Investment Opportunities in Hong Kong's Chemical Processing Industry

(A speech made by Mr. Lawrence Chan, Principal Consultant, Investment Promotion of the Hong Kong Economic & Trade Office in Sydney, at a breakfast briefing organised by CIP in Perth on 1 July, 1997).

The Asia Pacific Region is rapidly evolving into a consumer society. The petrochemical, chemical and associated fibre and moulded plastics industries are amongst the most rapidly growing and important industries, since they supply the building blocks and many types of important basic raw materials to the textile, automotive, housing, electronic and other important manufacturing industries.

The entire Asia Pacific region accounts for about 28% of the overall world demand for chemicals and is the fastest growing area of the world. It is predicted that this number could exceed 35% by the year 2002. The region's total annual production is expected to be US$604 billion by year 2002, about double its present production.

In order to capitalise on the rapid growth and demand for petrochemicals and their derivatives in South East Asia, Japanese, European and American firms are now exploring and undertaking new petrochemical and chemical related ventures throughout the Asia Pacific region, usually in some form of partnerships or joint ventures with local governments and industrialists. Much emphasis has recently been placed on investments in Malaysia, Thailand, Indonesia, Singapore and the People's Republic of China.

To a large extent, Hong Kong has been overlooked or neglected for overseas chemical industry investments, primarily because of its limited infrastructure, a lack of suitable sites and oil refineries or upstream petrochemical plants to supply basic raw materials. However, this situation is now changing in light of a growing local demand for chemicals, a new supply of industrial land and the reversion of the territory to China by 1 July, 1997. With China’s big appetite for chemicals to fuel its rapid economic growth, Hong Kong will surely play a more significant role in the development of China's chemical industry and the overall growth of the chemical industry in the Asia Pacific region.

Hong Kong does not yet have local oil refineries or petrochemical plants to produce basic raw materials such as ethylene, propylene, butylene, styrene monomer and related chemical feedstock. However, many basic raw materials are easily and readily imported into Hong Kong by containers, duty-free, for conversion to high valued-added products. Several oil refiners and petrochemical producers have expressed interests in setting up oil refineries and related downstream petrochemical operations in Hong Kong or in southern China near Hong Kong.

Some basic plastics are produced in Hong Kong. Polystyrene, PVC and some specialty chemicals are produced by Dow Chemical, Hong Kong Petrochemical, and alike. Dow Chemical and Hong Kong Petrochemical each operates polystyrene plants exceeding 100,000 tonne per year of capacity.

Hong Kong Petrochemical Company is a joint venture among Enichem of Italy, Yukong of S. Korea, and CITIC of China, and it operates its polystyrene plant in Yuen Long of the New Territories, on one of the estates of the Hong Kong Industrial Estates Corporation. Funded by the Hong Kong Government, the Hong Kong Industrial Estates Corporation now owns 3 industrial estates of a total area of 210 hectare and sells its land at development cost to qualified applicants. Other overseas chemical companies having plants in Hong Kong include Cabot Plastics, Coates Brother, Eastman Chemicals, Hoechst, Ciba-Geigy, W.R. Grace, and Mobil Chemical.

Plastics blending and conversion is a significant industry sector in Hong Kong. Hong Kong's plastics industries are heavily involved in the conversion of basic and specially tailored plastics to produce moulded parts for automotive, aircraft, electronic, electric appliance and other advance applications.

Production of expandable and foamed polystyrene containers for food and beverage containers, electronic packaging, insulation applications, etc., are also important industries in Hong Kong. Local industries also produce a variety of polyurethane foamed products for shoes, clothing, insulation, cushioning and other uses.

Other important, growing sectors in Hong Kong’s chemical industry include the manufacture of pharmaceuticals, medicines, cosmetics, industrial gases, chemical coatings and some specialty chemicals for local consumption.

Most chemicals and raw materials are currently imported into Hong Kong mainly by containers from Singapore, Japan, Taiwan, S. Korea and other countries in the Asia Pacific, as well as from the U.S. and Europe. Hong Kong also serves as an important location for the re-export of many chemicals to and from China. Du Pont, as well as other companies, maintain distribution facilities in Hong Kong.

In 1991, the Hong Kong Government commissioned a study undertaken by Ernst & Young on the territory's chemical processing industry with the objectives to assess the industry's potential for growth and to identify the factors of production which may constitute determinants of and constraints on growth.

 

Since Hong Kong lacks an oil refining and petrochemical industry, there is little scope to develop base chemicals manufacturing. The study therefore concentrated on the manufacture of high-value-added chemicals and had identified several products of high-growth potential. They included: electronic chemicals, adhesives & sealants, construction chemicals, surfactants & cleaning chemicals, water effluent treatment, textile chemicals, metal finishing chemicals, paints & coatings additives, plastics additives, and photographic chemicals.

 

In response to the recommendations of the study, the Hong Kong Government has placed high priority to provide an adequate level of infrastructure support, including land and chemical storage facilities, to enable the free-market forces to operate for the further development of the territory's chemical industry.

 

The Tseung Kwan O Industrial Estate is the newest of the 3 estates of the Hong Kong Industrial Estates Corporation and its first phase of land was available for tenancy in 1994. Having land reclaimed from the sea, upon completion, the estate will have a 1,000 meter long water front which can provide berthing facilities for ocean-going ships, an advantage over the two other estates. This is particularly attractive to tenants with processes requiring large quantities of liquid feedstock.

 

Other sites are also planned for industrial developments in Hong Kong. A 102 hectare site in the south east of the territory will be developed to cater for industries requiring deep waterfront and for bulk storage of chemicals and other inflammable or toxic substance. Another 55 hectare site in the north west of the territory will be developed as a Special Industries Area to cater for industries which are land extensive and capital intensive, with heavy water usage and deep waterfront access requirements.

 

Supporting facilities planned include a public oil and chemical pier to accommodate ocean-going vessels of up to 80,000 dwt, and where necessary, two dolphin berths, multi-user marginal quays, and a chemical waste bulking and treatment facility in addition to an existing one located on the Tsing Yi Island. These industrial sites have active development programmes and will become available by the year 1999.

 

In 1996, Hong Kong imported US$13.5 billion of chemical products, retained US$4.0 billion and re-exported the rest of them. After clothing, electronics, textiles, and watches and clock, the chemical industry is Hong Kong’s 5th largest domestic export earner reporting US$1.1 billion largely plastic resins and synthetic fibres. The industry has some 500 plants employing 6,100 people.

 

Plastic conversion is currently the largest chemical related business in Hong Kong, and Hong Kong produces a wide range of finished plastic products for automotive, radio, toys, cassette recorders, electrical appliances, cameras, computers, and numerous other electronic and general industrial applications.

 

There are 1,850 factories engaged in plastic conversion in Hong Kong employing about 13,000 people. As a major supplier of components and parts for a wide range of other industries, the plastics industry sector also exported plastic wares and alike to the tune of US$500 million in 1996. The sector consumed over US$1.2 billion of plastic resins in the same year.

 

In comparison with other areas in the Asia Pacific region, Hong Kong offers many attractive features and advantages to chemical companies. They include:

 

Infrastructure in Hong Kong now exists for the import of most basic chemicals and raw materials by containers and for the export of finished products to China, throughout Asia and the world.

 

Import tariffs for raw materials, finished products and equipment are non-existent. The cost to construct chemical plants can therefore be substantially lower in Hong Kong than in the U.S., Japan, Europe and other countries in the Asia Pacific Region.

 

Without restriction, Hong Kong allows 100% ownership and control of businesses established by foreign firms. It is of particular importance to chemical companies not willing to share their proprietary technologies with a local partner.

 

There are fewer government regulations for companies local or overseas, to set up chemical processing plants in Hong Kong than in most other countries in Asia.

Corruption is rampant in many parts of Asia but Hong Kong is among the least corrupted. Running a business in Hong Kong has fewer hidden costs.

 

Due to its prosperous, growing economy, favourable trade balance and wealth, Hong Kong has a vibrant local market and a pent-up demand of industrial raw materials from its dispersed manufacturing industry having its base expanded into southern China, many parts of the Asia-Pacific region and even the world. Hong Kong-based firms alone employ directly and indirectly 4 million people in southern China.

 

As the gateway to China, Hong Kong will continue to grow along with China and other emerging economies in the Asia Pacific. US$135 billion in goods were shipped to and from China through Hong Kong in 1996.

 

The territory has better physical access to China's markets than Singapore or other Asia Pacific countries. Hong Kong has the most frequent flights to China, by air, road, rail and sea. It takes only 45 minutes car ride from Hong Kong to Shenzhen, one of the first Special Economic Zones established by the Chinese Government.

 

With investments of US$100 billion, Hong Kong is the largest investor in China. China also invested heavily in Hong Kong amounting to US$17 billion. The two economies have thus developed a very close relationship in trade and investment.

 

The territory's stock market by capitalisation is the 7th largest in the world, second to Japan in Asia. Through a continuous listing of leading enterprises in China, Hong Kong is expected to be the world's principal market in the 21st century and the capital market for China.

 

Hong Kong's chemical industries have not yet been fully developed especially for high-value-added products identified by the Ernst & Young study. Market demands are also high for other chemical processing products such as traditional Chinese medicine, pharmaceuticals made in facilities certified to Good Manufacturing Practice, and drugs with novel delivery technology. Together, they offer good investment opportunities to chemical companies, specifically those from overseas with appropriate technologies.

 

The current 16.5% corporate tax rate is a significant investment incentive. The Hong Kong tax rate is very much lower than the tax rate of other countries in the Asia Pacific area, and much more favourable than those in North America, South America, Europe, and in fact, most countries of the world. There are no taxes on dividends, interest or capital gains. The initial depreciation allowance for plants and machinery can be as high as 60% and operating losses can be carried forward indefinitely.

 

There are no restrictions on types of ownership or the nationalities of company directors. Joint ventures and partnerships are also allowed, without restrictions. Foreign firms and joint ventures are free to purchase land or buildings and conduct all sorts of business activities.

 

Hong Kong has the status of a free-trade territory and is a separate customs territory from China.

 

After 1 July, 1997, Hong Kong becomes a Special Administrative Region of China. According to the Sino-British Joint Declaration, an agreement between U.K. and China on the future of Hong Kong signed in 1984 and lodged with the United Nations in 1985, Hong Kong will continue its free-trade and free-enterprise policies, and its capitalist way of life for at least 50 years after 1997. Except in areas of defence and foreign policy, Hong Kong will enjoy a high degree of autonomy and preserve its existing legal, economic, financial and social systems, which in large part, the major pillars of the present economic success of the territory.

 

Under the "One Country, Two Systems" concept of the Sino-British Joint Declaration, policies applied in China will not apply in Hong Kong after 1 July, 1997. Hong Kong Government will be run by the people from Hong Kong and China will levy no tax from the territory.

 

Since 1983, the Hong Kong dollar is closely linked to the U.S. dollar, backed by a strong foreign exchange reserve. Therefore, investors in Hong Kong are able to conduct trade worldwide in U.S. dollars without the risk of foreign currency fluctuations.

 

Free transfer of capital, profits and dividends from investments in Hong Kong are made without restriction.

 

Hong Kong ranks high in Asia regarding economic prosperity and growth. Its per capita GDP was US$24,500 in 1996 reporting a real GDP growth of 4.7%. As the world’s 7th largest merchandise trading entity, Hong Kong’s international trade in 1996 amounted to US$383 billion. It is a cosmopolitan and affluent society favoured by its expatriate community.

 

Hong Kong Government is pro-business and it provides assistance to manufacturing industries largely through the support services offered by the Hong Kong Productivity Council. Its other support initiatives include the Applied R&D Fund, the New Technology Training Scheme, the Industrial Support Fund, and the establishment of the Hong Kong Industrial Technology Centre and the Science Park.

 

Hong Kong has been an preferred investment location of leading industrialised countries. The territory is the second most favoured investment location for Japan in the Asia Pacific region after Indonesia. It is the third most favoured investment location for the U.S. in the region after Japan and Australia. The U.K. has substantial investments in the territory as a sovereign power. China ranks Hong Kong as its most favoured overseas investment location.

 

Over 4,600 firms in Hong Kong were registered with an overseas interest. Of which, some 800 firms were regional headquarters and 1,500 others were offices with regional responsibilities, according to a latest survey. Many global companies have a direct presence in Hong Kong and those engaging in chemicals include Mobil Oil, Exxon, Du Pont, Eastman Chemical, Union Carbide, ARCO Chemical, Dow Chemical, W.R. Grace, Air Products & Chemicals, GE Plastic, Hoechst, ICI, Ciba-Geigy, BASF, Shell, BP, Enichem, Asahi Chemical, Hitachi Chemical, Mitsubishi Chemical, and Dainippon Ink & Chemicals.

 

The Chinese Government has agreed that to provide added assurance to overseas investors on a fair treatment and protection of their investments in Hong Kong, the territory can negotiate its own investment promotion and protection agreements, which will remain effective post 1 July, 1997. Australia with other 13 countries have signed such an agreement with Hong Kong.

 

As a Special Administrative Region of China, Hong Kong is entering into a new era. It is now a territory of considerable wealth with sound economic fundamentals, and an affluent society but highly competitive. After almost 20 years of liberalising its economic policies, with the facilitation from Hong Kong and its firms, China has emerged to become a significant player in international affairs. As a country with 1.2 billion population, China also promises to become the world’s largest consumer market in the decades to come.

 

After 1 July, 1997, being a part of the country but guaranteed with a high degree of autonomy from China, Hong Kong will sustain growth and prosperity. It will continue to have a competitive edge over other countries to trade and invest in China and remain attractive as a preferred investment location for transnational companies wanting to take part in the rapid growth process of the Asia-Pacific region in the 21st century.

 

 

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