CONFIDENTIAL #2
cycle of some of the consumer items produced locally can be lengthened. As a result, some producers may feel under less pressure to upgrade their products and production
processes.
9.
(ii) China as a supplier of raw materials
and semi-manufactures
China is Hong Kong's second largest supplier of
imports of raw materials and semi-manufactures. In 1985, 22% of Hong Kong's imports of raw materials and
semi-manufactures, with a value of HK$21.6 billion, were
from China. Partly because of the price competitiveness
of imports from China and partly as a result of the growth
in compensation trade and outward processing arrangements,
the relative importance of China as a supplier of raw
materials and semi-manufactures to Hong Kong has increased
considerably since 1980 (Table 9).
10.
(iii) China as a supplier of outward
processing capacity
Compensation trade and outward processing arrangements with enterprises in the Special Economic Zones and the Open Cities in southern China are in effect
a particular form of sub-contracting. Two advantages are involved. First, Hong Kong manufacturers are able to reap
the benefits of lower wages and, to a lesser extent, lower
land costs in China. Outward processing arrangements appeal most to those producing goods that have little
scope for quality upgrading but involve highly labour
intensive production processes. Generally Hong Kong no
longer holds a significant comparative advantage in these
goods over its competitors in the east Asian region. Through these arrangements, the competitiveness of some
G.F. 326
CONFIDENTIAL #