Mainland China-ASEAN Economic Ties: Hong Kong, Asia’s Trading Hub

As a long-established free port, the trading and logistics industries have been the driving force for Hong Kong’s economic growth, contributing more than one-fifth of the gross domestic product. Positioning as an international business and trade hub, Hong Kong possesses some important elements, including the free-trade policy, the rule of law, a skilled workforce, well-established infrastructure, and more. Expecting stronger mainland China-ASEAN economic ties, Hong Kong is well prepared to develop as a Central Business Platform that fosters business and trading activities between the two emerging powers in the region.

In a survey conducted by HKTDC Research¹, respondents evaluated Hong Kong’s performance as a trading hub for their mainland China-ASEAN businesses. Overall, respondents were largely satisfied with the supply chain and logistics services offering in the city, given its supreme connectivity with mainland China and well-established logistics infrastructure and capabilities. Its function as a multilateral trade platform, though, is more prominent, underpinned by its free-trade policy and a high level of accessibility to mainland China and ASEAN markets for sourcing and retail/wholesale activities. Hong Kong also offers a favourable environment for tourism and MICE (Meetings, Incentives, Conventions and Exhibitions) activities, which promote the clustering of traders and enhance its status as Asia’s major trading hub.

Offering High-quality Logistics Services

Conveniently located at the heart of North and Southeast Asia, Hong Kong enjoys a unique geographical advantage and continues to serve as a pre-eminent supply chain and logistics hub in the region. In 2019, Hong Kong handled about HK$289.3 billion of the re-exports of ASEAN origin goods to mainland China and HK$212.9 billion of the re-exports of mainland origin goods to ASEAN, together accounting for 12.7% of the city’s total re-exports. Following a closer mainland China-ASEAN trade partnership, Hong Kong’s role as an important entrepot for trade between the two regions is poised to grow.

Respondents were asked to rate Hong Kong’s performance as a supply chain and logistics platform in the context of facilitating mainland China-ASEAN businesses on a scale of 1 to 5, with 1 representing the least satisfied and 5 the most satisfied. Respondents were found to be pleased with the overall quality of supply chain and logistics services offered in the city, rating it 3.65 out of 5.

In particular, respondents were found to be impressed with Hong Kong’s supreme connectivity with mainland China (4.03), underpinned by the well-established logistics infrastructure and capabilities, especially for air transport (3.97) and sea transport (3.91). In an interview, an executive manager from a public-sector organisation said: “Many companies like to choose Hong Kong as a logistics hub due to its strong air-logistics sector, world-class airport with high efficiency and professionalism in shipping valuable goods in Asia.”

In terms of the types of cargo permitted, Hong Kong imposed limited restrictions to allow greater flexibility to facilitate cross-border trade. “Hong Kong’s air-cargo flights are flexible in terms of the types of goods allowed,” said one senior promotions manager of a public-sector organisation. “For example, lithium batteries are not allowed through Chinese air-cargo flights.”

Hong Kong also offers high-quality supply chain and logistics services, features an extensive network of services providers (3.83) and a wide array of supply chain services (3.65), which further strengthen the city’s intermediary role in handling mainland China-ASEAN trade.

While Hong Kong still enjoys prominence in the industry, interviewees pointed out that the city is facing intensifying competition from other regional players. A senior project manager of a logistics company interviewed commented: “The rise of Chinese cities such as Shenzhen and Shanghai has provided Southeast Asian companies with a chance to base their sourcing and logistics operations directly in the mainland and bypass Hong Kong.”

In terms of the areas for improvement, the survey results highlighted connectivity with ASEAN (3.5) and e-commerce logistics services and solutions (3.22) in Hong Kong. Talking to senior executives, they suggested the city further upgrades the express-cargo sector and partner with ASEAN supply chain companies to ensure a wide delivery network and efficient distribution to capture the rapidly growing e-commerce businesses in the ASEAN market.

Interviewees also expressed concerns over the aging workforce. An engineering leader at a global courier delivery services company said: “A lot of highly skilled talents will become the silver class approaching the retirement age, while at the same time the industry has not done enough to attract new talent into it.” Interviewees hoped the city could provide targeted training and better compensation to tackle declining productivity as a result of an aging workforce in the frontline sectors.

Looking forward, interviewees highlighted the importance of the logistics sector with regard to embracing the digital era. To improve its competitiveness and fully serve future opportunities, Hong Kong should invest more in digitising its logistics facilities and processes, such as adopting inventory management systems backed by AI and big data and technology-driven traffic control solutions for better quality management and cost control. Interviewees urged for more government support and incentives on digital infrastructure to offset the high cost structure of the domestic logistics sector to stay competitive in the long run.

A Multilateral Trade Platform

Merchandising and trading have traditionally been Hong Kong’s strong suits. In 2019, Hong Kong was the world’s eighth-largest economy in merchandise trade and 18th-largest in commercial services. It should be noted that many Hong Kong traders also engaged in offshore trade, in which shipments do not physically pass through the city. The total sales value of goods involved in offshore trade has exceeded that of the city’s re-exports since 2007. The important role played by offshore trade could illustrate Hong Kong’s function as an international trade settlement platform.

To further strengthen its status in the international market, Hong Kong is committed to promoting bilateral and multilateral trade as well as an economic partnership. Due to the strong integration under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA), businesses based in the city can gain greater access to the market across the border. Similarly, the Hong Kong-ASEAN Free Trade Agreement opens up new market and export opportunities by progressively eliminating tariffs for a wide range of goods entering ASEAN countries and introducing other services commitments.

While Hong Kong’s role as a supply chain and logistics platform may somewhat fade with rising operating costs and intensifying competition, survey respondents were found to be more certain of its status as a trade platform between mainland China and ASEAN, with an average score of 3.72 out of 5. In particular, respondents appreciated the favourable environment to promote bilateral trade co-operation given its free-trade policy (3.9) and a high level of accessibility to the mainland and ASEAN markets for sourcing (3.85) and retail/wholesale activities (3.8), as well as the clustering of traders (3.8) in the city.

Best known for international and large-scale trade shows and sourcing events (3.88) such as the semi-annual HKTDC Hong Kong Electronics Fair, the city is seen as an ideal platform to establish business connections and expand sourcing networks. William Widjaja, Business Development Manager of ACE Hardware Indonesia (AHI), highlighted Hong Kong’s connector role, saying: “Hong Kong is seen as the gateway to connect suppliers from China to Indonesia.”

Hong Kong also offers extensive trade-related services (3.83). According to the APAC Managing Director of a leading Chinese chemical specialities producer: “Hong Kong plays a key role in serving as the co-ordinator and connector in the ASEAN-mainland China trade relationship in providing trade-related services such as financing outbound Chinese companies that want to expand into Southeast Asia.”

Despite Hong Kong’s strengths as a two-way trade platform, interviewees opined that the city needed to clarify its role in China’s Belt and Road Initiative as well as the development of the Guangdong-Hong Kong-Macao Greater Bay Area (GBA). In particular, interviewees anticipated greater collaboration with GBA cities including streamlined cross-border trade procedures and more co-location arrangements in place, such as co-location customs and one-stop quarantine. The Vice-President of a leading international freight-forwarding company interviewed said: “With the GBA initiative in place, there is an opportunity for Hong Kong to work with our Chinese neighbours to waive double inspection.”

To drive higher efficiencies in trading activities, interviewees also suggested bringing greater focus on technology adoption into daily operations and streamlining business processes for cost reduction and service quality enhancement. The city should develop core strengths in high-value trade services, including testing and certification, intellectual property trading, trade planning and management, etc., to embrace upcoming market opportunities.

Furthermore, the government and the public sector could consider providing financial incentives and organising training programmes to upskill talents by sharing best practices in trading operations. Interviewees also pointed out the importance of government support in solidifying Hong Kong’s position between mainland China and ASEAN trade, especially during uncertain periods such as Sino-US trade tensions.

Well-Connected Infrastructure for MICE

The tourism and MICE sector that promotes the clustering of traders plays a significant role in the development of a trade platform. Positioned as Asia’s World City, Hong Kong attracts millions of business and leisure travellers every year. The city was rated as one of the top 10 popular destinations for international travellers in Asia Pacific by Mastercard’s Asia Pacific Destinations Index 2019. As an integral part of tourism, Hong Kong’s MICE sector has also received worldwide recognition, crowned “Asia’s Leading Meetings & Conference Destination” for the fourth time at the World Travel Awards 2019.

In 2019, Hong Kong received 23.8 million overnight visitors. Mainland China and South/Southeast Asia have been providing the biggest source of visitors to the city, with four in five coming from these regions. Supported by key infrastructure and superior platforms for MICE, Hong Kong enjoys a premier role as a travel destination, particularly favoured by mainland China and ASEAN visitors.

Overall, survey respondents have been satisfied with the performance of Hong Kong as a tourism and MICE platform for mainland China-ASEAN businesses, with an average score of 3.85 out of 5. Many felt safe getting around Hong Kong (4.42). Transportation is well-connected with neighbouring destinations, in particular its connectivity with mainland China (4.19) and ASEAN countries (3.94), such that many visitors to Hong Kong may also travel on a multi-destination basis (4.03).

Respondents also recognised Hong Kong’s capabilities in hosting MICE activities, supported by a large number of professional exhibition and conference organisers (3.85) that arrange a variety of high-quality exhibitions and conferences (3.83) every year. Eddy Wong, General Manager of Essendant, said: “Hong Kong’s high-quality trade fairs have been contributing largely towards the city’s MICE tourism growth.” With mainland China and ASEAN being the two largest groups in terms of overnight MICE arrivals, buyers and sellers have excellent exposure to opportunities in the region.

Hong Kong’s state-of-art infrastructure and facilities (3.74) have also contributed to reinforcing the city’s position as a premier MICE destination. According to a chief marketing officer of an international trading company: “Hong Kong has been very active in developing MICE facilities and organising exhibitions for the region, as witnessed by our global recognition as a MICE centre.”

Superb infrastructure, modern venues and superior supporting services have helped tick all the boxes for MICE event planners and participants. Yet interviewees opined that one of the weaknesses of Hong Kong as a tourism and MICE platform was the language barrier (3.65). Despite improved Putonghua ability in the past decade, the standard of English has fallen compared with Singapore, as pointed out by the interviewees and suggested by the global English proficiency ranking. It is important to achieve a language capability balance in order to reinforce Hong Kong’s position as the most international city for both mainland China and ASEAN countries.

Cost efficiency (3.31) remains a challenge in the MICE sector. A senior manager of a Hong Kong-based statutory body said: “The local MICE sector has been facing rising operating costs and fierce competition against mainland cities such as Shenzhen and Guangzhou.” The high labour and rental costs in Hong Kong have driven MICE organisers to transfer increasing operating costs to end users, leading to relatively high fees for attending exhibitions and conferences. Given such circumstances, some interviewees said it would benefit Hong Kong to position itself as a venue for high-end exhibitions and conferences, which value premium services.

Looking ahead, stakeholders see the imperative for Hong Kong to continue to highlight its reputable brand in tourism and MICE and to build on being a melting pot of diverse cultures. To attract more international tourists, interviewees suggested highlighting and promoting the city’s unique mix of East and West cultures and traditions, through collaborating with airlines and hospitality service providers, and infusing with technological applications to improve the touring experience. Being a food paradise, an interviewee also proposed the idea of an Asia Michelin Stars restaurant rating system, catering to the rising regional tastes.

To strengthen Hong Kong’s position as a leading MICE destination in Asia, some interviewees recommended promoting a technology-embedded environment for MICE activities. Extending connectivity for free public Wi-Fi and adopting smart technologies such as augmented reality applications and routine task automation at frequent visitor touchpoints are some examples suggested to cultivate MICE activities in Hong Kong.

¹ HKTDC Research commissioned Deloitte Advisory (HK) Ltd. to conduct a study on Hong Kong’s competitiveness as a Central Business Platform for trade and business between mainland China and ASEAN through a combination of in-depth company interviews and online surveys in late 2018 to early 2019.

A total of 304 senior executives in private and public sectors were interviewed for their experiences in leveraging Hong Kong. In addition, 115 survey responses were collected on the strengths and weaknesses of Hong Kong as a mainland China-ASEAN Central Business Platform in six key areas: (i) trade; (ii) supply chain and logistics; (iii) international finance; (iv) tourism and MICE; (v) start-up and incubation; and (vi) legal services.