A Nasty Little Shoving Match In Hong Kong

For almost 150 years, China has borne a grudge against the Jardine group. In the 1840s, its drug trade helped start the Opium Wars. In the 1980s, the British group, whose businesses range from retailing to real estate, shifted its legal domicile from Hong Kong to Bermuda, demonstrating a lack of confidence in Beijing's ability to rule after 1997. This year, the Chinese blamed a Jardines director for allowing Governor Chris Patten's electoral reforms to pass.

Now a new conflict has erupted, with implications for Hong Kong and its huge concentration of U.S., Japanese, and other foreign investment. On Sept. 13, China said it would veto construction of a container-shipping terminal--expected to cost more than $1 billion--as long as Jardines was part of the consortium set to build and run it. Beijing can do that since the contract would extend beyond Britain's turnover of Hong Kong in 1997. With this threat, China has upped the ante in its efforts to shape Hong Kong's future. There was no mistaking the timing: The threat came just days before the first election under Patten's reforms, in which Beijing opponents won big.

British officials say the affair shows that the Chinese are prepared to interfere in the integrity of the colony's economic decision-making. Says one frustrated official: "Here you have clear evidence of Chinese unwillingness--for purely political reasons--to countenance a really good company's involvement in a project."

If politics has intruded into business, however, the Chinese insist that the British are responsible. The Hong Kong government, Beijing says, started the political game by granting Jardines the terminal project as a payback after Jardines director Martin Barrow, a member of the colony's legislative council, abstained during a crucial vote last spring on Patten's reform package. Barrow and Patten deny the charge.

On another front, Jardines is angering the Chinese by pulling out of the Hong Kong Stock Exchange. In March, Jardine Matheson and affiliate Jardine Strategic Holdings announced they would quit the local exchange, and in September Jardines affiliates Hongkong Land Holdings, Mandarin Oriental International, and Dairy Farm International announced similar moves. Jardines is leaving because it fears that after 1997, when securities rules will be set by China, it might be vulnerable to an unfriendly takeover.

In all, the Jardines moves mean some 10% of the Hang Seng Index will be delisted. To offset the pullout, Tony Chiu, manager at HSI Services, which compiles the index, says one option being considered is to expand the number of companies in the index from the current 33.

The latest row comes at an uncomfortable moment for British business executives. Worried about Chinese wrath after the Hong Kong elections, they had organized a delegation of some 100 top executives from over 70 companies. A week after the Jardines flap broke out, those executives were getting a good reception in Beijing, but the tension was evident. "British companies are operating against an uneasy political background," admits Francis Cornish, British senior trade commissioner for Hong Kong.

SEEING A BRIGHT SIDE. Perhaps the most sensitive point of contention between China and Jardines is Beijing's fear, first expressed in December, 1992, that the company is supporting alleged British efforts to subvert and destabilize Hong Kong before 1997. Last January, Beijing officials used administrative rules to force the closure of several Jardine Transport Services offices in China. Yet until now, none of its major business interests had been seriously threatened.

Other foreigners are hopeful that the impact of Jardines' disputes with China can be contained. Says one executive connected to the consortium: "If it's just a one-off hit on Jardines, then it shouldn't be a problem." The Hang Seng shrugged off the delistings announcements, trading in the same narrow range as before.

Optimists can even find a bright side to the dispute. In singling out the port project, the Chinese have shifted their attention away from Hong Kong's new airport. Now under construction, the $20 billion project, with a large number of its contracts extending past 1997, has been an easy target for Chinese officials who want to take potshots at Patten. But many in Hong Kong suspect that even China's leaders now realize the airport's importance.

That means Beijing could focus on the container port. "They need something to stick it to the British," says an executive with a U.S.-based company. "The terminal has got everything: visibility, a big British company with a bad colonial history." So more Jardines projects may be vulnerable, such as plans by Dairy Farm to open supermarkets in China. For a group with Jardines' scope--and history--China will have no shortage of targets to show its displeasure.

    Before it's here, it's on the Bloomberg Terminal.