Hong Kong suffers worrying downgrade
Commentary: Sponsors shun city in decline
http://www.marketwatch.com/story/hong-kong-suffers-worrying-downgrade-2012-11-18?siteid=bigcharts&dist=bigcharts
Nov. 18, 2012, 9:04 p.m. EST
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By Craig Stephen
HONG KONG (MarketWatch) — Investors should worry less about another
batch of weak economic numbers from Hong Kong and more about its future.
It could be sliding into irrelevance, becoming just another second-tier
Chinese city.
This week, attention in the city turned to golf as Rory McIlroy and
other stars rolled into town for the UBS Hong Kong Open — one of the
region’s oldest golf tournaments, dating back 54 years.
But that impressive history could be coming to an end. Unable to find a
sponsor for next season, the tournament has lost its slot as a European
Tour event — and might not even take place at all.
Normally, such a setback might be overlooked, but it comes at a time
when Hong Kong is questioning its very raison d’être. Fifteen years
after the territory’s handover from the U.K., the economy is
flat-lining, the government is deeply unpopular, and society is divided
like never before.
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And its relationship with mainland China — its giant neighbor and ultimate sovereign — is also under increasing strain.
Resentment is growing over the sense that, as integration between the
two accelerate, the benefits are stacked in the mainland’s favor. While
mainland Chinese visitors may enjoy duty-free shopping, hospital
services or acquiring offshore property assets in Hong Kong, the feeling
is that locals lose out.
Exacerbating these tensions is a reversal in the value of the two
countries’ currencies. Historically, the Hong Kong dollar has traded at a
premium to the mainland Chinese yuan, but now it trades at a chunky
discount.
In recent years, the yuan has gained by a quarter against the Hong Kong
dollar as Beijing has re-pegged its currency higher to the greenback.
Hong Kong, however, has been told it has to retain its U.S. dollar peg,
at least until China is ready to make its yuan currency fully
convertible. Meantime, this inequitable currency match is stoking
tensions, as it transfers wealth from Hong Kong.
As Hong Kong’s integration into the rest of China accelerates, Chinese
mainlanders find bargains in everything from shopping to property to
securing cheap financing. The opposite is true in Hong Kong: The deluge
of mainland money pushes up prices and imports inflation, while a weak
currency leaves people feeling poorer.
Now it seems, this reversal in the pecking order is also taking place in
the golfing world. As Hong Kong faces relegation, mainland China’s
stock is rising. Only two weeks earlier, HSBC hosted its Champions event
just across the border at the Mission Hills golf club in Shenzhen. This
came shortly after the big-budget Shanghai Masters, sponsored by BMW,
which has been elevated to a European Tour event.
This might just be a reflection of the new order: Mainland China is
where global brands can find growth in population and spending power,
not in old Hong Kong.
Still, even if this is the harsh reality, surely there are plenty of
wealthy local companies that could back to Hong Kong? It is also
noteworthy that HSBC is happy to pour money into golf sponsorship
elsewhere, but has apparently ruled out backing its Asian hometown. It
also sponsors the LPGA HSBC Ladies Champions tournament, played in Hong
Kong’s regional competitor Singapore.
This hurts. Not only is Hong Kong the first letter in HSBC, but in the
first half of this year the bank also made a massive $3.76 billion — or
36% of its operating profit — from this city of 7 million. Together with
its subsidiary Hang Seng Bank, the group has a huge market dominance,
which helps to make Hong Kong a lucrative cash cow.
That said, there are clearly wider reasons sponsors are not rushing to
write checks. The economy looks almost ex-growth. Third-quarter figures
out on Friday showed growth edged up 0.6% quarter-on-quarter in the
three months to September — better than the 0.1% contraction in the
previous quarter, but still pretty woeful.
Recent governments have consistently underperformed. Singapore is
smaller than Hong Kong but punches above its weight in attracting global
sporting events such as Formula 1. In 2014 it will open a massive
sports stadium complex to attract international events. Similar plans in
Hong Kong never appear to get off the drawing board. Many suspect the
administration is beholden to vested property interests.
Perhaps not surprisingly, Singapore is also stealing a march on Hong
Kong as a favored regional headquarters hub. According to a new survey
by the CPA of Australia, 59% said they would opt for the Lion City. The
key factors going against Hong Kong were high property prices, a high
cost of living and pollution.
These problems in Hong Kong are not new. But now we are seeing the wider costs of inaction in dealing with them.
This should be a wake-up call. Hong Kong needs to have a vision beyond
being a costly free port for China, living off tax arbitrage.
Otherwise, it risks becoming a second-tier city that global businesses and sponsors can ignore.
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