3 The new paradigm
T
he historical relationships that created convergence of interest between the very separate parts of the Pearl River Delta – Hong Kong, Macau and Guangdong – are now breaking the old paradigm apart. The new paradigm is one of intra-regional competition as the rapid growth of Guangdong’s cities together with Macau begins to level the playing field with Hong Kong. The strategic equation is not limited to financial opportunities but includes considerable scope for social and creative growth. Politics is the one area that looks unlikely to see rapid change, because of the inherent conservatism of the central government even when its communist ideology has changed beyond recognition.
3.1 Strategic perspective
T
he new paradigm will be good for:
• Technology: China’s new tax code provides high technology companies with the tax breaks associated for the last three decades with export processing. President Hu Jintao’s report to the 17th National Congress of the Chinese Communist Party on October 24, 2007 emphasized “scientific development” as the new Party mantra and outlined development themes including innovation, energy savings, and the environment. 18 On a national basis, these will benefit high-tech plays in sectors ranging from telecommunications equipment, shipbuilding, machinery and software under the innovation heading; to alternative energy and building technologies under the heading of energy savings; to water plays, desulphurization equipment, and paper and forestry companies under the environment. 19 • Guangdong telecommunications sector: Guangdong is the national leader in telecommunications equipment, with Shenzhen-based ZTE Corp. leading the development of China’s indigenous third-generation mobile telephony. Most of Guangdong’s telcom companies, however, remain original equipment manufacturers, such as Taiwan-owned Foxconn and Huawei Technologies, also based in Shenzhen. Hong Kong companies have little on offer in high technology generally and although Hong Kong’s telecommunications sector is competitive on the operations side, it has not been an innovator in terms of technology or equipment. The new tax incentives may see Hong Kong companies moving into this sector, as niche suppliers and subcontractors to the headline players. Technology is evolving so quickly in the sector that a Hong Kong OEM supplier such as VTech Holdings may be able to segue into high-tech from cordless handsets and educational games. In 2007, VTech spent US $45.2 million on research and development and is trying to move up the value chain in that sector by developing more sophisticated broadband telephony products; in December 2007 it signed an agreement with Funkwerk Enterprise Co. to develop new products for Integrated Access Devices. • Property: This is one area where Hong Kong developers are likely to shine, even though they face stiff local resistance, because they can capitalize on Hong Kong cash flows and finance as
18 China’s official news agency, Xinhua, carried the official English text of the speech, available at http://news.xinhuanet.com/english/2007-10/24/content_6938749.htm.
19 Jun Ma, China’s policy and market outlook after party congress, Deutsche Bank AG, Hong Kong Branch, October 2007 26