Enmeshment of two economies lays communist fears to rest
ENDING 155 years of humiliation for the motherland, Hong Kong goes home to China at midnight tomorrow with its business and investment communities in a mood of near elation.
Human rights and pro-democracy activists may be apprehensive as their freedom of political expression - enjoyed only in the final years of British colonial rule - is put under tight control but the handover has few terrors for entrepreneurs.
Shipping tycoon Tung Chee-hwa, who takes over from Governor Chris Patten as China's first leader of Hong Kong, actually welcomes the limits on demonstrations. Criticising Beijing has always been regarded as bad for business and Tung recently told the Financial Times that while he favoured gradual progress towards democracy, social order had to take priority. "In the past five years we have become too politicised," said the man who, ironically, made his fortune in Hong Kong after fleeing Shanghai when the Communists marched in nearly 50 years ago.
Indeed, Hong Kong might have remained a smallish port at the mouth of the Pearl River had it not been for the huge influx of refugees, many of them business leaders, after the revolution.
And as China opened up - to trade before Deng Xiaoping's reforms and investment opportunities afterwards - the history of the past 40 years has been the ascendancy of Hong Kong as one of the four Pacific Rim "tiger" economies.
The interdependence with the mainland has intensified since 1979 when the issue of the end of Hong Kong's New Territories- leased for 100 years to Britain in 1897 - was raised by Deng Xiaopeng. It concluded in 1984 with the Beijing Joint Declaration between the UK and China which enshrined Deng's "two systems, one nation" -- which, if honoured, gives Hong Kong a high level of autonomy and the capitalist system for the next 50 years.
Any worries about the second concession have been dispersed by the explosion of "socialist market economy" reforms in China which has seen $100-billion in foreign direct investment in the 1990s alone. About 60% of external investment in China has come from Hong Kong in over 400 enterprises. They range from a high-tech electronics group employing 20 000 workers in neighbouring Guandong to infrastructure such as the 123km six-lane highway linking Hong Kong with the Shenzhen free trade area, the region's industrial powerhouse. Hopewell Holdings which built the road has $4.4-billion invested in China while New World Development plans to increase its $3-billion in property five-fold to $15-billion in the next five years.
In the reverse direction, a host of Chinese enterprises have set up shop in Hong Kong leading, in the past four years, to the so-called "red chip" boom. Over the past 18 months alone mainland companies and former state-owned businesses have raised $8-billion in flotations on the Hong Kong stock exchange - in a period when foreign direct investment seems likely to be tailing off. According to The Economist it could drop (for the first time in the 1990s) to $30-billion this year from $42-billion in 1996 because of over-capacity in sectors such as the motor industry.
Helped by Hong Kong's open market and lack of exchange controls, the handover will increase the economic enmeshment "because it is too important a tool for the Chinese as far as getting foreign investment", according to Louis Koo, ABN Amro Hoare Govett's corporate finance chief in Hong Kong. However, as much as Hong Kong's businessmen hope to make a lot more money out of their cross-border investments the island is not highly dependent on the mainland. ING Barings estimates that only 5% of the 1998 earnings of companies in the Hang Seng equity index will derive from China.
Taking over Hong Kong will cost China virtually nothing - the former colony's healthy revenues will amply cover costs such as the People's Army garrison. In return it is getting an economy with a gross domestic product of $160-billion, equal to 20% of the entire mainland's total. And Hong Kong brings with it $60-billion in forex reserves compared with all of China's $112-billion. The short-term outlook is rosy. Real gross domestic product growth should rise from 4.7% in 1996 to over 5.7% this year and next on Deutsche Morgan Grenfell forecasts.
China desperately wants the transition period to go smoothly. Hence the sensible retention of several key Chinese civil servants under British rule in the "cabinet" which will advise Tung. In Beijing, Communist party leaders have issued a stream of assurances. Li Lanqing, vice-premier responsible for economic relations and trade, told the Financial Times: "We will not be interfering. One of the most important contributions to the excellent economic growth is the efforts made by Hong Kong people themselves. It is therefore absolutely unnecessary to interfere in the internal affairs of Hong Kong except for foreign affairs and defence."
So far the stock market has shown few signs of post-handover worries. The Hang Seng index generally tracks Wall Street and US interest rates. It dipped in February and March in response to weaker US bonds and equities. But since this year's low touched in the first week of April, the Hang Seng has risen by 26% and with the market's average price-earnings ratio at around 14, shares are not being considered on their economic fundamentals.
The Hong Kong market has also benefited from problems in Thailand, the Philippines and Malaysia which have made it a nearby safe haven for many managers of Pacific Rim portfolios. There has been speculation that the Beijing regime would support Hong Kong shares if need be.
As ING Baring's recent strategy research noted: "A drop in the stock market immediately after June 30 will be embarrassing, not only for China but more importantly for (President) Jiang Zemin, who needs to consolidate his power before the 15th Party Congress and use the handover as a means to raise his profile domestically and internationally."