Can Shanghai’s new free trade zone knock Hong Kong off its perch? Unless it can copy the Chinese city-state’s highly developed rule of law, it’s unlikely. But Hong Kongers can’t be complacent. Shanghai may yet turn its sights on other things the city-state holds dear – like its low taxes, and luxury-hungry tourists.
Hong Kong billionaire Li Ka-shing is worried, because social tensions in the city state are rising. Dockers at one of Li’s container ports went on strike in March. The populist Occupy movement, fuelled by impatience for democratic reforms and anger over inequality, could damage the city’s business-friendly reputation, just as Shanghai’s starts to improve.
Shanghai’s detractors argue that rule of law matters more. Hong Kong’s transparent, bilingual legal system protects foreign firms, and isn’t easily duplicated. Compared with the mainland, the city’s common law courts are transparent and companies expect contracts to be honoured.
The rule-of-law camp is probably right. But there are two areas in which Shanghai could steal a march. It could take over as the main location for trading China’s partly-convertible currency. Looser regulation may make Shanghai an attractive place to do those trades – especially if it proffered a banker-friendly tax regime to rival Hong Kong’s 17 percent top rate, and expat-friendly schools and healthcare. China may even offer uncensored access to blocked websites like Facebook within the zone to put foreign workers at ease.
Luxury could be another target. Mainland customs duties of up to 65 percent on high-end products currently drive rich shoppers across the border. The mainland accounts for 72 percent of Hong Kong’s tourist arrivals. Shanghai’s planners haven’t yet mentioned luxury tariffs, but as China’s recent free trade agreement with Switzerland on high-end watches showed, anything is possible. A third of China’s dollar millionaires live in and around Shanghai, according to Hurun’s 2013 wealth report.
In the long run, Hong Kong can’t rely for growth on artificial advantages like luxury taxes and currency controls. One alternative might be to build better ties and travel with nearby mainland cities like Guangzhou and Shenzhen in preparation for a future urban mega-merger. Hong Kong’s experience and unrivalled rule of law would put it in a good position to lead that kind of experiment. And that would ensure that Shanghai’s rise needn’t be Hong Kong’s fall.