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Getting with the Programme

  Guangdong-Hong Kong cooperation during the latest Five-Year-Programme should be a process of market

Guangdong-Hong Kong cooperation during the latest Five-Year-Programme should be a process of market integration, a move from manufacturing to marketing in the PRD (Photo: iStockPhoto.com)

The period of the 12th Five-Year Programme (FYP) will be crucial in the transformation of the Chinese economy and society in general. The plan promises to usher in a people-centred, consumer-oriented era for the country as a whole. 

The transition from “made in China” to “made for China” will be at the heart of the new programme. This involves building “a domestic market ranked as one of the largest in the world” – a goal formally endorsed at the Fifth Plenary Session of the 17th CPC Central Committee. 

Long-term development demands the emergence of a large middle-income group. Only then will China offer the basis for sustainable development. This is a key reason why expanding domestic demand has become the primary task of the 12th FYP. 

Path Ahead  

Guangdong-Hong Kong cooperation during the 12th FYP period should see a move from PRD manufacturing  

In pursuing PRD integration, the market system will eventually have to be compatible with the Hong Kong system (photo: EPN)

 
Despite its huge potential, China’s domestic market faces institutional development hurdles. The China market is highly controlled and characterised by high transaction costs. 

“Made in China” owed its rise over the past three decades to the international market rather than the local one. The “front shop, back factory” model, which gave Guangdong-Hong Kong cooperation its great economic benefits and competitive edge, was actually a combination of advantages enjoyed by the Pearl River Delta (PRD), with its low production costs and a multinational-dominated international market and supply chain. 

Even now, Guangdong-Hong Kong cooperation has yet to shake off this basic pattern and penetrate the PRD local market. This is true for PRD-based manufacturing started by Hong Kong manufacturers, as it also is for PRD services based on the Closer Economic Partnership Arrangement (CEPA).

Thanks to PRD manufacturing upgrades in recent years, tremendous headway has been made in extending the local industrial chain. Virtually all production materials used in traditional industries are made in China. 

The main markets for these “made in China” intermediate products, however, are outside, rather than inside, China. This makes China the biggest source of imports for “made-in-China” raw materials and supplies. But re-imports of mainland origin have accounted for more than 20 per cent of Guangdong’s imports since 2000. That percentage exceeded 25 per cent in Dongguan. 

As to PRD services promoted by CEPA, apart from real estate developers, 60 per cent of Hong Kong-invested services providers are engaged in logistics, freight forwarding and other activities in the service of manufacturing in the PRD. These Hong Kong services providers have yet to gain substantial access to the PRD market. Guangdong-Hong Kong cooperation is still based on external markets and is an export-oriented economic integration. The PRD and Hong Kong are still two separate markets. 

Market Integration

  In pursuing PRD integration, the market system will eventually have to be compatible with the Hong K
 

Guangdong-Hong Kong cooperation during the 12th FYP period should see a move from PRD manufacturing to PRD marketing (photo: EPN) 

Market integration should be the logical progression of Guangdong-Hong Kong cooperation during the 12th FYP period. This would mean moving from PRD manufacturing (made in China) to PRD marketing (marketed in China). 

There will also be a transition from export-oriented economic integration to real integration of local and overseas markets; that is, market integration in a substantial sense. Seen from the long-term prospects of development in the Greater PRD, the rise of Hong Kong and Guangdong as a major city cluster requires not just world-class manufacturing and trade, but also an internationally competitive market system. That system has to be free and open, featuring the integration of internal and external markets and world-class manufacturing, logistics and consumption. 

Market integration has to include a number of key features. First, there has to be a unified process of commodity inspection and certification for manufacturing in the PRD. That will provide a process-driven means for a transition from manufacturing to becoming a market, ultimately achieving the integration of the PRD consumer market. 

There should also be unified market access for PRD services industries in order to achieve the integration of a services market. Finally, unified rules are required for the PRD market, including standards for goods and services and a system of market regulation. 

The Hong Kong Model

To achieve these objectives, other tasks need to be kept in mind, including deepening the domestic market’s structural reform. This involves lifting government economic controls and eliminating unreasonable market rules, which are the fundamental reasons for high transaction costs. It is also necessary, eventually, to make the market system compatible with the Hong Kong system. 

Guangdong as a pilot province should take the lead in building an efficient market system with low transaction costs, combining internal and external markets in cooperation with Hong Kong. This represents a great opportunity for a cooperative transition in the Guangdong-Hong Kong relationship and, at the same time, its biggest challenge.

For more on the Chinese mainland market, please see the March issue of the HKTDC Trade Quarterly, which can be ordered at http://bookshop.hktdc.com/. 

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