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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

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From Our Correspondent: Making Enemies
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Asiaweek Time Asia Now Asiaweek story


That's Hong Kong. Can it remain competitive as costs fall elsewhere?

By Cesar Bacani

How they compare Find your city on the list of the world's most expensive places to live

A THREE-BEDROOM FLAT RENTING FOR $12,000 A MONTH? Ask Donald Tsang Yam-kuen about it. Hong Kong's financial secretary has a ready answer to complaints about stratospheric business and living expenses in the SAR. "Wh at's the point of being cheap if you cannot make money?" he asks. "What is important is that, despite the cost, you are able to make a lot of money in a very convertible currency. We offer a wholesome menu of low taxation, hardly any government interventi on, a very well-developed legal system where the rule of law is paramount, a level playing field with no import duty, and a completely free flow of information." And, he might add, proximity to, and cultural affinity with, the vast markets of China.

Solid arguments - except that few companies in Hong Kong are profitable these days. More and more are beginning to look at controlling costs to contain the red ink. "There are signs that many Hong Kong offices that used to be regional headquarters are rel ocating to Singapore," says John Koh, head of executive recruiting at Drake International in the island republic. "All things being equal, if one place is more expensive, it makes sense for businesses to consider leaving." In June, the Royal Bank of Scotl and confirmed it was closing its Hong Kong base to focus on its Singapore office. Earlier, Volkswagen moved to Beijing and opened centers in Singapore and Tokyo. The list of refugees include German airline Lufthansa and cable TV channels CNBC and ESPN Sta r Sports.

Just how expensive is Hong Kong? Very, according to a survey by the Corporate Resources Group. The Swiss business consultancy says the SAR has surpassed Tokyo as the world's costliest city in U.S. dollar terms. The Japanese capital was No. 1 last year whe n Hong Kong was in second place. Singapore, the eighth-most expensive business center in 1997, has slipped to No. 13 thanks to the 14% devaluation of its currency since a year ago. The CRG ranking was based on the prices of 145 goods and services and nine types of rental housing in 150 cities worldwide. In an exclusive release to Asiaweek, CRG made available the prices of selected items for seven cities. Jakarta emerges as the cheapest city in Southeast Asia because of the rupiah's 82% fall against the do llar.

A bargain, it must be said, only for dollar-earning expatriates and Western tourists. In the local currency, prices have actually rocketed. Year-on-year inflation in Indonesia is currently galloping at 56.7%. The two other countries badly hit by the Asian crisis - Thailand and South Korea - have managed to keep price increases below 11%, but a blow-out is expected if their economies dive deeper into recession. Even Malaysia (inflation rate: 6.2%) is hurting. Housewife Ann Ng has just returned to Kuala Lum pur after seven weeks visiting relatives in Canada. "A bag of onions which would have cost three ringgit before I left now goes for seven ringgit!" she exclaims. Ng hates to cut down on food for the family, but worries she may be forced to do just that.

At least the world's most expensive city, whose currency is pegged to the greenback, is spared the worst of a price bubble. Hong Kong's year-on-year inflation in June decelerated to 4%, down from the 8% levels of recent years. Property prices in the SAR h ave fallen some 40% from their peak last year because of the government's commitment to affordable housing and the economy's 2% contraction in the first three months of the year. "If someone were to do a survey now, they would find that the cost of livi ng is not as high as the last time they did it," says Tsang. (The CRG ranking was based on March prices.) "We have seen a massive reduction in rental value, up to 60% in the last few months, and wages are going down. The adjustments are taking place."

The problem is that Singapore is adjusting too. The consumer price index there actually fell 0.2% year-on-year in June. As a base for Southeast Asian business, the island city is the only credible rival to Hong Kong in infrastructure, financial expertise and other business needs, at least while Shanghai is still rebuilding its past glory as a regional financial and commercial center. Rents and other business expenses may be far lower in Bangkok, Jakarta, Kuala Lumpur and Manila, but the level and quality of services in those cities, including the legal systems, have a long way to go. As Jurgen Kracht, managing director of Hong Kong-based consultancy Fiducia, puts it: "There is no use having low costs if you don't have much business potential."

Singaporeans are bent on making their nation more attractive. Earlier this year, subcommittees of the group studying the country's competitiveness released wide-ranging recommendations. The expectation was that the government would take its time to implem ent them. But perhaps because of the Asian crisis, Deputy Prime Minister Lee Hsien Loong, who also heads the Monetary Authority of Singapore, has been moving swiftly. Among the reforms already in train: tax concessions and easier entry for fund-management companies, and flexible government oversight of strong banks but stricter controls on weaker ones. Efforts to strengthen the banking system got another boost last week with the purchase by DBS Bank of the postal savings bank. Expect changes in insurance, securities and debt instruments too.

Hong Kong believes it still has the advantage. For one thing, Singapore has yet to match its simple tax system. The SAR caps corporate taxes at 16% of gross profit. Singapore has a flat business tax of 26%, though it offers a number of targeted incentives to financial institutions and transport and logistics companies. "We don't believe as an administration in 'boutique jobs,'" says finance czar Tsang. "While the [overall] market expands and others will find areas to specialize in, like Singapore and fore ign-exchange dealing, Hong Kong has no rival on the wider front of financial services. We continue to upgrade our technology and our products. I welcome competition, but I am not worried that someone will overtake us soon."

Above all, there is economically vigorous China. Even before its 1997 return to Chinese sovereignty, Hong Kong marketed itself as the gateway to the mainland. "Limited by the relatively small size of their domestic economies, the success of Singapore and Hong Kong will hinge largely on the development of their international markets," the Hong Kong Trade Development Council noted in a recent report. "China's plan to issue offshore bonds to fund part of its ambitious infrastructure projects and the mainland companies' future equity-raising activities overseas will be in Hong Kong's advantage." In contrast, Singapore is closer geographically to Indonesia and Malaysia, whose economies are in recession.

Some corporations, however, are by-passing Hong Kong to go straight to China. In the CRG survey, Shanghai, Beijing and other Chinese cities boast cheaper costs than the SAR. That is not the only consideration. Volkswagen, for example, says it moved to Bei jing simply to be closer to its customers. Last December, the Fiducia consultancy surveyed about 200 European companies in China. Six of 10 firms headquartered in Hong Kong wanted to move to Shanghai or Beijing. By 2000, says Fiducia, only 7% of the total respondents expected to be based primarily in the SAR. "The more foreign companies move to China, the less trade there will be between the mainland and Hong Kong," warns Fiducia's Kracht.

But he says Hong Kong could still host "virtual head offices" in the foreseeable future. Most foreign manufacturers in the mainland tend to have their legal office in Beijing, a sales-and-marketing center in Shanghai and a base for finance and human resou rces in Hong Kong. The bottom line: talent and expertise are more plentiful in the SAR, whose infrastructure, open financial rules, full currency convertibility and other advantages are also highly prized. Shanghai continues to build office towers, hotels , apartment buildings and shopping malls in its new Pudong financial district. But they are fairly empty. It will take years for the needed software - people, expertise, regulations, transparency - to be put in place.

Hong Kong can also draw comfort from the fact that expense, at least for banks and other finance companies, is not yet the key determinant for deciding where to set up offices. "It's a question of costs and quality, not just comparing the cost of a square foot [of office space] in Hong Kong versus Penang [in Malaysia]," says Venky Krishnakumar, head of operations and technology at Citibank in Singapore. "When we had to choose a regional center for equity derivatives, we chose Hong Kong. For trade processi ng, we chose Penang, because we can afford to build skills there and still come out at the right cost. For our data operations center, we came to Singapore."

That said, cost-cutting remains important in Hong Kong since the region's cheaper cities are not standing still expertise-wise. Remember that $12,000-a-month lease for a three-bedroom apartment? A similar flat in Singapore in the equivalent prime area wa s going for about a third of that in March. Office space? In April, says property consultant Jones Lang Wootton, the average rent in Hong Kong's central business district was $954 per square meter per year. In Tokyo, once host to the world's costliest rea l estate, it was only $659 - and that was when the yen was at 132 to the dollar (it closed at 142 on July 28). Tsang insists that Hong Kong's currency will remain pegged to the greenback, so cost-cutting via a devaluation is not an option. "But we are wor king hard to enhance our competitiveness," he says. Wait for the results of CRG's next round of cost-of-living surveys later this year.

--With reporting by Andrea Hamilton/Singapore, Rose Tang/Hong Kong, Alexandra A. Seno/Hong Kong and Santha Oorjitham/Kuala Lumpur

This edition's table of contents | Asiaweek home



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Philippine government denies Estrada's claim to presidency

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Japan claims StarLink found in U.S. corn sample

Thai party announces first coalition partner


COVER: President Joseph Estrada gives in to the chanting crowds on the streets of Manila and agrees to make room for his Vice President

THAILAND: Twin teenage warriors turn themselves in to Bangkok officials

CHINA: Despite official vilification, hip Chinese dig Lamaist culture

PHOTO ESSAY: Estrada Calls Snap Election

WEB-ONLY INTERVIEW: Jimmy Lai on feeling lucky -- and why he's committed to the island state


COVER: The DoCoMo generation - Japan's leading mobile phone company goes global

Bandwidth Boom: Racing to wire - how underseas cable systems may yet fall short

TAIWAN: Party intrigues add to Chen Shui-bian's woes

JAPAN: Japan's ruling party crushes a rebel at a cost

SINGAPORE: Singaporeans need to have more babies. But success breeds selfishness

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