May/June 1996
Hong Kong is a renowned gateway to the Far East and a hub of international commerce, including the trade of scrap commodities. Here’s an introduction to this unique capitalist enclave, with a glance at how it could change when China regains control next year.
By Kent Kiser
Kent Kiser is managing editor of Scrap.
On one level, Hong Kong is an amalgam of diverse and sometimes opposing elements—East and West, high tech and low tech, urban and rural, rich and poor.
Yet deep down, there is one unifying thread, and that is its absolute dedication to capitalism in general and international trade in particular. Some, in fact, call it the most capitalist city in the world. “The whole ethos of Hong Kong is money. It represents free enterprise stretched to the limit,” says Ian Cooper, an international recycling industry consultant based in Kenley, England. Or, as one Hong Kong government official once put it, “The business of Hong Kong is business.”
And the facts support that point. Considering its diminutive land mass (430 square miles) and population (6.3 million), this British crown colony has a gargantuan economy. Its gross domestic product of $149 billion, for example, is one-fifth the size of that of China, which is a whopping 8,000-plus times larger in area, with a population about 170 times bigger.
Hong Kong has become an economic dynamo thanks to a combination of factors, authorities on the area agree, pointing primarily to its industrious work force, the laissez faire economic policies of the British system, and its perfect trading location linking Southeast Asia—particularly China—to the world.
This equation will undergo a momentous change on July 1, 1997, however, when the British pass control of the region back to China.
International traders have mixed views about the effects of this changeover: some expect the worst, others believe it will be an anticlimax, and still others predict that Hong Kong will change China more than China will change Hong Kong. But regardless of their expectations, all are casting a watchful eye to the East to see if and how 1997’s historic transition alters Hong Kong’s role in the world economy.
Manufacturing Success
As things stand now—and have for most of the 155 years the colony has been under British rule—Hong Kong’s international economic role is based on three business pillars: manufacturing, finance, and—especially—trade.
While the latter two foundations play important roles in the world scrap market, Hong Kong’s impressive manufacturing ventures—which produce light consumer goods such as clothing, textiles, electronics, watches/clocks, plastics, and toys, and also encompass the fourth-largest printing industry in the world—consume surprisingly little scrap.
The colony’s manufacturers, in fact, don’t even consume all of the recyclables collected domestically. Of the 1.94 million mt of scrap Hong Kong recovered in 1994—encompassing ferrous, paper, plastics, nonferrous, and textiles—its industries consumed only 540,000 mt, or 28 percent, with the remaining 1.4 million mt exported, according to Hong Kong’s Environmental Protection Department.
Hong Kong exports the majority of its scrap for the simple reason that its scrap-consuming sector is relatively small. The colony’s base metal industry, for instance, is composed of 160 largely small-scale “establishments” that primarily make bars, rods, angles, plates, and strips for the local market, with only some making use of scrap. Of the total, 70 focus on iron and steel, consuming an estimated 214,000 mt of scrap annually, with the colony’s sole minimill—Shiu Wing Steel Ltd.—accounting for 200,000 mt of that total. Hong Kong’s nonferrous sector, meanwhile, includes 41 copper and 11 aluminum operations that consume an estimated 9,000 mt of scrap a year.
In the nonmetallic area, the colony has numerous plastic recycling facilities that consume about 50,000 mt of scrap annually, as well as two midsize and two small-scale paperboard mills, which together consume around 269,000 mt of recycled fiber a year, the Environmental Protection Department reports.
Hong Kong’s scrap processing and collection infrastructure is likewise small, relying on a network of peddlers and small-scale (often one person) processing operations that scour streets, dumpsters, and landfills for recoverable metals, paper, and plastics.
The colony’s tiny domestic scrap industry is directly related to its petite physical size, which translates to a shortage of land for industrial use, say international observers. And this, combined with Hong Kong’s dearth of natural resources, they add, has precluded the establishment of large-scale industries. “You don’t drive through Hong Kong and see a lot of furnaces,” observes Rick Schwartz, executive vice president of Acme Trading & Supply Co. (Portland, Ore.), a scrap exporter.
So, instead, Hong Kong specializes in light industry, and its manufacturers are almost entirely dependent on imported materials, principally finished and semifinished goods—from paper to metal to plastic resin.
Trading on Its Reputation
Despite its low-key domestic scrap consumption, Hong Kong is a significant importer of scrap, taking in more than 460,000 mt from the United States alone last year. (See the table on page 52 for a breakdown of these imports.)
So what is a country lacking the capacity to consume its own scrap doing importing other countries’ recyclables? The answer is that it transships or re-exports the vast majority of this material. Says Michael Friedman, president of Friedman Metals Brokerage Co. (York, Pa.), a scrap brokerage firm, “Hong Kong is a jumping-off point, not a destination. Scrap passes through Hong Kong in terms of paperwork, but the physical material goes elsewhere.”
In international commerce, Hong Kong serves as an entrepôt—an intermediary center of trade and transshipment, rather than a final destination—for a vast quantity of products and raw materials, reportedly making it the eighth-largest trading entity in the world. Hong Kong’s container port at Kwai Chung in Kowloon, furthermore, is said to be the busiest in the world, handling the equivalent of 12.6 million 20-foot containers in 1995.
Besides being its real claim to fame in the international marketplace, trading is an economic necessity for Hong Kong. One reason is that its internal market is relatively small, so it must export about 80 percent of its domestic manufacturing production, primarily to China and the United States. In addition, its lack of natural resources forces it to import much of its raw materials and food, principally from China, Japan, and Taiwan. Also, the colony has been steadily losing manufacturing operations to China, where labor is cheap and land is plentiful, thus making it more dependent on trade for income.
Hong Kong’s appeal as a consummate trading hub is based on a few factors, not the least of which is its prime location on the southeast coast of China, which makes it an ideal transit point for the rest of burgeoning Southeast Asia and China. It also possesses an excellent natural harbor—dubbed Victoria Harbour—which some say is the best seaport between Shanghai and Indochina. Plus, Hong Kong is a free trade zone with no import or export duties, offering obvious trade attraction.
For all its advantages, however, Hong Kong’s port does have at least two drawbacks, scrap traders point out. One is the “very high cost to discharge and warehouse cargo at the port,” mainly because it is so busy and crowded, says Raymond Yiu, vice chairman and president of Ever-Glitter International Ltd. (New York City), a scrap trading company that operates four scrap processing plants in China.
The other problem is that shippers “can pay a huge amount of demurrage charges,” says Joseph Chen, president of Tung Tai Trading Corp. (Foster City, Calif.), a scrap trading firm that has a trading office in Hong Kong and a scrap processing plant in Shenzhen. According to traders, the Hong Kong port gives vessels five free days to complete their business, then it imposes a fee of about $64 ($500 HK) per container per day. Compare that to demurrage charges of about $10 per container per day at U.S. ports. “You can’t afford to have demurrage in Hong Kong,” Yiu states flatly, adding that the specter of such hefty costs explains why Hong Kong scrap traders “usually have to move very quickly.”
There are two primary ways in which scrap moves through Hong Kong. In some cases, vessels will moor dockside, with containerized scrap offloaded onto trucks or railcars for overland shipment to Chinese consumers in such areas as Shenzhen in the adjacent Guangdong province. Other times, ships will anchor in the middle of Victoria Harbour and be offloaded midstream by barges or charter boats equipped with derrick cranes, which then float the material to various Chinese ports or other countries.
Most of the scrap traded through Hong Kong is nonferrous material; the port handles little ferrous or paper in comparison because these materials’ lower values don’t leave much room for the additional costs of transshipment. Plus, Hong Kong’s is a container port and thus isn’t as equipped to handle scrap shipped loose in a vessel’s hull, as ferrous scrap is typically shipped. “It doesn’t pay to handle ferrous scrap very much,” says one U.S. ferrous exporter. “If it’s shipped to the Far East, it’s much smarter to go direct to the consuming port.” A paper exporter offers much the same explanation for his commodity’s fairly limited import/export through Hong Kong.
Financial Security
Hong Kong’s history as a trading nexus goes hand-in-hand with its third international role—that of a world banking and finance center. And this, in turn, serves as another reason why many scrap exporters trade through the colony. “One of the great advantages of selling through Hong Kong is that banks there have a solid reputation and great depth of experience in trading,” Cooper explains.
In essence, Hong Kong offers a degree of financial security and stability that can be lacking in banks in some other Far East countries, especially China. “The Bank of China is a fine institution,” says Schwartz, “but commerce isn’t as easily facilitated through that bank.” Friedman is more critical of Chinese financial institutions, asserting, “There are big problems with Chinese banks. They don’t confirm their letters of credit, for instance, so I won’t take a letter of credit drawn on a Chinese bank.”
Such problems work in Hong Kong’s favor. As Schwartz remarks, “Hong Kong survives on being a little easier to deal with and people’s terror of dealing directly with Far East consumers such as China.”
As the quintessential middleman, however, Hong Kong’s trading and financial assistance comes at a price, not so much for the shipper as for the consumer, who may end up paying more for scrap after the Hong Kong trader—sometimes several—has worked in his margin, says Schwartz.
Hong Kong, China
The question still remains, of course, as to how Hong Kong’s economic character will be affected when China “resumes the exercise of sovereignty” over the colony next year.
Under conditions of the 1984 Sino-British Joint Declaration, which was established to direct the handover, China will make Hong Kong a Special Administrative Region that will “enjoy a high degree of autonomy, except in foreign and defense affairs.” China has also agreed through the declaration that its “socialist system and socialist policies shall not be practiced in the Hong Kong Special Administrative Region and that Hong Kong’s previous capitalist system and lifestyle shall remain unchanged for 50 years.”
In addition to retaining its current laws and executive, legislative, and independent judicial powers, Hong Kong will reportedly be able to preserve its social and economic system, rights and freedoms, and status as a free port, separate customs territory, and international financial center. China is also set to allow the Hong Kong dollar to continue to be used and remain freely convertible, and it has agreed not to levy taxes on the region.
That is what’s supposed to happen—on paper.
But no one can predict what will actually happen when China’s autocratic/socialist system merges with Hong Kong’s democratic/capitalist culture. The Sino- British accord notwithstanding, some of China’s recent actions have raised concerns about its plans for Hong Kong’s elected legislature, human rights laws, and citizenship and travel policies. China has also reportedly interfered with awards of substantial local business franchises in the telecommunications and port sectors. And few Hong Kong residents are thrilled with the prospect of having People’s Liberation Army troops in the region.
For their part, scrap traders also have a few reservations about the Chinese changeover. China could, for instance, exercise more control over Hong Kong’s container trade, stepping up inspections of containers, which could have a slowing and chilling effect on trade, worries Chen. Also, despite China’s promise to allow Hong Kong to remain a free port, there are rumors that it could impose customs duties and taxes similar to those at Chinese ports, which levy a 5-percent customs duty and 17-percent tax, Chen says.
On the financial front, others wonder if China will let the Hong Kong dollar—and its peg to the U.S. dollar of 7.8-to-1—remain, since unlike other currencies, it is guaranteed by Hong Kong’s banks rather than a government entity.
Aside from these fears, scrap traders generally expect China to honor its commitments and allow Hong Kong to continue largely unchanged. “I have confidence that Hong Kong will remain as prosperous as now,” says Yiu, noting, “The Hong Kong Chinese are brilliant people, and China can benefit from them—if it keeps them happy.”
The simple fact is that diminishing Hong Kong’s strength would not be in China’s political or economic interests, several traders assert. After all, Hong Kong serves not only as a foreign exchange window for China, but it also gives China direct and easy access to the capitalist world and its offerings. “I think the Chinese appreciate Hong Kong as a wonderful economic asset that’s at last coming into their possession,” Cooper says. “I don’t think they’ll upset the status quo. They’d be mad to do that.” Friedman agrees, offering lightly, “I think the biggest changes the Chinese will make will be to switch the side of the street people drive on and no longer honor Taiwanese independence day. That’ll be it.”
Then, more seriously, he observes, “There’s so much trade, so much commerce through Hong Kong, the momentum can’t be stopped. It’s like a freight train in motion. The train’s not going to stop, though it may slow down. There could be curves in the track, there may even be some unscheduled stops, but the Hong Kong Express will continue to roll.”
Hong Kong in Brief
Hong Kong’s status as an international trade and financial center is reflected in the glittering skyscrapers of downtown Hong Kong Island below.
Far from being limited simply to this central island, the colony also encompasses 235 Outlying Islands in the South China Sea and two areas on mainland China—the Kowloon Peninsula and the New Territories, which adjoin the province of Guangdong. While Hong Kong Island and Kowloon serve as the colony’s principal identity and commercial/industrial base, the New Territories account for 90 percent of its total land mass.
Great Britain first claimed Hong Kong—which means “fragrant harbor”—as a colony in 1841, acquiring the Kowloon Peninsula in 1860 and signing a 99-year lease on the New Territories in 1898. Though Hong Kong Island and Kowloon were supposedly “ceded in perpetuity,” China will resume sovereignty of both, as well as the New Territories, in 1997.
Hong Kong Imports of U.S. Scrap (metric tons)
Aluminum 75,834
Brass/Copper 76,905
Iron & Steel* 104,403
Lead 83
Nickel 82
Paper 48,921
Plastics 154,686
Zinc 1,689
*includes stainless steel and alloy steel scrap.
Sources: U.S. Department of Commerce, Bureau of the Census; American Forest & Paper Association. •