The China Connection

Thirteen years before Chinese leader Deng Xiaoping made his famous Southern Tour, Jeffrey Lam made
one of his own. Just five years out of college, Lam traveled to the city of Dongguan in Guangdong province
to set up a small factory to produce parts for his family's Hong Kong toy company. The year was 1979, and
China had just begun to open up its economy. Unlike Deng's 1992 trip, which revitalized a wavering reform
program, Lam's voyage won't make it into the history books. But his efforts, and those of thousands of other
Hong Kong businessmen like him, helped turn neighboring Guangdong—and hence China itself—into an
economic giant. "If it hadn't been for Hong Kong," says Guan Zhisheng, an economist at Sun Yat-sen
University in Guangzhou, "then there wouldn't have been any reform and opening up in Guangdong."
As Hong Kong marks the 10th anniversary of the end of British rule, there has been no shortage of debate
over the question of China's influence over its reclaimed territory. What about the opposite? When Deng
put the mainland on the path that led to the end of its self-imposed isolation, Hong Kong became the
example China followed as it groped for a way forward in the transition from communism to capitalism.
And Hong Kong quickly established itself as a conduit for foreign technology, culture, business know-how
and investment. Now, as the mainland grows richer, what's striking is the degree to which the flow of ideas,
influence and investment has started to reverse. "China has learned from Hong Kong," says Michael
DeGolyer, a political-science professor at Hong Kong Baptist University. "China has learned how to
compete. Now it's competing with Hong Kong and forcing Hong Kong to improve."

The China Connection


Three decades ago, it was Guangdong province that needed a jump-start. Although it was a backward
region in a backward country, Guangdong did have several advantages. Its people were eager to work hard.
Its politics were removed from the power centers of Beijing and Shanghai, so Deng considered it a safe
place to begin reforms. In 1980 three of China's first four special economic zones (SEZs) were set up in the
Guangdong cities of Shenzhen, Zhuhai and Shantou. These experiments in capitalism attracted foreign
capital through liberalized regulations and tax exemptions.
As the SEZs' market-oriented policies spread across Guangdong, the possibilities became obvious to Hong
Kong businessmen. After years of remarkable growth, the city's economy in the late 1970s was in danger of
stalling. Land and labor prices were climbing, making light manufacturing increasingly unaffordable.
Guangdong, meanwhile, had millions of able-bodied citizens who shared language, culture and often family
ties. Hong Kong entrepreneurs "just thought about bringing factories here because the production costs
were lower and they could be more competitive," says economist Guan. "They didn't know they would
influence Guangdong. They didn't know they would influence China."
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At its crudest, this influence took the form of cash, bucketloads of it. Since 1978, Hong Kong has contributed
more than $273 billion in foreign direct investment to China, nearly as much as the total from all countries
combined; southern China got the lion's share. The Pearl River Delta, the part of Guangdong province closest to
Hong Kong, is now home to 57,500 factories established by or producing for Hong Kong enterprises. But
investment did not just mean building factories. When Lam first visited Dongguan, the trip required two ferry
rides and took up to four hours. Today his factory is a two-hour drive from Hong Kong. Travel time has been
vastly reduced in part because of the infrastructure investments of Hong Kong companies. Hong Kong tycoon Sir
Gordon Wu's Hopewell Group built the mainland's first expressway, the 120-km Guangzhou-Shenzhen
Superhighway, and more than 160 km of other key roads in Guangdong. Hong Kong companies like Hutchison
Port Holdings and Swire Pacific helped develop critical Guangdong ports.Great Wall
Projects like these turned the region into a manufacturing force on a global scale. From 1980 to 2002 the Pearl
River Delta was, according to the book Regional Powerhouse, "the fastest-growing portion of the fastest-growing
province in the fastest-growing large economy in the world." Hong Kong didn't just bankroll this party. It also
supplied management expertise and knowledge of foreign markets. In the mainland's planned economy, meeting
customer expectations wasn't a priority. For Hong Kong's entrepreneurs it was a matter of survival. "These small
businesses were exporters of course," says Joseph Cheng, a professor at City University of Hong Kong. "They all
knew that Christmas delivery was a matter of life and death. They had to deliver for a particular ship, 14 weeks
before Christmas. If they couldn't make it, it was bankruptcy." At Lam's first operation in Dongguan—25 sewing
machines and some paint sprayers set up in a converted municipal building—lessons were sometimes as painful
for the teachers as they were for the students. Once, when the shop ran short of black paint needed to complete a
run of pieces for a toy mirror set, local employees bought an extra can at a market and finished the job. The only
problem was the paint was toxic, and unsuitable for use in a toy. The unsafe parts had been mixed in with the
safe, so Lam had to scrap thousands of pieces. "They had no clue in making anything," Lam says of his Dongguan
employees.
But they learned. Just ask F.C. Lo, once known as China's "king of cans." The Hong Kong entrepreneur shipped
the first aluminum cans to the mainland in the early 1980s from a plant in Hong Kong's New Territories. In 1985
he built his first factory on the mainland in Guangzhou, an $18 million investment. With the help of foreign
stakeholders, his company expanded to 20 plants, and at one time controlled about 60% of China's can market.
(Lo split the company's assets with its American investors in 2001 and now runs four plants on the mainland.) In
the beginning, working with mainlanders was "one-way traffic," Lo says. "We would tell them what to do because
we were so strong and they didn't know anything." Today Lo competes with homegrown manufacturers. "The
local guys are so good," he says. Lam, the toy manufacturer, agrees: "They are teaching us. That's the way it
should go. We should not be jealous of somebody who worked for us for $34 a month who is now making $34
million a year. If they are good, they deserve it."
Guangdong has become the workshop for the world, but that doesn't mean all it does is work. As commercial
contacts with Hong Kong grew, the province also looked to its neighbor for hints on how to have fun. Nowhere is
that more evident than in Shenzhen, the mainland city next to Hong Kong. The border crossing at Lowu is the
world's busiest, with 252,000 trips daily. Hong Kongers cross to shop, sing karaoke in a nightclub or partake in
other diversions that have become favorite pastimes for mainlanders, too. Shenzhen is home to Mission Hills, the
world's largest golf complex, with a dozen 18-hole courses. When Hong Kong paper-and-packaging tycoon David
Chu founded the club in 1994, 90% of its members were from Hong Kong. Today 60% of the members are from
the mainland.
The SAR's cultural sway has extended far beyond Shenzhen and the fairways of Mission Hills. Hong Kong's
music, movies and fashion dominated pop culture in Guangdong when China first opened up. "In the '80s and
'90s, I definitely only listened to Hong Kong artists like Alan Tam, Jacky Cheung and Anita Mui," says Kent Li,
37, who hosts a pop-music show for state-owned Guangzhou Radio. Hong Kong also set the pace for fashion.
Before a look is big in Guangzhou, Guangdong's capital, it is vetted in Hong Kong, says He Ying, a 28-year-old
video editor and former owner of a clothing shop. "Hong Kong is like a filter," says He. "If people there don't
embrace certain trends, then Guangzhou will never embrace them."
The trends are transmitted to the mainland through Hong Kong media, which is widely available in Guangdong
despite the fact that most newspapers and TV channels are restricted. Hong Kong-style teahouses, found
throughout southern China, always have copies of day-old Hong Kong newspapers; some are distributed legally
while others are smuggled across the border. Likewise, hotels and residence compounds for foreigners have
access to two dozen overseas satellite channels and eight from the SAR. A huge gray market in illegal satellite
dishes means Hong Kong programs are widely available. Indeed, Hong Kong's media spurred the development of
Guangdong's own press, which is known for testing the limits of mainland censors. Fledgling mainland
journalists looked next door for instruction on everything from story development to production, says Chang
Ping, deputy editor of the Guangzhou-based Southern Metropolis Weekly. "Hong Kong media helped establish
the foundation for Guangdong's media," he says. but familiarity sometimes breeds discontent. Mainland Chinese
nowadays no longer take all their cues from their cousins—and the spread of the Internet in China means they no
longer have to, because the whole world is in reach. "Now, there's more of a global culture in Guangzhou," says
Alex So of the youth-lifestyle magazine Coldtea. Relaxed travel restrictions mean mainlanders can easily visit the
SAR. "Before, when it was harder to go to Hong Kong, I thought it was such a cool, mysterious place," says He.
"It's not the same anymore."
Guangdong's industries, too, are more independent of Hong Kong than they once were. "In the 1980s, the shop
was in front and the factory was in back," Yvonne Choi, Hong Kong's Secretary for Commerce, Industry and
Technology, told a business forum in April. "This has changed and Hong Kong is no longer playing the leading
role." Instead, the SAR is increasingly dependent upon China for its economic vitality. Last year, Hong Kong's
stock market launched initial public offerings worth more than any other market except London—a bravura
performance that was largely due to the $25 billion raised through the IPOs of Bank of China and the Industrial
and Commercial Bank of China. In 2001, mainland China became Hong Kong's largest investor, and by the end
of 2005, it had poured $162 billion into the territory. The capital influx is expected to expand since Beijing
announced in May that it would begin to allow mainland institutions to invest in foreign stock markets,
beginning with Hong Kong.
The hope is that the mainland's investors will provide the same economic boost that its tourists have. Beginning
in 2003, when Hong Kong was suffering a severe economic slump due to the SARS outbreak, the central
government began allowing greater numbers of mainlanders to visit the territory. They played a key role in
reviving the economy, says Allan Zeman, a Hong Kong developer who operates Ocean Park, a
marine-and-amusement park, and owns property, restaurants and bars in Lan Kwai Fong, a popular night spot.
"China was the match that started the fire burning and got the economy going again," Zeman says. Of Hong
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Kong's 25 million visitors last year, 13.6 million came from the mainland, more than four times the 3.1 million
who visited in 1999. Zeman says he has changed his businesses to meet the needs of mainland tourists. Fluent
Mandarin speakers have been hired, menus have been altered and renminbi, the mainland currency, is now
accepted. "Over the last several years there's been a tremendous impact on all business," he says. "I think
everyone in Hong Kong is starting to cater ... to the mainland market."
That has created some unexpected opportunities for entrepreneurs like Apichar Sirichantakul, a Thai
businessman who calls himself the "father of the ladyboys." The transvestite stage shows he runs in Bangkok are
so popular among Chinese tour groups that he decided to bring them to Hong Kong. As many as 3,000
customers a day, most of them mainlanders, pay $20 each to see three dozen Thai transsexuals and transvestites
give a 45-minute dance-and-lip-synch performance in an old movie theater on Hong Kong island. "Chinese
travelers come here, go shopping in the day and see some sights, but at night there's nothing to do," Apichar
says. "We give them something to see."
From lowbrow entertainment to high finance, it's certain Hong Kong will increasingly be catering to China in
coming years. Lam, for one, reckons the partnership between the SAR and the rest of China is just as dynamic as
it was when he ventured to Guangdong to set up a toy factory 28 years ago. "Hong Kong will continue to impact
the mainland," he says. Just not as much as the mainland impacts Hong Kong.



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