CHINA

THE SKY’S THE LIMIT: The office directory at the 88-storey International Finance Centre is evidence of the growing mainland footprint in the city. REUTERS/BOBBY YIP Beijing has struggled to tame Hong Kong politically. But in business it’s a different story as mainland Chinese companies consume ever bigger chunks of the city’s economy. The mainland’s colonisation of the Hong Kong economy

BY CLARE BALDWIN, YIMOU LEE AND CLARE JIM

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ELITE LINE-UP: Hong Kong’s business leaders pose for a group picture with President Xi Jinping (front row, centre) in Beijing. Xi is flanked on his left by Li Ka-shing, Asia’s richest man, and on his right by Tung Chee-hwa, the former chief executive of Hong Kong. REUTERS/LI XUEREN/XINHUA

HONG KONG, DECEMBER 31, 2014 And it is here, in the city’s business sec- business invasion of the city. tor, that China is inexorably tightening its One of the most telling signs of change hen Xi Jinping wanted to de- grip on the former British colony. Even as is the space mainland Chinese compa- liver a political message to Hong Beijing struggles to tame Hong Kong po- nies lease in Central district, the heart of WKong as protesters demanding litically, Chinese companies are consuming Hong Kong’s financial centre. These firms free elections were threatening to take to ever bigger chunks of the city’s key sectors now account for over 50 per cent of new the streets, he summoned the tycoons who including real estate, finance, power, con- leases signed for offices there, according dominate the city’s economy. The words struction and the stock market. to a September report from Hong Kong- from the Chinese leader at the September Many of these industries have for de- based brokerage CLSA. That’s up from 20 22 meeting in Beijing were uncompromis- cades been dominated by the business ti- percent in 2012, the report said. ing but not surprising. He would not enter- tans who attended the meeting with Xi. The trend is the same in all major busi- tain any demand for full universal suffrage Men like Li Ka-shing, Asia’s richest man, ness districts. Mainland occupancy of 25 in Hong Kong, according to two people casino and hospitality billionaire Lui Che- key Grade A office buildings, or prime who attended. woo and palm oil magnate Robert Kuok. office space, in the districts of Central, Just six days later, pro-democracy activ- Now they are witnessing a mainland Admiralty, Sheung Wan and Wan Chai ists made good on their threat, unleashing increased from 13 percent in 2008 to 21 more than two months of street demon- They like landmark percent earlier this year, according to com- strations. But while Xi’s message that day properties, high-profile buildings. mercial real estate services firm CBRE. in the Great Hall of the People failed to de- They often like naming rights if it’s “We do expect more mainland finan- ter the protesters, in speaking directly to the cial firms moving into Hong Kong,” said city’s business and professional elite he was available. Simon Smith, senior director of research showing where Beijing believes real power Simon Smith and consultancy at real estate services pro- in Hong Kong resides. Savills Plc in Hong Kong vider Savills Plc in Hong Kong. “They like

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XI’S VISITORS: Robert Kuok (left) attended the September 22 meeting with President Xi Jinping, along with Li Ka-shing (right) and more than 60 other members of Hong Kong’s business elite. REUTERS/CHINA DAILY; TYRONE SIU

landmark properties, high-profile build- (COLI) and one to Poly Property Group. and Guangzhou just across the border. ings. They often like naming rights if it’s “Price is not an issue for them,” said a In 2011, a chapter was dedicated to available.” former senior executive of a Hong Kong- Hong Kong for the first time in China’s listed developer who was responsible for five-year blueprint for national economic ‘PRICE IS NOT AN ISSUE’ bidding at land auctions before he left the development. The 12th Five-Year plan, cov- The office directory at Hong Kong’s company in June. “That’s why they offered ering the years from 2011 to 2015, lays out 88-floor International Finance Centre prices that surprised everyone.” how Beijing wants to connect Hong Kong has a growing number of mainland com- A spokesperson for Poly said the com- with the Pearl River Delta’s increasingly panies on the list. Among them is China pany had no comment. COLI did not re- prosperous middle class consumers. Development Bank International Holdings spond to questions sent by email. ‘IT WILL BE LIKE NEW YORK’ Ltd, which held its opening ceremony in While it was predictable business ties 2011 and serves as the offshore investment would expand after the 1997 handover, Under the plan, Hong Kong would be firm of China Development Bank, the Beijing has made it clear that economic in- a leader for the region in shipping, trade, country’s biggest policy lender. tegration is central to reinforcing its sover- services and distribution. In finance, Hong “If you go to the International Finance eignty over Hong Kong, which is ruled un- Kong would serve as an offshore market for Centre now and compare it to five years der the one country, two systems model that the mainland currency, the renminbi. ago, it’s very easy to see that there are many affords the city’s 7.2 million residents broad New transport links from Hong Kong more Chinese enterprises represented,” personal freedoms. Part of Beijing’s vision is now under construction, including a high property analyst Nicole Wong, an author of to draw Hong Kong into a Pearl River Delta speed rail to Guangzhou and a bridge the CLSA report, told Reuters. mega-economy that would also include the across the Pearl River Delta to the main- In a market accustomed to stratospheric giant southern Chinese cities of Shenzhen land city of Zhuhai near Macau, would al- land prices, state-owned Chinese develop- low the rapid movement of commuters and ers this year stunned long-established local visitors. property giants with winning bids exceed- “It will be like New York where you have ing auction forecasts by up to 20 per cent. Of people working in Manhattan and living on the six available plots sold since the middle 40.7 million Long Island or in New Jersey and commut- of last year in Kai Tak district, one of Hong The number of mainland visitors ing in to work every day,” said Hong Kong Kong’s largest developments of residen- to Hong Kong last year. entrepreneur Allan Zeman, who developed tial and commercial complexes, two went the pub and restaurant area to China Overseas Land & Investment Source: Hong Kong’s Tourism Commission popular with expatriates. “People who can’t

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have a home here (in Hong Kong) will live in Shenzhen and be able to come here in Footprint of mainland firms in HK 10 minutes.” Occupancy by company origin, in percent The mainland’s construction behe- moths, including state-owned China State China Hong Kong EU U.S. Japan Others Construction International Holdings Ltd, are also grabbing market share. 2008 13% 37% 21% 16% 4 9 Hong Kong’s permanent secretary for Development (Works), Wai Chi-sing, said in an interview that while mainland firms 2014 21% 34% 17% 17% 3 8 accounted for less than 15 percent of public works contracts by value in the mid 1990s, they now accounted for more than a third. Note: Based on 25 key Grade A office buildings in Central, Admiralty, Sheung Wan, and Wan Chai. Source: CBRE Research While mainland Chinese companies are rapidly expanding into Hong Kong, Western banking and financial institu- tions still have a strong presence in the city. Global bank HSBC Holdings Plc, for in- NOT ALWAYS AMICABLE stance, employed more than 28,000 people Rather than foster understanding, growing Hang Seng in Hong Kong at the end of 2013. economic integration has at times raised Index shares For Beijing, growing economic clout tensions. One source of friction is the real Weightings by share type - in % has not been mirrored by increased popular estate market where wealthy mainland support. Frustrated by Hong Kong resi- Chinese have bought up property in Hong Red Chip Other HK-listed dents’ lack of identification with the main- Kong, helping to push up home prices that mainland land 17 years after the handover, China has are already out of reach for many of the companies at times resorted to covert means to bolster city’s residents. its control. Earlier this month, for instance, “One might have assumed that the in- 12.22 Reuters reported that retired Hong Kong flow of mainland money and companies policemen were part of a mainland-led and people here, and the favorable eco- 16.08 surveillance operation to tail leading pro- nomic policies of the mainland should have 46.09 democracy figures in the city. increased emotional integration rather than Although the street protests ultimately just economic integration but it hasn’t,” said 25.61 petered out, at their height they drew tens David Zweig, chair professor of social sci- of thousands, presenting Xi Jinping with ence at Hong Kong University of Science his most serious popular challenge since he and Technology. “For the rich people here, H Share HK Ordinary took power two years ago. While the pro- the heart has followed the dollar but for the testers have demanded full universal suf- middle class and for students it hasn’t.” H Shares: Shares of a company frage, the mainland authorities insist that That’s been evident, at times, on the incorporated in China that is listed only a handful of Beijing-vetted candidates streets of Hong Kong. While the growing on the Hong Kong stock exchange. can stand in the next elections for the city’s influx of mainland tourists has been good Red Chips: Shares of mainland political leader in 2017. Hong Kong’s cur- news for the city’s retailers – the number Chinese companies incorporated outside and listed rent chief executive, Leung Chun-ying, got of Chinese visitors catapulted from 28 mil- in Hong Kong. the backing of Xi and Premier Li Keqiang lion in 2011 to 40.7 million last year – in- during a visit to Beijing last Friday, accord- teractions between mainlanders and Hong Source: Hang Seng Indexes Company Limited ing to reports in China’s state-run media. Kong residents are not always amicable. The Hong Kong and Macau Affairs In one incident that made headlines ear- Office in Beijing and Leung’s office did not lier this year, locals got into a scuffle with respond to questions sent by Reuters. a mainland couple who had allowed their

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UMBRELLA REVOLUTION: Growing economic integration has not yielded greater popular support among Hong Kong residents for Beijing. REUTERS/DAMIR SAGOLJ

toddler to urinate in the street. the Chinese leader’s remarks. Instead, Xi altering any of its policies and urged the ty- “Hong Kong without the mainland- appeared to signal that the city’s troubles coons to support the city’s chief executive. ers would be a very small city,” says Allan were relatively minor compared to other He also said the Hong Kong economy was Zeman, explaining the business elite’s at- problems in his in-tray. falling behind those of Singapore, Taiwan titude to the growth in tourism. “Ocean Before commenting on Hong Kong, and South Korea. Park and Disney without the mainlanders Xi gave some of the richest men on earth Li Ka-shing, Lui Che-woo and Robert would be nowhere. They’d be losing mon- a tour of China’s foreign policy challenges. Kuok, three of the tycoons who were part of ey.” Zeman developed Ocean Park, one of He told the tycoons that China was now a the delegation that met Xi, did not respond the city’s main amusement parks. major force in the world and most of his at- to questions from Reuters. When Xi met the delegation of ty- tention would be focused on ties with big- DOWNPLAYING THE PROTESTS coons and professionals on the eve of the ger nations including the U.S. and Russia, demonstrations, he gave no indication he the delegate said. In an interview earlier this month, another was worried, according to one delegation When he eventually turned to Hong delegate, former Hong Kong Law Society member who gave Reuters an account of Kong, Xi said Beijing had no intention of president Ambrose Lam said Xi had ruled

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out any departure from the guidelines al- ready laid out for the city’s political future. Yuan deposits in HK Without citing the Chinese leader directly, Total RMB deposits RMB deposits as % of total deposits Lam said he didn’t think the protests were a in HK (LHS) -in bln in HK banking system (RHS) big issue for the Chinese leadership. It would have been different, he said, 1000 15 if they had happened 30 years ago when Hong Kong’s economy was more impor- tant to China. But the city’s gross domestic 800 12 product is now only 3 percent of China’s, he added. At the time of the handover in 1997, it was almost a fifth. 600 9 Still, summoning the city’s business lead- ers suggests Beijing may be more concerned than it is prepared to acknowledge. The 400 6 city’s business leaders were also called to the capital in the aftermath of a 500,000-strong protest in 2003 when China attempted to 200 3 introduce controversial new security laws. The proposed laws were withdrawn and the then chief executive, Tung Chee-hwa, was 0 0 eventually forced to resign. 2010 2011 2012 2013 2014 As the mainland ponders how to con- Source: Thomson Reuters Datastream/Hong Kong Monetary Authority tain demands for political change, its eco- nomic footprint in Hong Kong continues to expand. In retail banking, subsidiaries of mainland banks operate nearly 500 branch- been making inroads into the local stock Kong into the Chinese grid would create es in Hong Kong, accounting for about 40 market. They now account for 54 percent competition for the city’s dominant local per cent of the total number of branches, of the companies traded on the Hang Seng utilities – CLP Holdings, backed by the according to figures from SNL Financial, a Index. wealthy Kadoorie family, and billionaire Li financial service research company. Ka-shing’s Power Assets Holdings – and MAINLAND GIANTS MAKE Hong Kong’s financial system has also further strengthen Hong Kong’s ties with INROADS become more intertwined with the main- mainland China. The two local firms have land, especially as it has emerged as the pre- As part of Beijing’s plan for the Pearl River enjoyed guaranteed returns for decades mier hub for offshore renminbi business. Delta, Guangdong and Hong Kong will under what is known as the Scheme of The market in so-called dim sum bonds, seek to integrate their transport, energy Control. bonds denominated in renminbi but issued and power grid infrastructure. For its part, But the mainland grid giants are mak- outside the mainland, is rapidly closing on the Hong Kong government is pushing ing inroads. China Southern Power Grid its Hong Kong dollar counterpart. to boost electricity imports from main- last year bought a 30 percent stake in CLP’s The bonds, named after a popular Hong land China to reduce pollution and the power unit Castle Peak for $1.6 billion, Kong cuisine, were first issued in 2007. dominance of two local utilities backed by while State Grid Corporation of China Since then, the outstanding value of dim powerful families, say industry experts who spent about $1.2 billion to buy into the lo- sum bonds has soared to around 700 billion have been involved in consultations with cal initial public offering of HK Electric renminbi, according to industry estimates. the government. Investments, a spinoff of Power Assets, That’s nearly 60 per cent of the value of Hong Kong’s grid is not interconnected early this year. Hong Kong dollar bonds, according to data with China Southern Power Grid, which Hong Kong’s Environment Bureau said compiled by the Asian Development Bank. supplies electricity to Guangdong and four in an email response that importing elec- And mainland companies have long other southern provinces. Plugging Hong tricity from mainland China was one of

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TALKING HEADS: Xi Jinping expressed support for Hong Kong Chief Executive Leung Chun-ying (right) after the protests in the city ended. REUTERS/KIM KYUNG-HOON

two options under consideration. CLP and Club (LRC) and the Hong Kong Golf FOR MORE INFORMATION Power Assets did not respond to questions Club, members say there is definitely more Clare Baldwin sent by email. Mandarin being spoken. [email protected] One area where mainlanders have yet “Mainlanders haven’t quite got in any Yimou Lee to make headway is the city’s elite clubs. meaningful way into the clubs,” says a [email protected] With the exception of some clubs like the Hong Kong resident who is a member of Clare Jim Aberdeen Marina Club and the Jockey three clubs. “But it is only a matter of time.” [email protected] Club which offer hefty debentures, it is dif- Bill Tarrant, Enterprise Editor ficult for newcomers like mainland Chinese Additional reporting by Anne Marie Roantree, [email protected] to get membership as some of these estab- Saikat Chatterjee, Charlie Zhu, Xiaowen Bi, Peter Hirschberg, Asia Investigative Editor lishments have waiting lists that can be as Michelle Chen, Michelle Price, Donny Kwok [email protected] long as 20 years. and Lizzie Ko. Writing by David Lague. Editing Michael Williams, Global Enterprise Editor But at places like the Ladies Recreation by Peter Hirschberg and Bill Tarrant. [email protected]

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