DECEMBER 11, 2000 VOL. 156 NO. 23

A Clash of Two Cities
International business needs a gateway to China. A few years hence, will it be Hong Kong or Shanghai?
By ISABELLA NG Hong Kong & Shanghai

ALSO
"One Door Is Not Enough"
Interview with the mayor of Shanghai

Life at the office will never be the same again for B.C. Lo. An employee of Coca-Cola for the past 14 years, the corporate affairs director has been busy lately helping the company move its Greater China headquarters from Hong Kong to Shanghai. By December, he and six other staff will be all that's left of an office that used to employ 140 people. But Lo, like many executives in the former British colony, is convinced of the wisdom of the relocation. "We need to be close to the market," he says. "In Hong Kong, all the information we get about China is filtered. If you want to crack the China market, you have to be in Shanghai."

For years, the business world has been abuzz over the looming showdown between Hong Kong and Shanghai. It's a battle suited for prime time. In one corner stands Shanghai, the once and perhaps future financial center of all of Asia. It's a city of rapid financial growth whose own center has shifted to the space-age island of Pudong, where millions now work and live in an area that just a few years ago was marshland. In the other corner is Hong Kong, a city famously proficient at overcoming hurdles and slam-dunking pessimism but facing twin challenges: terrifyingly high property prices and the aftermath of its reversion to Chinese sovereignty, a move that has put the entrepôt's historical uniqueness at risk. The fear, to use the nervous and oft-heard phrase, is that Hong Kong could become "just another Chinese city."

These days, more and more executives are voting with their feet, realizing that to do business in China they indeed have to be in Shanghai. This development is an ominous sign for Hong Kong, a city of 7 million which has long been viewed as the gateway to the communist mainland. More and more multinational corporations are moving their China offices to Shanghai, abandoning the island hub in favor of China's largest metropolis, whose 14 million people are rapidly catching up with their southern cousins, both as a workforce and as a market. AIA insurance moved its China headquarters to Shanghai last year, Philips did the same in April and HSBC Group followed in May. Dozens of other companies plan to make the jump soon, according to a survey by the American Chamber of Commerce in Hong Kong. (The Shanghai Chamber is signing up more than 50 new members every month.) Hong Kong still has unique strengths and will no doubt retain an important role in the region, but as China continues to liberalize and modernize, Shanghai is positioning itself as the logical base for China operations. "Hong Kong was never really a gateway to China, it was a window," says Andy Xie, executive director of Morgan Stanley Dean Witter in Hong Kong. "But why would you want to go through the window when the door is wide open?"

ALSO IN TIME COVER: All Wired Up Their country has gone from being an online backwater to one of the most connected places on the globe in double-quick time. Now millions of Koreans are living the Internet revolution • Player Power: Online gamers are in a league of their own • Virtual Vows: A couple live their lives on the Net • Viewpoint: How Koreans took to the new technology JAPAN: Did Somebody Mention Pinochet? Peru's ousted ex-President Fujimori copes with exile in Japan INDIA: Reform Behind Bars Delhi's notorious Tihar Jail is now a kinder, gentler prison HONG KONG AND SHANGHA: May the Best Town Win The former colony is losing business to China's largest city CINEMA: The Chosen One Chinese actress Zhang Ziyi's effervescent talent pours through Zhang Yimou's The Road Home, and Hollywood is beckoning. But she still struggles to be appreciated back home TRAVEL WATCH Get Insured: No One Plans for a Shark Attack

Don't cry for Hong Kong—yet. The city's immediate future is bright enough. It can still bank on its reputation as a free, international city with a sound judicial system. Those qualities could help preserve the territory's financial supremacy. The city's low business taxes, which hover around 16%, attract foreign investors and entrepreneurs. In Shanghai, however, taxes fall below 33% only in Pudong, the city's special business district. Perhaps most important of all, Hong Kong's ability to raise money remains unmatched. "Hong Kong could still live on as the financial center," says Thomas Chan, head of Hong Kong Polytechnic University's China Business Center. "But its corporate and industry sectors are dying." As businesses move their China offices to Shanghai, Hong Kong, which developed out of its access to a closed China, will have to look for a new economic niche.

In fact, Hong Kong is energetically trying to find a future as the cyberhub of Asia. "Hong Kong needs more than one pillar industry to sustain its economic glory, and infotech is one of them," says Dong Tao, a senior China analyst for Credit Suisse First Boston. Yet, even with such buzz-generating events as the Pacific Century CyberWorks deal with Hong Kong Telecom and the controversial building of the Cyberport, it's far from certain that Hong Kong could become Asia's infotech center. For one thing, it will have to keep up with Shanghai, which already has a superior record of concentration on R. and D.

At times, Hong Kong seems a bit clueless about its identity and its future. Its new emphasis on being "Chinese" undermines its status as an international city. The tilt began immediately after the return to Chinese sovereignty in 1997, when the local government abandoned the colonial bilingual education system in favor of teaching in the mother tongue. Many Hong Kong people feel the government is getting carried away with patriotic fervor. "I don't consider myself very Chinese," says Betty Tam, a business executive raised in Hong Kong. "And I don't like it when the government keeps saying we are Chinese—we were brought up in an international environment. We are products of a colonial legacy."

While Hong Kong becomes ever more Chinese, the reverse is happening to the north: Shanghai is determined to regain its pre-communist status as an international metropolis. "Shanghai will be a bridge to connect China with the Western world," proclaims Mayor Xu Kuangdi, the man often credited for the city's spectacular recent growth. To that end, Shanghai has spent $36 billion to upgrade its infrastructure—expressways, bridges, public transportation—over the past 10 years. "When I first came to Shanghai, there was nothing—no Pudong, no TV tower," says David Polaski, vice chairman of the American Chamber of Commerce. "Now, Shanghai is growing so fast that no one can miss it."

The city is already China's economic center, making the most of its location at the edge of the country's most prosperous provinces. It also has a growing pool of cheap, skilled workers—one of the reasons Microsoft chose to set up its Asian Regional Engineering Center there. Foreign investors have poured $27.7 billion into the city in the past ten years. In that period, Shanghai's GDP has grown at an average of 10% a year, compared with 3.7% average growth for Hong Kong. William Overholt, head of Strategy and Economics, Nomura International (HK) Ltd., calls Shanghai the "most successful reforming city today."

If it continues along its current trajectory, analysts and academics predict Shanghai will overtake Hong Kong within a decade. "By 2010, Shanghai's GDP will surpass that of Hong Kong," says Yao Xitang, president of the Pudong Academy of Development in Shanghai. Dong Tao predicts that six years from now, Shanghai is likely to have the biggest stock market in Asia outside Japan.

That won't be enough to bring Shanghai up to Hong Kong's speed, though. Before Shanghai can become a world-class financial center, it will need a fully convertible currency—there's still no indication when China will float the renminbi—a reliable legal system and widespread use of the English language. Which is why many multinationals are hedging their bets. China operations may be moving to Shanghai, but companies like Coca-Cola and Philips have kept their Asia-Pacific headquarters in Hong Kong. Still if Hong Kong doesn't discover a new future fast, it may find most of the chips piled onto Shanghai.

Write to TIME at mail@web.timeasia.com