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Hong Kong as high-tech center?

Beijing tries to capitalize on city's openness to sidestep US trade controls

| Hong Kong, Macau

The U.S., anxious to preserve its lead in technologies it deems vital for national security, has instituted a range of trade and investment curbs aimed at disrupting Beijing's "Made in China 2025" industrial modernization program.

But far from abandoning its ambitions, China is instead ramping up efforts to rise up the value-added chain and foster homegrown innovation. It seeks to reduce its heavy reliance on U.S.-made hardware and software, which includes the importation of 80% of its microchip supplies.

In a clever maneuver, Beijing has now quietly assigned Hong Kong a role as a national technology and innovation center. In a move that has received relatively little attention abroad, Deputy Premier Han Zheng, head of the Communist Party's policy group for Hong Kong, declared during a May trip to neighboring Guangdong Province that Hong Kong would be the innovative technology hub for the wider area of southern China.

The reason? Unlike China, Hong Kong is classified by Western countries as a market economy and so is not subject to Cold War-era restrictions on the export of goods that can have both military and civilian applications.

China has long argued that the most effective way to address its bilateral trade imbalance with the U.S. would be for Washington to relax its controls on such dual-use products and let Chinese companies buy America's high-speed computers, advanced radar systems and other sophisticated equipment.

Even a U.S.-built CT scanner could not be licensed for export to China, according to a person familiar with the event, until its central processing unit had been security-sealed because the Pentagon thought it could be removed and used to enhance China's missile technology.

Hong Kong, however, has managed to retain the same status it enjoyed in terms of U.S. export controls as it did before 1997 under British control. Taking at face value Beijing's pledge to preserve Hong Kong's market economy for at least 50 years under its "one country, two systems" doctrine, the U.S. considers the city as a separate export destination. Macau, by contrast, is subject to the same restrictions as mainland China due to perceived shortcomings in its administration of export controls.

Companies and organizations in Hong Kong, as a free port outside the curbs that affect China shipments, can thus order new machinery, equipment and parts at will. The city can also sell its products to any part of the world with little hindrance.

What better place then to house China's technology and innovation center than a city which has a well-respected court system, which honors intellectual property rights and which is an international financial center to boot?

China's leaders have thus begun to take a number of initiatives to put this idea into motion.

At Beijing's behest, Hong Kong is introducing a fast-track immigration program for scientists and technologists from around the world. The quota this first year is for 1,000 scientists -- a large number by anyone's standards.

The Chinese government is funding, for the first time, scientific research projects at eight Hong Kong universities. In tandem, the Hong Kong government has been asked to double its paltry research and development budget. Collaborative research between Hong Kong and mainland Chinese entities is being stepped up.

Promoting Hong Kong as a high-tech hub -- never a strong point before -- has the additional political appeal of strengthening the Greater Bay Area initiative, a flagship project designed to draw the former British colony closer to its neighboring mainland municipalities.

Shenzhen, the city adjacent to Hong Kong which is already bustling with tech startups as well as established players like Tencent Holdings, Huawei Technologies, DJI Innovations and Hon Hai Precision Industry, will continue to be the commercial incubator for the most promising scientific research.

Collaboration with Hong Kong will be built in from the start of any new projects. As and when research starts to bear fruit, the honor of launching new products will fall to Hong Kong. So while Shenzhen will remain the domestic hardware R & D hub, Hong Kong will spearhead China's international high-tech drive.

It is easy to envisage research labs being established in Hong Kong and daily traffic to and from Shenzhen increasing exponentially as the two cities start to merge commercially and physically.

To be sure, the determination of the U.S. to contain China's high-tech rise could lead it to try to tighten international export controls if it thought Beijing was using Hong Kong as a conduit to exploit sensitive technology or it could even end Hong Kong's special legal treatment.

Concerns about predatory Chinese investment have already led to a strengthening of the mandate of the Committee on Foreign Investment in the United States, which scrutinizes the national security impact of proposed acquisitions of U.S. companies by overseas investors.

Any further such moves would doubtlessly cause Beijing to redouble its campaign for ever more indigenous innovation and production. China may also take retaliatory action on U.S. acquisitions, as it did recently by blocking chipmaker Qualcomm's $44 billion bid for Dutch rival NXP Semiconductors on competition grounds.

In short, we may be in the early stages of not just a tit-for-tat tariff conflict but a full-blown digital cold war that could do immense harm to the global economy. China is making a smart move by putting Hong Kong at the center of its science and tech strategy but it will have to walk a fine line with Washington to pull this off.

Diana Choyleva is chief economist of Enodo Economics, a macroeconomic forecasting company in London.

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