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International Trade

Hong Kong, the pearl of Asia has been the center of trade and finance in Asia since the early 20th century. In a short history of about 150 years, Hong Kong has become the source of growth for many nearby economies. In a certain sense, it can be even said that it is a merchant city founded and managed by businessmen. Traditional hongs or trade houses of Hong Kong were the pillar of the economy. Jardine Matheson and Hutchison were major hongs that led the economy and the Hong Kong & Shanghi Bank were the financier of these hongs and has today grown to become one of the largest bank in the world.

These firms were he critical factors of the growth for Hong Kong’s economy. Their role however has changed overtime. They are no longer the de facto leaders of Hong Kong as they were in the mid 1800’s. Their role has diminished as Hong Kong grew to become more international, and the 1997 handover to the People’s Republic of China has further altered their position. Some hongs that adapted well to the changing times prospered while others either went bankrupt or become stagnant.

Background on Hong Kong Economy The territory of Hong Kong is located at the mouth of the Pearl River, a little southwest of the Guangdong Province of the PRC. Hong Kong was ceded to the British after the Opium War in 1842. Many believe that the British hongs were behind lobbying the British government into fighting the Chinese Government and the settlement of the island. Kowloon was annexed in 1860, and the New territories were leased for 99 years in 1898. In 1984, the British and the PRC government agreed that Hong Kong as a whole would return to Chinese soverienty in 1997.

However, a system of one country two systems were also agreed upon where Hong Kong would retain its status as a free port, with it’s laws remaining unchanged for 50 years. It’s main mphasis is to preserve Hong Kong’s laws and economic freedom, thus to enhance the position of Hong Kong as a economic center. The Large British owned hongs were originally trade and warehouse companies established by the British in the early days of Hong Kong colonialism, they have since grown in to major commerical conglomerates. They hold interest in cargo handling, manufacturing, real estate, and even retailing.

They are the engine of the Hong Kong economy. Since Britain took over the port city in 1842 to use as a gateway to the Chinese markets, the business of Hong Kong had been business, and the power was eld by the hongs. The first traditional hong was the Jardine Matheson. It was once seen to be more influential than the colonial government but nowadays it has become a minor player compared to Li Ka Shing’s Hutchision Whampoa. Li Ka Shing, the Chairman or Taipan of Hutchision Whampoa, became the first Chinese to own a traditional hong.

Li’s drive and business ability helped foster Hutchision into a global conglomerate. Hong Kong Bank grew from a small trader’s bank into one of the Top ten banks in the world today. Jardine Matheson Jardine, Matheson & Co. was founded by 2 Scottish merchants, William Jardine and James Matheson in Guangdong in 1832. It was an opium trader that were the pioneers into the China trade. Eventually James Matheson takes control from 1836. It played a key role in the founding of Hong Kong and became the first to purchase land from the colonial government in 1842.

Jardine expanded into other trade products in other Asian countries like Japan and South East Asian countries and also enters the ship/cargo handling industry and the real estate business. After World War II, Jardine moved their head office from Shanghi back to Hong Kong and it offically goes public in the Hong Kong Stock Exchange in 1961. The 1970’s saw Jardine forming many ventures and aquisitions such as the joint venture with the Robert Fleming of UK to create the Jardine Fleming & Co. , a holding company the aquires many foreign and local firms and diversifies Jardine’s business.

The mid- 1980’s saw some mismanagments and misguided aquisition especially after the 1984 Sino-British announcement on the return of Hong Kong. Jardine wanted to diversify more abroad in fear of the Chinese takeover because their relations with the PRC was not good. It aquired the British construction giant Trafalgar House and ther various retail chains in Europe o that Jardine could emphasize more in Europe, but these investments would turnout to be disappointing in the future. The current taipan, or CEO is Alasdair Morrison. He has tried to undo many past mistakes and to rejuvenate the 160 year old hong.

Morrison has sold off many losing companies and has a greater emphasis on profitability. The management has been changed to more aggresive and experienced managers such as Ronald J. Floto who previously worked as Kmart Corp. and is known for his turn-around ability. But most importantly, Morrsion has been trying to improve ties with Beijing. He ealises that the China market as an indespenable location and has tried repeatly to mend the differences made by the previous taipans. Today, the Jardine Matheson group is a multinational enterprise that operates in over 30 countries and employs some 160,000 people.

It is divided into eight core companies : Jardine Pacific(general trading), Jardine International Motors(Car dealership), Jardine Fleming, Jardine Lloyd Thompsion(Insurance), Jardine Strategic, Dairy Farm(supermarket and convenience stores), Hong Kong Land(Commerical property), and the Mandarin Oriental(luxury hotel chain) . Last year’s sales were US$11. billion and a operating profit of US$190 million was made. The profits fell 34% from last year, and share prices have fallen almost 60% since it moved its primary listing from Hong Kong to Singapore.

The main problem with Jardine is that it needs to use its large cash resources to boost market shares in existing profitable businesses and make aquistions in core business while assests in Asia are still cheap from the Asian crisis. It also needs to refocus on Asia, because it is where it’s main expertise and connections are, but the controlling family, the Keswicks with only a 4. 9% share are reluctant to invest heavily back to Asia nd especially China. The Keswicks have held control through cross ownership to build a financial defense against hostile takeovers.

Li Ka Shing has tried but failed to take over Jardines in 1988 but many still believe that Li has not given up but is rather waiting for an opportunity. Although the current taipan, Morrison is trying to shape up Jardine again, many are doubtful as long as the Keswicks still retain the controlling shares. Jardine Matheson has had a astonishing past, but many fear that the golden days of the past are over for them. Hutchison Whampoa John D. Hutchison Company was founded in 1828. Being one of he first major traditional hongs in Hong Kong, it had made vast investments in port facilities and other infrastructure projects in the colony.

In the 1960’s, in an effort to revitalize the hong, John Douglas Clague, the last British CEO of Hutchision made huge investments in not only in Hong Kong but also abroad. It reoragnized itself to the Hutchision International and up til the early 1970’s, many believed that Hutchision would indeed make a comeback as a dominant firm in the colony. However, losses started to occur from 1973, and being overstretched and short in liquidity it lost the favors from its investors and reditors(most importantly the Hong Kong Shanghi Bank).

Eventually the Hong Kong Bank would step in to take up 33% of Hutchision International and within 2 years merge with a subsidary, the Whampoa Dock Company and create the Hutchision Whampoa. Hong Kong Bank was looking for a suitable investor to take over the pre-opium war hong and eventually they chose a rising real estate tycoon, Li Ka Shing. There are many reasons that Hong Kong Bank chose Li Ka Shing, but two reasons stand out the most, His reputation as a honest and able businessman and his contacts with the government in Beijing.

Today, Hutchison Whampoa has grown into one of Hong Kong’s largest blue chip companies with over 70,000 employees worldwide. The Group operates five core businesses : Property Development and Investment, Ports and related services, Retailing and manufacturing, Telecomminications and Media, and Infrastrucutre and Energy. Property Development and Investment Hutchison Whampoa Property develops residential and commerical properties for sale and lease. Its portfolio includes some of Hong Kong’s largest private housing projects and several landmark developments in the Mainland. Ports and related services

The group’s expertise in port investment and management stems form its pioneering operations in Hong Kong. Its port operations arm, Hutchison International Port Holdings, is now exporting its professional experience and expertise to ports in different parts of the world. Retailing and manufacturing Watsons operates three of Asia’s most innovative retail chains:Park’N Shop supermarkets, Watson’s personal care stores, and Fortress, selling domestic electrical appliances. The manufacturing division produces and distributes a wide range of food and beverages throughput Hong Kong, the mainland and other

Asian countries. Telecommunications and Media Hutchison Telecom operates a wide range of intregrated telecommunications services worldwide and is one of the world’s major providers of mobile communications Infrastruture and Energy The Group has major shareholding in Cheung Kong Infrastructure, which holds interests in infrastructure and related businesses, and power plant projects such as the Hong Kong Electric. It is the sole supplier of electricity to Hong Kong Island. Husky Oil, is one of Canada’s largest privately owned oil and gas companies.

For the fiscal year ending in December 31 1998, The Hutchison Whampoa Group had a net profit after tax of HK$8. 7 billion. It was lower than HK$12. 2 billion from 1997. The Asian crisis which brought on pressures on the entire Asian region. It experienced a period of unprecedented asset and price deflation coupled with severe recessionary conditions. These conditions had the hardest impact on the Property/Development and Retail/manufacturing operations of the group in 1998. Li Ka Shing’s another main weapon in Asian business is his strong ties to the Chinese Government.

He has been favored since being the first Chinese to take over a western hong in the late 1970’s. He also played a large role in the transition period for the ’97 handover of Hong Kong. Currently he has a strong influence in the policies that effect Hong Kong both through his contacts with Beijing and the Chief executive, Tung Chee Wha. HSBC Group Headquartered in London, HSBC holdings is one of the world’s largest banking and financial services organizations. The HSBC Group’s international network comprises more than 5,000 offices in 79 countries.

The HSBC Group is named after its founding member, The Hong Kong and Shanghi Banking Coporation limited. Hong Kong Bank, as it is known for short, was established in 1865 to finance the rowing trade between China and Europe. The inspiration behind the founding of the bank was Thomas Sutherland, a Scot who was then working as the Hong Kong Superintendent of the Peninsular and Oriental Steam Navigation Company. He realised that there was considerable demand for local banking facilities in Hong Kong and the China coast and he helped to establish the bank in March 1865.

Then, as now, the bank’s headquarters were at 1 Queen’s Road in Hong Kong and a branch was opened in April 1865 in Shanghai. Throughout the late nineteenth century and the early twentieth century, the bank established a network of agencies and branches ased mainly in China and South East Asia but also with representation in the Indian sub-continent, Japan, Europe and North America. In many of its branches the bank was the pioneer of modern banking practice. From the outset, trade finance was a strong feature of the bank’s business with bullion, exchange and merchant banking also playing an important part.

Additionally, the bank also issued notes in many locations throughout the Far East. During the Second World War the bank was forced to close many of its branches and the head office was temporarily moved to London. However, after the war the bank played a key role in the econstruction of the Hong Kong economy and set about further diversifying the geographical spread of the bank. The post-war political and economic changes in the world forced HongkongBank to analyse its strategy for continued growth in the 1950s.

The bank diversified both its business and its geographical spread through acquisitions and alliances. However, the bank remained committed to its historical markets and played an important part in the reconstruction of Hong Kong where its branch network continued to expand. In 1965 the bank purchased a controlling interest in Hang Seng Bank, which had been established in Hong Kong in 1933. By the 1970s the policy of expansion by acquisition of subsidiaries with their own identities and specialisations was firmly in place.

During the 1980s the bank concentrated on moving into those markets where it was not yet fully represented. Hongkong Bank of Canada was established in 1981 and HongkongBank of Australia Limited in 1986. In 1987 Marine Midland Bank, based in New York State, became a wholly owned member of the Group and its principal subsidiary in the United States. HSBC Holdings plc, the parent company of the HSBC Group, was established in 1991 with its shares quoted on both the London and Hong Kong stock xchanges. Conclusion Already almost two years have passed since the handover Hong Kong to the PRC.

It is hard to judge the impact of the handover to the Hong Kong economy, due to the Asian Financial Crisis in 1997. What is definite however is that Hong Kong has suffered a difficult 1998 and is still in the process of recovering. The good news is that the fallen prices of 1997 got rid of a lot of the bubbles that was being accumulated in the territory. Large landowners like Li may have had some losses but 1999 saw the economic prices and activities picking up again. Many say that the worst is over and that recover is in process. Already land prices have recovered a lot of its losses during the 1997-8 period.

The problem in the territory is more a political one. Many incidents have brought attention to the problem of implementing the one country, two system policy, which is fundamental in the Hong Kong Basic Law and which will guarntee the independent governing of Hong Kong. The main attraction that has made Hong Kong what it is today is it’s efficiency and lassie faire approach of the government. If the mainland interferes too much in Hong Kong, it status will decline as the international free port city that has made it so prosperous.

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