TNAG-2467-FCO40-3591-Economic-situation-in-Hong-Kong-1992 — Page 71

The China-Uk

"dungreement factor'

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neer largely descointed. Rows between

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linger have the

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sume impact as before.

18

the late 1990's at the earliest. In general it is likely that me countries in the region will develop financial sectors sufficiently sophisticated that either domestic or locally-located international financial companies will be able to supply necessary access to international financial markets. Clearly this provides opportunity to London and to UK financial sector companies but it also may lead to the Far East's regional financial centres losing market share.

3.4 Political uncertainty and risk could clearly dominate Hong Kong's prospects, especially if Sino-Hong Kong-UK relations were to sour significantly in the run-up to retrocession; these issues are considered in detail in the next sub-section. Assuming a stable political outlook, viewing Hong Kong's future, the key question on the supply-side is -

- how will its factors of production and infrastructure develop relative to those of Singapore and others?

Overall, the analysis

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positive for Hike - the risks identified ore

all sether hypothetical. 3.5 The following analysis suggest that Hong Kong's position may deteriorate in respect of relative costs and retention of the appropriate labour. Consequently Singapore might see its position. relative to Hong Kong strengthen in some areas of the operating environment financial sector companies work in, as discussed in paragraphs 3.16 to 3.28. However, it has to be borne in mind that:

-

Hong Kong will for some years continue to enjoy considerable momentum both in terms of the number of financial and non- financial companies which have regional headquarters already located there, and the sunk costs companies have incurred of initial establishment there even if there are now probably more non-financial multinationals establishing regional bases in Singapore than in Hong Kong;

Hong Kong companies may be able to respond sufficiently flexibly to adapt to any deterioration in Hong Kong's competitive position, although the option of out-processing ir. Southern China may not work for financial services generally, except (perhaps) to the limited extent that some back-office activities could be re-located to cheaper sites in Southern

China; and