When my mum visited Hong Kong for the first time in 1985, she brought back a colour TV -- a triumphal souvenir from her venture to a city that seemed very exotic to us. The vivid, colour pictures amazed our neighbours, who thought that Hong Kong must be a spectacular place compared to my home town of Wuhan.
Indeed, in 1980s China, where people still needed permission from the Communist party boss at their dan wei (work unit) and the local police to travel abroad, few had the chance to go to Hong Kong. The British colony seemed so close, yet so far away.
Even today, the distance is still felt. Hong Kong is routinely chosen as one of the world's freest economies, while China's economy is still centrally planned and highly regulated -- but the two are becoming increasingly reliant on each other.
Gradually and warily, Hong Kong is becoming proud to be part of China at such a fortuitous time, but conflicting emotions remain. Hong Kong loves China's favourable economic policies, but fears restrictions to its freedom and the slow progress towards democracy; it likes its mainland cousins to come and spend money and for Chinese companies to launch IPOs on the stock exchange, but is worried they may divert opportunities for locals; it wants to be part of China and prosper with it, but Hongkongers see themselves as Hong Kong Chinese, differentiated from mainland Chinese.
Hong Kong faces an identity crisis between its colonial past and its Chinese future. While that debate simmers on, a deluge of cash-rich mainland individuals and corporates are helping define the territory's relationship with China.
As Beijing strives to turn its people from savers to spenders in the wake of the global downturn that eroded the country's dependency on exports, by having a moderately loose monetary policy and improving social healthcare and education system, the spending spree has spilled into Hong Kong.
A fifth of sales in Hong Kong's retail sector now come from mainlanders, who pour into the city each day on coaches and trains that deposit them directly into the city's shopping malls and department stores. And they are arriving in ever bigger numbers, spending ever more money.
"Before 1997, mainland tourists' expenditure accounted for 5% to 6% of retailers' revenue, but that portion jumped to 20% last year," said Irina Fan, an economist at Hang Seng Bank. "They give significant support to the retail and catering sector in Hong Kong. Although this sector makes a smaller contribution to overall GDP compared to the banking sector, it is one of the most labour-intensive sectors in Hong Kong, hiring 9.5% of the working population," she said. The only other sectors that employ more are trade and logistics, which hires 25%, and professional services, which employs 11%.
Statistics from the Hong Kong Tourism Board show that in 2009 there were 17.95 million mainland tourists who visited Hong Kong, spending a total of HK$83.5 billion ($10.72 billion) in the city, which was 20.5% more than in 2008 and 41.6% higher than in 2007.
"I come to Hong Kong twice a year. It's a great place for shopping, though I wouldn't want to live here. It's too crowded," said Duan Min, a 37-year-old Beijing resident. "But I would consider investing in properties here; it's very difficult to get mortgages in China these days," he added.
The colour TV my mum bought no longer has a place in our home. Mainland visitors' spending habits in Hong Kong have changed dramatically in recent times. Besides shopping for jewellery and watches, they also buy Hong Kong-listed stocks and properties in prime areas; a shopping list that has increased both in size and value more quickly than expected.
About 10% of the clients at Taifook Securities, a leading brokerage firm in Hong Kong, are mainland residents, and that number is increasing, the firm said. Taifook itself has been bought by a Shanghai counterpart, Haitong Securities, and will soon be renamed as Haitong International.
There are no official statistics showing the volume and value of properties that mainlanders have bought, but it is widely believed that cross-border buyers are partly to blame for the 30% surge in Hong Kong property prices last year, when already expensive apartments became even less affordable to the majority of local households.
The property price acceleration has also been influenced by the growing number of mainland residents migrating to Hong Kong under the Capital Investment Entrant Scheme, which grants residence in return for a minimum capital investment of HK$6.5 million into various local assets, with real estate at the top of a list that also includes stocks and bonds.
Mainland residents are not eligible unless they have permanent resident status in a foreign country, but that is a relatively small obstacle in practice. Foreign passports can be bought for between HK$120,000 and HK$150,000 from places such as the Philippines and Gambia, according to Kwan King-hung, a Hong Kong-based immigration consultant.
Statistics from the Hong Kong Immigration Department show that it approved 3,359 mainland applicants with foreign passports last year, which was 186% more than in 2008 and 417% higher than 2007. Some 2,086 were approved in the first five months this year. Mainlanders now account for more than 90% of the total applicants.
"The government would like to grant more resident permits to elite mainlanders to encourage them to spend more money in the city," said Kwan, adding "applicants used to like financial products, but now they are turning to real estate investment since the recession."
"Some newly completed real estate projects have seen up to 30% of buyers originating from mainland China. Although they mostly target high-end luxury flats, they are having the effect of lifting the market's overall price level," said a senior executive at a real estate company.
While Hong Kong welcomes China's economic contribution, worries are mounting that the increasingly wealthy mainland is depriving it of resources, in this case, land.
"Mainland migrants may not be having a direct impact on the Hong Kong economy, but it's worth noting that more property developers, in order to meet the mainland buyers' appetite for big and posh apartments, are building more projects that are beyond most local people's budgets," said Paul Tang, chief economist at Bank of East Asia.
Complaints about rising home prices are growing in number and some lawmakers have urged the Hong Kong government to take bureaucratic measures to solve the problem. One suggestion has been to raise the entry level of the migrant scheme to HK$10 million.
Kwan King-hung has said the increase to HK$10 million would have little effect since the average investments of mainland migrants were already more than HK$7 million. It may also weaken Hong Kong's competitiveness, he added. Canada requires C$400,000 ($386,286) in its investment migrant scheme and the US demands $500,000.
There were 875,000 mainland residents with personal wealth of more than Rmb10 million ($1.47 million) at the end of 2009, 6.1% more than a year earlier, according to the Hurun Report. The number with personal wealth of more than Rmb100 million grew 7.8% to 55,000 during the same period.
Hong Kong has many reasons to be worried about China's influence; its big neighbour is a partner as well as a competitor. The mainland's new ports are taking trade away from the territory and its lower labour costs take away job opportunities, previously in manufacturing, now in services. However, Hong Kong sets a good model for China and is an important platform for Chinese companies tapping global markets. Hong Kong could stay prosperous by being a part of booming China. The two learn from, and depend on, each other.
This article was initially published in the July 2010 issue of FinanceAsia magazine.
