Hong Kong has been a major conduit for FDI to the Chinese mainland for over 23 years

The AT Kearney survey says this is especially so now that the mainland has for the first time supplanted the US as the most attractive destination for foreign direct investment (FDI).

In its FDI Confidence Index report, the business strategy consultancy found that chief executives and chief financial officers who participated in the survey have been lured by the size of the Chinese market and its buoyant economy.

According to Ian K. Perkin, chief economist of the Hong Kong General Chamber of Commerce, increased FDI flows into China have positive implications for Hong Kong. Mr Perkin notes: "Hong Kong has been a major conduit for FDI to the mainland over the past 23 years. It still accounts for something like 50 per cent of the cumulative total of FDI on the mainland.
 
"Although this is not all Hong Kong money, the SAR did have a role in providing it. While it is true that Hong Kong's share of the annual inflow has diminished somewhat in recent years, it is still the largest provider. It remains, therefore, an important base and conduit for investment in China. And as FDI in China grows, so Hong Kong will benefit, both directly and indirectly."

Investors look for alternatives

	Economist Ian Perkin says Hong Kong will benefit both directly and indirectly as investment in China grows

Figures recently released by United Nations Conference on Trade and Development (UNCTAD) also seem to confirm the conclusion of AT Kearney's 2001 survey by indicating flagging investor confidence in the US.

The International Monetary Fund's chief economist Kenneth Rogoff also feels China is likely to match the US as the dominant driver of global economic growth in the coming decades.

UNCTAD noted that the level of FDI more than halved last year, falling to US$735 billion worldwide, with the biggest reductions being posted by industrial countries.

However, China attracted nearly US$50 billion in FDI in 2001, against US$125 billion by the US. The level of FDI into the US was down from US$301 billion in 2000, while China has been drawing in growing levels of foreign investment.
 
In the nine months to September, China drew US$39.56 billion in FDI, up 22.6 per cent year-on-year, China's Ministry of Foreign Trade and Economic Co-operation figures show. This means the country is on course to hit US$50 billion in inward investment again this year.

Mr Perkin feels that Hong Kong benefits from being a base for raising capital for the mainland, in the form of both equity - with China listings on the local market - and non-equity, in terms of loans and venture capital financing.

Key role set to continue

Economist Chia Woon Khien says Hong Kong provides China with higher-end service sector solutions

This sentiment is echoed by Chia Woon Khien, senior economist at ING Financial Markets. She notes: "In the next few years China will need Hong Kong's expertise in financial, banking and other service sectors including higher-end marketing roles to help its manufacturing industries."

Mr Perkin added that the spin-off benefits for Hong Kong-based companies would be dependent on the sector in which these firms operate. "There will obviously be a direct benefit to those in the financial services sector, but also in support sectors like legal, accounting, taxation, and consultancies of various types."

Ms Chia concurs: "If China is drawing in foreign investors, the news is definitely positive for Hong Kong. Hong Kong's role in China and its economic development has gradually evolved. With companies based in Hong Kong shifting their low-cost activities to the mainland, Hong Kong should provide the growing mainland Chinese economy's higher-end service sector solutions."

Hong Kong also need not be concerned by the trend of bigger international players dealing more directly with the mainland. "For those medium and smaller companies - and therefore more risk averse - Hong Kong still provides the ideal base for investment into China, as well as providing the old roles of trading," Mr Perkin said.

In this regard, Hong Kong will not face any immediate challenge from the mainland, Ms Chia feels, because China will take some years to develop these skills. "This will be the way forward for Hong Kong, as many overseas companies move their base to Hong Kong and from here initially develop their activities in China."

Related links:
AT Kearney www.atkearney.com
United Nations Conference on Trade and Development www.unctad.org
International Monetary Fund www.imf.org
ING Financial Markets www.ingprime.com