Hong Kong still means business under China

The fireworks were sparkling across the sky of Hong Kong’s #725m Tsing Ma bridge between the mainland and the new airport as Margaret Thatcher declared it open. But as the former Prime Minister watched the spectacle, part of what is being seen as Britain’s departing gift to Hong Kong, where was the chief executive-designate Tung Chee-hwa, the man who will replace Chris Patten on 1 July?

He was just over the border in the Guangdong province of China talking to government and party officials. His excuse for not attending? He had “better things to do”.

Yes, it was an enormous snub to Lady Thatcher and to the departing administration.

More significantly, however, it may be seen as an early lesson, not so much in what Britain may expect from Hong Kong in future in trade and business, but in where new loyalties will lie.

Many a UK-based Sinologist understands exactly the point Tung was attempting to make. Even Lord MacLehose, the long retired 79-year-old former governor of Hong Kong, commented that using Lady Thatcher to open the bridge was “probably totally unwise”.

In any business with Hong Kong and indirectly China, whether investing or sourcing there, it is absolutely vital to understand where you are coming from in Chinese eyes.

From Beijing’s point of view Hong Kong represents not just a wonderful edifice of prosperity – the goose that lays the golden egg – but, just as importantly, a century of humiliation. It is as if China had colonised the Isle of Wight, had made it more prosperous than the south of England and was reluctantly handing it back.

Despite the century of associations, Britain trades with China and Hong Kong with very few innate benefits and some disadvantages. For a start, its European partners were delighted to rush in on big infrastructure deals when relations reached rock bottom over the Patten democracy proposals in 1994.

Things have improved markedly since then and it is true Hong Kong speaks (some) English, has a common law system of jurisdiction and a superbly effective and (still) politically neutral civil service. But don’t expect any favours or thanks for times past. It also (still) has a free press, so the flow of information so vital for business is currently unhindered and uncensored.

But Tung is widely seen as dancing to China’s tune, no matter how difficult the rhythm is to follow.

That said, views on the future of Hong Kong as a place in which to do business fall into two camps, those who believe its unique position and prosperity will continue much the same as today and those who feel several factors, some cyclical, but others also structural and indeed political will define its commercial future as not quite as rosy as it has been so far. Of those camps the majority view is certainly that of the optimists – and there is no shortage of material to support their view.

Let’s look at some of the statistics to begin with. Hong Kong has been defined by several organisations as having the world’s freest economy.

It has Asia’s highest per capita income and the world’s second highest per capita holding of foreign exchange. It is defined as having Asia’s second least corrupted economy (after Japan). It is the world’s third most competitive economy, the world’s fourth largest source of direct foreign investment and it is the world’s seventh largest trading economy – fourth if we regard the EU as one entity.

Hong Kong is the world’s ninth largest exporter of services, the second largest financial centre on some estimates, the second largest venture capital centre and the world’s fourth largest bullion market. It has the world’s fifth largest stock exchange on the seventh largest stockmarket.

Hong Kong is the world’s busiest container port, its airport handles more international cargo than anywhere else. It has Asia’s highest rate of telephone penetration; even the world’s highest connection to optical fibre cables.

So it is top of, or at least high up, the league in whatever area you wish to choose.

Take the word of Michael Sze, the executive director of the Hong Kong Trade Development Council: “All the present indicators are that Hong Kong is extremely confident on the eve of transition. The stockmarket is at record levels, all the surveys of international chambers of commerce show confidence levels of their members over the 90% mark.

“More Hong Kong people are returning permanently to Hong Kong. Multinationals are still coming in. And there has been no capital flight. The place looks and feels like what it is, a remarkably successful business hub for Asia.

It does not look like a city on the edge of decline as some media scribes would have you believe.”

He added: “Hong Kong people have been through a rollercoaster ride of controversies and change … but the key thing is that we have kept on moving ahead, remained confident and simply got on with creating a strong economy.”

Sze rightly points out that despite all the controversies of recent years – from funding for the new airport, through to the development of a new container terminal, even to the constitution of the new Court of Final Appeal to replace the Privy Council, there has been far more agreement than disagreement.

“There have been and there will continue to be differences of opinion,” insists Sze, “some of them debated rather vigorously. But that is exactly what you would expect of a free, pluralistic society.”

But you would expect that of someone in Sze’s position, wouldn’t you?

Take a political neutral then. The Asian Development Bank in its forecast for 1997/98 published in April was extremely bullish about Hong Kong’s economy over the handover and into the future.

It stated: “Any economic uncertainties that might result would seem to have been discounted and, as the transfer date approaches, economic activity is buoyant.”

It concluded that the local business community was optimistic, if cautious.

There was also little evidence of capital flight over the period up to the handover with growing confidence reflected in the strengthening of property investment. Several large multinationals have recently purchased premises for regional headquarters in Hong Kong.

The report added: “With increasing consumer demand and investor confidence Hong Kong will assume its new status as a special administrative region with fiscal strength, improved internal and external transport links and a declining inflation rate.”

It anticipated a smooth transition, a rebound in retail sales, rising investment and a turn around in exports. Economic growth, it states, for 1997-98 should be about 5.5%.

The mainland’s need for a stable and convertible currency would ensure the maintenance of the HK-US$ link for the foreseeable future.

Take an alternative view. Michael Enright, visiting professor at the University of Hong Kong and formerly of the faculty of the Harvard Business School, admits to formerly been sceptical about the future of Hong Kong’s economy.

However, now he says: “Hong Kong benefits from the combination of tens of thousands of local firms with trans-border activities and thousands of operations of overseas firms. Hong Kong is the leading centre in Asia for the regional offices of North American, European and Japanese multinationals as well as the de facto capital of the overseas Chinese business network that is shaping the development of Asia.

“Hong Kong’s local firms provide dynamism and local relationships, while its overseas firms provide international calibre skills and worldwide contacts,” Enright says.

“The territory’s large managerial firms provide the business infrastructure and services that allow entrepreneurs to hustle after each deal sometimes employing no fixed asset other than a cellular telephone.

“At the same time the entrepreneurial firms provide a rapidly evolving customer base that keeps the larger firms on their toes, and entrepreneurial options that influence the way the managerial forms attract and compensate key employees. Hong Kong succeeds not just because it has entrepreneurial firms, not just because it has managerial firms, but because it has a mixture unmatched in the region.”

So to an extent, for Professor Enright at least, Hong Kong’s success may be defined as its own particular business culture. This is not something one hears trip easily from the minds of many analysts.

But what about competition from elsewhere in the region for Hong Kong’s role and position? Several large companies maintain the flexibility to move to Singapore for instance if things go wrong. They keep relative silence on this factor though, not wishing to be seen as losing faith in China.

Singapore and other regional centres have been promoting themselves very keenly to take advantage of the 1997 uncertainties and Singapore’s legal system is tried, tested and trusted. That is an undeniable strength. But Hong Kong argues Singapore does not have China as its hinterland – and, after all, China is why Hong Kong prospers. Singapore may be fine as a centre for trade with South East Asia but not with the big prize, China.

Others argue that Shanghai will be deliberately engineered to overtake Hong Kong in the next decade or so. Its natural links to the industrial heartland of China are much stronger than Hong Kong’s and the development of Shanghai to number one position would be a prize for any Beijing government.

Paul Lowndes, support manager, general management at Standard Chartered Bank says: “Hong Kong has a number of specialities. It can survive competition from other centres. Nor do I see Shanghai taking over and replacing Hong Kong because Hong Kong can do a number of things that Shanghai does not, such as trading with Taiwan and serving Guangzhou.”

Of course, the Shanghainese would not agree with this (before the Second World war Hong Kong was “Little Shanghai”). They would argue, only partially correctly, that Hong Kong prospered because it benefited form Shanghai’s financial, textile and shipping experts fleeing south. Even Tung is Shanghai-born.

But, in the short term at least, Shanghai cannot become an information centre; state control and communism preclude that. Its trading prospects too will depend on China’s entry into the World Trade Organisation (WTO).

Shanghai is developing as a banking centre with 45 of the world’s top 100 banks now operating there, but the total annual value of transactions in the Foreign Exchange Centre is still only equivalent to about one day’s forex transactions in London.

In Shanghai and China capital markets are run by quotas and the vast bulk of listed companies have the government as the major shareholder.

If more freedoms were given to Shanghai then doubtless other Chinese cities would want them.

Give Shanghai the same autonomy as Hong Kong should have after the handover and the competition might hot up, but for the foreseeable future Hong Kong remains China’s international finance centre and Shanghai its domestic centre.

Once China’s currency, the renminbi, becomes a fully convertible currency then Hong Kong really stands to benefit.

“The renminbi could be the number one currency in the world and Hong Kong would be the place with access to the renminbi market,” Tam Ping Shing, the president of the Hong Kong foreign exchange association was quoted as saying recently.

But what do the pessimists say? The most downbeat of reports in recent times came from the Massachusetts Institute of Technology (MIT) in April which claimed Hong Kong had “critical weaknesses” and could no longer rely on the strengths and advantages it has acquired during the past 40 years of its rapid expansion.

In a well-researched study it pointed to factors including the constraints of family ownership of companies, the weakness of its technology base and high labour and land costs. Its recommendations ranged from special financing for high-tech companies by the issuing of technology shares to boosting the protection of intellectual property rights. There were doubts about the sustainability of Hong Kong’s output and its ability to exploit major opportunities unless it adapted to changing markets.

The piracy of intellectual property rights was another concern for MIT.

That is understandable. You can already buy pirated Windows 97 on the streets of Hong Kong, albeit riddled with bugs, even though it has not been generally released.

Piracy in everything from CDs to software has worsened of late, according to the US government which recently placed Hong Kong on its “watch list” – a level one notch below the “priority watch list” which raises the prospect of trade sanctions if improvements are not made.

If Hong Kong goes up that notch it has promised to raise the issue for dispute settlement with the WTO but that would be a messy business and win it few friends where it really needs them … in Washington.

Hong Kong needs the US to constantly renew its “most favoured nation” (MFN) status for China, if that was blocked the effects on the economy, so dependent on China’s ability to trade with the US, would be dire. It is one issue everyone from Patten through Tung to the most vociferous internal opponents of the new administration are united on. There has been talk in Washington of only renewing MFN on a six-monthly basis. The effect would be grave.

But how do observers compare Hong Kong to its regional rivals then?

The Economist Intelligence Unit (EIU) recently rated Hong Kong as riskier than both Singapore and Taiwan as a place in which to invest. In the areas of political risk, its economic structure, its economic policy and its liquidity Hong Kong was given a “B” rating.

Currency risk was also given a “B” rating, reflecting the view in some areas that after the handover the currency peg between the Hong Kong and US dollar would come under speculative attack. The banking sector was also given a “B” rating on the grounds that growing expectations of interest rate increases could precipitate a fall in the stockmarket hitting the banks and affecting sentiment in the property market where the banks provide mortgages.

On a scoring system where the lower the score the better, Hong Kong rated 21, Taiwan 18 and Singapore 11.

The EIU did not dismiss the political problems surrounding the handover, with China’s intention to abolish Patten’s directly elected legislature and water down its Bill of Rights.

The real pessimists worry that the obsequiousness towards China manifested by many of Hong Kong’s politicians now – the desire to keep one’s nose clean and not rock the boat, will only lead to an unlevel playing field for future international business.

They believe Hong Kong’s new Court of Final Appeal will prove not to be up to the job and that corruption, the curse of Hong Kong in the 1960s and 1970s, will return with a vengeance. The territory’s Internal Commission Against Corruption has an excellent, although not unblemished record.

What would happen if it went soft?

But then Hong Kong has a civil service and a police force second to none in the region and there is no evidence so far to suggest they will waver.

Tung is changing the way of viewing things. In seeking to amend various civil rights laws he has talked of the need for a balance between “civil liberties and social order” as well as between “personal freedoms and public interests”.

Hong Kong’s fledgling democracy was thrown out of the nest before it could even fly when China said it would scrap Patten’s directly elected Legislative Council. There will be new elections in June 1998. Of course, they may well be rigged and evidently pro-China, but they won’t necessarily be any less democratic than the dreadful “functional constituencies” of bankers and lawyers voting for their favourites, the system previously promoted by Britain.

But suppose the kow-towing towards China spreads, what will the new political correctness mean? After all Beijing has a long memory.

An example: The 11 China-based retail outlets of the Giordano chain – the clothing retailer founded by Hong Kong businessman Jimmy Lai – were closed down in China in 1994 after Lai’s Next magazine offended Chinese premier Li Peng.

Lai sold out and now has nothing to do with Giordano but just recently five state-owned enterprises backed away from a proposed share placement in mysterious circumstances. Giordano had gone out of its way to find politically correct partners but all the suspicions are that it was just politically incorrect to do business with Giordano.

Martin Lee, the leader of Hong Kong’s Democratic Party has another argument which he now proffers to Western businessmen thinking of doing business in Hong Kong. In China it is difficult to do business because there is little or no accurate and trustworthy information. He charges that if the edifice starts to rock, and the bowing towards Beijing’s whim gets out of hand to the point that newspapers start to self-censor themselves, or indeed are censored by Beijing appointed minders, then the clean information with which world business can trade in Hong Kong today will be tainted.

Business will not know where it stands and will quite simply have to move elsewhere for its own good.

It is a thesis he had pushed around Europe and the US leading to accusations from Tung of “bad mouthing” Hong Kong. Tung meanwhile was so inept as to publish his own proposals on changes to civil liberties laws on the very day Lee was receiving a high profile award from the National Endowment for Democracy in Washington.

But a last word to Lu Ping, the head of China’s Hong Kong and Macau Affairs Office. He is adamant that the territory’s return to Chinese sovereignty will not damage its economic well being at all. Speaking in Brussels recently he stressed Beijing would honour the deal and Hong Kong’s special status and said business confidence in the colony was high, property prices were high and the business community did not fear China’s intentions.

“July 1 is the day following June 30 and preceding July 2, that is all,” he said.

David Wallen is the Europe editor of the South China Morning Post.