As China’s importance as a center of apparel production grows, some wonder if Hong Kong is losing its place as the key gateway city.

Hong Kong — High unemployment, falling retail sales and low consumer confidence are just some issues affecting once-swaggering Hong Kong. HSBC Holdings PLC has publicly predicted another recession and local newspapers have gone so far as to compare the city with bankrupt Argentina.

Meanwhile, the rapid growth of Shanghai as a commercial center has some observers wondering whether that city will overtake the former British territory as a key gateway to the Chinese market.

Adding fuel to the pessimistic fire is the effect that the abolition of quotas among World Trade Organization members will bring in 2005. For China, eager to sell more of its wares abroad, there is worry about its own markets being flooded with foreign goods. For Hong Kong, which has relied on quotas and re-exporting to make it the world’s second largest exporter of garments, the challenge is to find a new niche.

Dickson Ho, assistant chief economist for the Hong Kong Trade Development Council, said how Hong Kong fares in the next few years depends not just on economics, but on attitude.

"Twenty years ago, when China opened up, Hong Kong companies went in first. And for a fair number, 2005 will be difficult," the HKTDC official said. "But, it’s a matter of choice. Is 2005 a challenge or an opportunity? It seems more likely that Hong Kong companies will take advantage of such an opening to explore Chinese markets."

Kenneth Fang, chairman of Fang Brothers Knitting and a member of the HKTDC’s garment advisory committee, concurred. His company has had factories in China for more than 20 years.

"China’s market is growing rapidly and we can expect sourcing to change," Fang said. "But Hong Kong has certain advantages in China. We speak the same language, we have been working in the Mainland a long time, we know the market well and we have technical expertise."

It is this "value-added" approach that has become Hong Kong’s rallying cry. From Chief Executive Tung Chee-Hwa to college students learning about textiles, the emphasis here is on Hong Kong’s ability to cut through Chinese red tape, while providing quality assurance, reliable banking, efficient transportation and high-caliber design. In fact, the city will soon open a design center and, according to Tung, will "examine critically whether design courses offered at tertiary institutions need to be further supported and improved in order to face new challenges."This new direction is the right one, according to Katy Lam, general manger of trade fairs for Messe Frankfurt (HK).

"If Hong Kong can’t compete on salary, then it has to find a way to add value. It can’t always be a middleman," Lam said. "Hong Kong has been a service center for the textile industry for 20 years because it has a good understanding of transportation, design and so on. That service is very important and Hong Kong plays a brilliant role in this area."

Hong Kong may be looking to develop its creative potential, but its traditional financial role won’t change overnight. Said Ho, the economist, "There are challenges on the Chinese side, too. They want to accelerate market liberalization, but the financial sector is probably the slowest. It will take at least six years for certain sectors to catch up. Plus, the Chinese currency is not convertible."

This sticking point has kept many foreign companies from investing too heavily in China and keeps them relying on Hong Kong. Lam explained, "As it stands, companies can sell their products and not get their money back. It’s immature. China has to catch up by 2005. Otherwise, it will lag behind. Right now, foreign companies must go through Hong Kong to do business in China. And banking isn’t the biggest issue because the legal system is very immature."

Hong Kong’s government business community is working to gain a legal foothold in China — while Hong Kong reverted to Chinese control in 1997, the "one nation, two systems" policy preserves some differences in the Chinese and Hong Kong legal systems. Currently, a group of Hong Kong lawyers is lobbying to have copyright issues involving foreign firms settled in Hong Kong under Hong Kong law.

"If that happens, it will really help the legal system in China," Lam said.

That Chinese cities — particularly Shanghai — are gaining in stature is clear by recent trade show attendance figures. Visitor numbers were up 30 percent at the most recent Intertextile Shanghai, while numbers have been falling at Interstoff Asia in Hong Kong. Lam said the reasons for this are numerous."China is a hot topic right now," she said. "It’s politically stable, the markets are open and there is the promise to do more. U.S., Europe and Japan are slowing down and looking for a new market, so it’s natural to go into China. Politically, it’s a big issue, too. For example, governments that might have sponsored a company to attend Interstoff Asia for 16 years are thinking maybe it’s time to look at new markets, to find new areas of promotion. In five years’ time, one or two trade fairs won’t be enough."

Still, there are no plans to write off Hong Kong.

"Those who are going to China are really going to sell in China," she said. "The fairs won’t merge because these are different locations that serve different markets."

Indeed, Messe Frankfurt’s approach — dividing China into regions — is now quite common. Beijing and Dalian serve northern China and Korea; Shanghai is central China’s gateway; and Hong Kong services southern China and the Asia Pacific region. The idea is no longer that Hong Kong is the sole gateway to China, but one of several.

Fang, the knitter, said he believes Hong Kong will remain a key commercial city as China continues to open to foreign businesses.

"China is a huge country. Sure, Shanghai is coming up very strong and it is the driving force of the middle part of China, but Hong Kong has connections in the South," he said. "Hong Kong and Shanghai won’t be competing — they will be complementary to each other."

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