Optimism outweighs fears for Hong Kong growth

The July 1, 1997 “handover” that transferred Hong Kong back to Communist China after a century of British rule has many important implications to investors and exporters wanting to do business in Asia.

Perhaps most notable is Hong Kong’s increasing role as a focal point for entry of products into mainland China. Experts agree, however, that new challenges will be inevitable as Hong Kong settles into its new position.

There are two key documents that protect Hong Kong’s right to keep its capitalist economy and local autonomy within the People’s Republic of China: the 1984 Sino-British Joint Declaration and the Basic Law passed by the Chinese National People’s Congress in 1990. Together, the documents pledge that until the year 2047 Hong Kong is to be a Special

Administrative Region, or SAR, with independent legal and social systems and the right to elect its own legislature, without outside interference.

China’s powers in Hong Kong are to be limited for the next 50 years to foreign policy and defense. In short, Hong Kong is to be the first test of Chinese Leader Deng Xiaoping’s “one country, two systems” formula.

Instead of the forecasted exodus of brains and capital, Hong Kong over the past four years has increased output by 26 percent, education spending by 76 percent and health-care spending by 99 percent. Far from running for cover, multinational companies have set up 200 new regional headquarters, with reportedly 11,500 more Britons, 11,000 more Americans and 9,000 more Japanese in residence. In addition, Hong Kong is close to completing the world’s largest construction job — the new Chek Lap Kok airport with its undersea tunnel and land links.

As the Chinese economy expands, Hong Kong is positioned to extend, not to forfeit, its advantages as the dynamo of the booming region surrounding the South China Sea. There is a threat, however, that low-level officials might try to meddle in the affairs of the SAR.

Despite this potential problem, the grounds for cautious optimism outweigh those that spell fear and alarm since a smooth transition is in the best interest of China. In fact, Chinese officials must not overlook the following facts:

* Hong Kong adds 21 percent to the size of China’s economy, the equivalent of

California’s contribution to the U.S. economy;

* Half of China’s exports flow through Hong Kong;

* Three-fifths of all foreign investment channeled into China goes through Hong Kong;

* Hong Kong’s foreign exchange market (the fourth largest after London, New York and Tokyo) is by far the most effective vehicle for Chinese companies and municipalities to raise capital.

Even after Hong Kong’s October stock market crash, the financial sector is still strong and, on average, banks have capital equivalent near 18 percent of their risk weighted assets — more than double the minimum specified by the Bank for International Settlements. Moreover, with average bad-debt ratios of a mere 0.18 percent at the end of 1996, the banks are in good shape to absorb any fluctuations.

Still, there are those who worry about Hong Kong’s competitiveness as other Asian countries devalue their currency while the Hong Kong dollar remains pegged to the American dollar.

The structure of the Hong Kong economy also has changed over the past few years. It is no longer a manufacturing center that once presented stiff competition to low-wage countries in the region. In fact, manufacturing exports now account for less than one-tenth of GDP, though

the role of services is growing.

While Hong Kong is quickly becoming the service center for China, it still faces stiff competition in terms of becoming the services regional hub from Singapore and other neighboring countries.

However, Hong Kong’s increasing integration with the Greater Chinese market secures its role as a conduit for investment and trade to the world’s fastest growing market. Furthermore, Mainland China has already replaced Britain as the biggest outside investor in Hong Kong. This means, however, that Hong Kong’s fortunes are now dictated by Beijing’s ability to keep its economy on track. In the future, Hong Kong’s competitiveness may well be judged mainly by its ability to sell services such as finance and management skills to China.

For Colorado companies willing to take on the challenges, important new markets are clearly emerging for goods and services in Hong Kong. For example, according to Jeff Muir, the vice chairman of the American Chamber of Commerce in Hong Kong, “Environmental work, waste management and related equipment” are new markets that will experience booming

growth not only in Hong Kong, but also in other parts of Asia. These opportunities may be well worth the risk for local companies looking to expand into Asia.

Chang Han is an intern at the World Trade Center Denver.