's local property market.

The emergence of China's market economy Confidence in the future is not just underpinned by developments here in Hong Kong, but also by dramatic changes occurring on the mainland of China. Private and collective enterprises--which were next to insignificant in 1986--accounted for more than 50 per cent of the GDP last year. Trade-oriented provinces such as Guangdong accounted for more than 70 per cent. That is breathtaking as a measure of the pace of change occurring inside China.

These enterprises have not just been the spawning ground for China's growing community of entrepreneurs, but also of a fast-growing middle class. Since this class has generated the majority of growth and new jobs across the country, they have played a powerful role in moving China in the direction of an open economy. Many see set-backs in the liberalisation process--such as the recent re-imposition of some price controls--and throw up their hands in alarm. They need to realise that China still has a few proper macro-economic mechanisms in place that can effectively regulate the market--and in their absence, administrative measures are the only means available to regulate the economy.

And with such a massive and unprecedented economic experiment in progress across the country, it should not be surprising to see hiccups along the way. The fact is, we have in Beijing an economically pragmatic leadership that is feeling its way, learning by experience, and is acutely conscious of the need to maintain stability, avoid large-scale unemployment and prevent hyperinflation.

Hong Kong is indispensable conduit for trade and investment in China.

For traders or potential investors from Europe or North America, the Chinese market can present a formidable challenge. The country's size, its still rudimentary transport infrastructure, its unfamiliar bureaucratic structures and business practices, the importance of family and friendship connections and introductions, the need for fluency in mandarin and often a number of regional dialects all point to the need for an intermediary to ease the frustrations and pre-empt the risk of expensive mistakes.

That is why Hong Kong is playing an invaluable role as a business partner as Western enterprises construct links into the mainland economy. Hong Kong is likely to continue in this role well into the 21st century. In Hong Kong, we have long-established contacts rooted in practical joint-venture experience inside China. We have immense on-the-ground knowledge, as well as familiarity with the language and culture of Mainland China.

That is, perhaps, why some 80 Canadian companies have branch and subsidiary companies in Hong Kong, with another 500 represented by distributors, agents or joint-venture partners.

Hong Kong's value is all the greater because of its strengths as one of the world's leading services economies. Services such as banking and insurance, trade finance and shipping, high-quality design, and legal services now account for 76 per cent of our gross domestic product. These are high value-added services provided by highly trained professionals. They are underpinned by Hong Kong's key roles as a communications and transport hub for Asia and as a springboard from which foreign companies can launch successfully into China.

Our competitive strength no longer lies in low-cost manufacturing, but in the expertise of our work force, the enterprise of our investors, the strong foundations of our legal system, and the integrity of our markets. Our economic success is based firmly on our ability to provide indispensable services to the world, the region and, above all, to the Chinese economy.

I hope that by now I have punctured the fourth myth: about Hong Kong living in fear and trembling over 1997. As I hope will by now be clear, 1978 is likely to be seen in the history books as a year of far greater importance than 1997. Of course, there will be upsets and accidents along the road we are travelling, but this has little to do with 1997. Rather, it is due to the awesome fact that both China and Hong Kong are travelling along routes never previously travelled.

Just as there are no road maps to guide Hong Kong's political and economic planners on the practical implementation of the "one country, two systems" guaranteed under the Sino-British joint declaration a decade ago, so there are no road maps for China's unprecedented emergence from state-planned to market economy. And anyway, the process is in keeping--except in sheer sizewith the experience of Japan, Taiwan and Korea in the early stages of their economic development.

This brings me to the final myth: that the Swire Group might be equivocal in its commitment to Hong Kong and China into the 21st century. This is a subject I will willingly discuss whenever I have the opportunity. Put simply, we are fully engaged in China and Hong Kong, and intend to remain so. Indeed, I think we would be corporately crazy to plan otherwise.

Why on earth would we forsake almost 130 years of experience in a region where we play so significant a role? Why on earth would we dilute our commitment to the most dynamic part of the world economy--a region forecast to stay that way for as far into the future as economic planners are willing to probe? Why should we equivocate over businesses that have been nurtured to maturity and strength over decades? When you examine the sectors in which we have the greatest involvement--aviation, property, and industry and trading--and think about the sluggish prospects these sectors face in other regions of the world, how can anyone seriously imagine we are poised to withdraw?

First, we are putting money where our mouth is: Cathay Pacific has equipment orders worth over U.S.$8 billion for delivery between 1995 and 1999; Swire properties has just acquired a land site in Hong Kong worth U.S.$370 million in a joint venture with Citic. Developing the site into a major retail and commercial complex is estimated to cost as much again. The Hong Kong Aircraft Engineering Company (Haeco), in which the Swire Group has a major shareholding, has signed a joint-venture agreement with the Chinese authorities in Xiamen to construct an aircraft maintenance facility at a cost of about U.S.$63 million. The group's aviation interests will be investing approximately U.S.$850 million in facilities associated with the new airport at Chek Lap Kok. Swire Pacific's industries division is rapidly expanding its Coca-Cola soft drink bottling operation in both China and Taiwan. All of these investments involve taking a long-term view: none will yield a return to the Swire Group until long after July 1, 1997, when sovereignty in Hong Kong reverts to China.

Second, the Swire Group is developing close commercial and joint-venture relationships with a number of Mainland Chinese partners. Apart from Citic, which has a 12.5 per cent stake in Cathay Pacific, 46 per cent in Dragonair, 15 per cent in the Coca-Cola bottling company in China, and 50 per cent in the recent Hong Kong land acquisition that I just mentioned, our Chinese partners include the China National Aviation Corporation, China Travel, China Merchants Holdings and a number of local and regional mainland companies.

Much of the speculation over prospects for Hong Kong's new airport at Chek Lap Kok has been quashed in recent weeks, following agreement between Britain and China over funding. This is obviously as important to Cathay Pacific's future as it is to the future of Hong Kong. With the two runways at Chek Lap Kok and the consequent capacity increase from 28 million passengers a year

to 80 million early in the next century, it will be possible to schedule faster and more efficient connections on long-haul flights into and out of the region, and onto flights throughout Asia and Mainland China.

Indeed, we don't even have to wait for Chek Lap Kok to achieve many of these improvements. I note with some pleasure the first long-haul non-stop Cathay flight into Toronto just over a week ago which used one of our new 747-400 aircraft.

There are other airports being built or planned in the region, which are trying to promote themselves as the ideal gateway to Asia. But none has Hong Kong's advantage of being on China's doorstep and at the very heart of Asia.

All in all, the Swire Group and Cathay Pacific have every reason to be optimistic for the future. There is arguably no more exciting place in the world to be--and the Swire Group and I would not change places with anyone.

The appreciation of the meeting was expressed by Daniel Hung, President, The Hong Kong-Canada Business Association (Toronto Section).