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China using Shenzhen to hedge its bets and reduce reliance on Hong Kong as gateway to West

HONG KONG — China is using Shenzhen to hedge its bets and reduce its reliance on Hong Kong, the gateway to the West that is caught up in political turmoil, according to Mr Water Cheung, Asia-Pacific chief executive for Storm Harbour Securities, a global markets and financial advisory firm.

Shenzhen is becoming increasingly important in Beijing’s plans to draw talent and international investment.

Shenzhen is becoming increasingly important in Beijing’s plans to draw talent and international investment.

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HONG KONG — China is using Shenzhen to hedge its bets and reduce its reliance on Hong Kong, the gateway to the West that is caught up in political turmoil, according to Mr Water Cheung, Asia-Pacific chief executive for Storm Harbour Securities, a global markets and financial advisory firm.

“If I am Beijing, I would definitely try to hedge this situation, in terms of promoting Shenzhen as another international city,” said Mr Cheung, who has 30 years of experience in investment banking. “I think they have no choice [but to reduce reliance on Hong Kong] – this is still the door to the Western world”.

Hong Kong has faced unprecedented unrest against the government and Beijing, for almost three months.

Questions have been raised about whether Hong Kong’s role in the Greater Bay Area – a planned powerhouse to rival the US’ Silicon Valley – will be lessened due to the protests.

Amid the turmoil, Beijing last week announced Shenzhen – north of the border – will become a global model city. Reforms would cover the legal, financial, medical and social sectors, and international organisations would be encouraged to set up there.

Shenzhen was where China’s market reforms began 40 years ago. It is now a hi-tech powerhouse – home to DJI, the world’s largest commercial drone maker, Tencent, the world’s largest gaming company, and Huawei, the world’s largest supplier of telecoms equipment – and one of China’s 18 free trade zones.

Last year the city’s economy surpassed Hong Kong for the first time. In the second quarter this year, Hong Kong’s gross domestic product (GDP) slowed to a less-than-expected 0.6 per cent year-on-year increase.

Meanwhile escalating protests are harming businesses, including the high profile case of flag carrier Cathay Pacific, which complied with demands from mainland China’s aviation regulator, leading to the resignation of its then-CEO Rupert Hogg.

“Businesspeople want to stay low key and not need to volunteer what cards they are carrying,” said Cheung, who is a member of YPO, a non-profit network of young chief executives. “Forcing businesses to declare their political loyalties or allegiance – I really do not think that is a good thing.”

While he thinks companies that do business in China will stay, “if the environment is such that everyone needs to declare their political stance, I think that will scare a lot of [multinational corporations] off,” prompting them to set up headquarters in cities like Singapore.

A total of 60 per cent to 70 per cent of deals by Storm Harbour Securities’ Hong Kong branch are China-related. It focuses mainly on private transactions for companies raising capital a couple of years before listing, and helps Chinese companies expand abroad in high-growth industries like real estate, mining and infrastructure.

Hong Kong will, however, remain an Asian financial hub that cannot be replicated by Shenzhen, argued Mr Cheung.

The Hong Kong dollar is pegged to a hard currency of the US dollar, while China’s yuan is closely controlled and not convertible. “China probably will still want to keep that under tight control,” he said.

“Of course, technically Shenzhen can always carve out a district and make it exactly the same as Hong Kong,” with free internet and an open market. “But then you need to create a new border”.

Meanwhile, soft skills like strong talent will keep Hong Kong competitive, as well as economic benefits given by China.

“We have attracted a lot of quality professionals from legal to accountants,” who are traditionally trusted by Chinese businesses for their professionalism and fair play, according to Mr Cheung. “For the tech sector, I think it is unrealistic to think we will overtake [Shenzhen]. I think the service industry, including finance and tourism, will remain very strong”.

“Even if Shenzhen builds an airport 10 times bigger than ours, builds four bridges or another 10 industrial parks, you cannot replicate. To make Hong Kong special, you need to build upon those soft skills,” he said.

Mr Cheung predicted Beijing could give “economic goodies”, to make Hong Kong “more rulable”, including things like encouraging more tourists to travel to Hong Kong, giving local companies preferential status in China or having more mainland companies list on the city’s stock exchange.

“I think China will make Hong Kong richer, but not more important. There is a difference between rich and important – important means you are indispensable, unique. Some say the ‘big bay concept’ is a hedge. I think the effort is in that direction,” said the CEO. SOUTH CHINA MORNING POST  

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