High Hopes And High Anxiety

Today's powerhouse could become the nexus between China and the world, or just another corrupt communist city

Time: Midnight

Date: July 1, 2007

Place: Hong Kong, China

They said nothing could equal the old days, but the 10th anniversary of Hong Kong's return to China is turning out to be the city's biggest bash ever. High-tech fireworks soar into the sky, their glare competing with the neon logos on the Chinese company skyscapers below. At exclusive waterfront cafes along the harbor, throngs of young Chinese professionals are balancing champagne glasses, their conversations gliding easily from English to Mandarin to Cantonese. Nor has the optimism that fuels the festivities been lost on the markets. The Hang Seng Index, dominated now by scores of top-ranked Chinese industrials, set records all week. "Euphoria stocks," the analysts dubbed them.

Like Manhattan, London, or Tokyo, the might of this Asian metropolis extends far beyond the skyscrapers downtown, which act as the nerve center of Chinese finance, advertising, and design. Connected to southern China by superhighways and railroads, Hong Kong has suburbs that reach far into Guangdong province, where commuters retreat on the weekends to spacious homes and private golf clubs. During the day, many work at state-of-the-art R&D centers along the border run by Motorola, Siemens, and Sony. China's best and brightest are present everywhere, providing whatever kind of brainpower is required by multinational investors.

Hong Kong as the cosmopolitan capital of Chinese capitalism. This is the storybook version most of the city's elite would like you to believe. For them, the new Hong Kong is poised to become the crucial nexus between the booming China market and the rest of the world.

But there's a competing, more disturbing vision for Hong Kong shared by many in the U.S., Europe, and even Asia: It's 10 years after the handover, and Hong Kong has little to celebrate. Sure, the euphoria lasted a few years. But gradually the realities of Chinese-style capitalism made themselves felt: endemic corruption, meddlesome bureaucrats, a muzzled press, rigged stock markets. It's not that the Chinese consciously set out to ruin Hong Kong. Quite the contrary. They just didn't understand what made Hong Kong special. Now, Hong Kong is just another Chinese city, and its best and brightest have fled to safe havens in Vancouver, New York, and London.

It's impossible to predict which of these scenarios will come nearer to the truth. But the contrasting fates they represent explain the mix of expectations and anxiety that the handover is triggering inside Hong Kong and among investors and policymakers worldwide. For better or worse, a new economy is emerging from the reunification. Never before has a communist state acquired a freewheeling capitalist economy, not to crush it with tanks, but with the intent of nurturing that capitalism and learning from it.

The merger of a dynamic and ambitious China with entrepreneurial Hong Kong poses huge opportunities as well as tremendous risks. Much depends on the ability of Hong Kong's elites to lead the territory forward. From conversations with dozens of these movers and shakers, from tycoons to top civil servants, a picture emerges of how the new economy will shape up.

SPACIOUS HOMES. Hong Kong's economic clout is certain to expand. Some envision the rise of a Greater Hong Kong, with the Chinese hubs of Guangzhou and Shenzhen becoming sister cities. The south of China, where Hong Kong has shifted most of its manufacturing because of cheaper labor and land costs, will fuse even more with Hong Kong. Everything from greater coordination on infrastructure projects to building high-tech factories along the border is under discussion. Guangdong will become an affordable alternative to Hong Kong as middle-class families and retirees seek suburban housing and the well-to-do stake out land for spacious homes. "We haven't scratched the surface of opportunity between us and mainland China," says C.Y. Leung, a property consultant and member of the new elite.

Top officials in the Special Administrative Region (SAR)--as post-handover Hong Kong will be called--are determined to be more active than the hands-off British. They will probably borrow from the playbook of statist Singapore. They also intend to spend more on education and technology, dipping into Hong Kong's $64 billion in foreign currency reserves. "We're investing in the future, and industrial development is one thing to invest in," says Henry Tang Ying-yen, the new government's industrial policy guru.

Finance will continue to be the territory's heart and soul. The hope is that Hong Kong's market will force China's "red-chip" companies--the mainland groups listed in Hong Kong--to adopt internationally accepted standards of accounting and management. Meantime, Western companies, from investment houses to law firms, are using Hong Kong as the base for raising funds from around the world for promising mainland companies. Such deals will help convert state enterprises into modern industrial powerhouses. "Hong Kong will be the melting pot of Western and Chinese business," says Antony K. Leung, managing director of Chase Manhattan Bank in Hong Kong and a member of the future Cabinet.

A more controversial role for the new Hong Kong is as the media and pop-culture hub for all of China. Hong Kong-bred Cantopop singers are huge hits on the mainland, while the Chinese in neighboring Guangdong province easily pick up local Hong Kong TV. Many also use illegal satellite dishes to view STAR-TV and other global broadcasts with Hong Kong bases. Hong Kong media define what is chic among Chinese youth.

But Hong Kong is also likely to be a more conservative place. The Hong Kong media are increasingly pulling their punches on China coverage, while Hong Kong's new leaders have bent over backwards not to differ with China in public. There are already some ominous signs of what this conciliatory stance could lead to. Laws are being twisted to satisfy China's leaders, including restrictions on public demonstrations, when there is not a whiff of public upheaval. This is unsettling to some of those leaving power. "I hope people won't lose sight of Hong Kong's identity and of the absolute imperative of hanging on to the whole of our system--and not just part of it," says Governor Chris Patten.

By tightening its economic embrace with China, Hong Kong also runs the risk of being too dependent. One Asian banker working for a U.S. firm recently complained that his Hong Kong colleagues are "looking inward at China" and not to the entire region for potential deals. He fears that such myopia could jeopardize Hong Kong's standing as a regional hub and leave it exposed to any economic upheavals in China itself. A sputtering economy in Hong Kong would just get worse if the territory's business and professional classes start to slip away. A quarter of the population has dual passports and other means of emigrating legally, while the wealthiest have prudently purchased second homes in North America, Europe, or Australia.

Hong Kong has other worries. Singapore and Malaysia are vying with Hong Kong to be financial and high-tech hubs, while India and Indonesia are competing in low-end manufacturing. Chinese coastal cities are luring foreign investors. "In the next five years, how useful will Hong Kong be to China, with Shenzhen, Dalian, and Tianjin growing by leaps and bounds?" warns Shiu Sin Por, executive director of the One Country, Two Systems Economic Research Institute.

Weighty risks indeed. Yet as investors calculate the odds, many in Hong Kong are betting that the territory will prevail over any threats to its prosperity. These are the people who have gone haywire buying new shares in the "red chips." They have been bidding the price of real estate to unbelievable heights. In essence, these optimists think the handover is a giant business transaction: China lets Hong Kong get richer, so long as Hong Kong shares the wealth and knows its place.

The Hang Seng index reflects this surging optimism. The market has risen 20% since the end of 1995. Not as strong as Wall Street, but a sight better than the pathetic exchanges of Bangkok and Seoul. Executives puffing on Havana specials still fill cigar parlors at noontime, while evening golf nuts putt on the Hong Kong Country Club's artificially lit course.

SET UP SHOP. To the boosters, Hong Kong is too strong to ruin. It's the world's seventh-largest trading power, fifth-largest banking center and foreign exchange market, and busiest container port. Its economy grows by 5.5% a year, and per capita income is $23,000, surpassing that of Britain. Hong Kong is the largest foreign investor in China, and it employs almost as many Chinese in factories on the mainland as its entire 6.3 million population. Foreign corporations, from 20th Century Fox to the California Fitness Center, continue to set up shop in Hong Kong, where they can rely on a flexible workforce and a first-class telecommunications network. Foreign investments in Hong Kong now total around $100 billion--and they're growing as the vast China market opens up.

The man who will run this thriving city-state is 60-year-old C.H. Tung, who will be called chief executive. He faces a delicate balancing act: allaying Beijing's concerns about Hong Kong becoming a "base of subversion" while protecting the system that gives Hong Kong its competitive edge. A Confucian patriarch, Tung is nicknamed "7-11" because he starts work at 7 a.m. (after doing tai chi in his garage) and quits at 11 p.m. (often after attending three cocktail parties and three dinners).

Tung puts China wholly at ease. A conservative who admires Singapore's orderly society, his views are often indistinguishable from those held by top Chinese officials. Solidly in his camp are a variety of pro-China groups ranging from wealthy Shanghainese businessmen who hobnob at lunch at the exclusive China Club to leftist politicians and educators loyal to the Beijing party line. "Beijing is pro-business," says James P.C. Tien, chairman of the Hong Kong General Chamber of Commerce. "Beijing understands us."

Indeed, the comfort level is high between Beijing's party cadres and Hong Kong's tycoons. It's common knowledge that, in hopes of cutting mutually advantageous deals, they've been wining and dining one another at Chinese state houses and Hong Kong clubs. "They are tangoing cheek to cheek," says Democratic Party legislator Martin Lee, a vocal China critic. Most Hong Kong property tycoons, for example, have about 10% of their assets in China. While Tung himself is modest and unassuming, his family runs a $1.7 billion company. When asked who would be the most powerful people in Hong Kong after July, a Tung confidante readily gave the names of the city's top property magnates, including billionaire Li Ka-shing, whose close links to China are legendary.

Since Tung won't be able to deliver on politics or human rights, he wants to rally Hong Kong to a program of economic reform. Tung's savvy advisers fear that continued success is by no means a sure thing. They strongly believe that Hong Kong manufacturing, most of which has shifted to southern China, is losing out to competitors.

SIGNS OF STRAIN. As a result, Hong Kong's leaders are engaged in a lively debate over whether the government should follow other Asian nations in fostering an industrial policy. To reach a consensus, however, won't be easy, particularly since many top civil servants are strongly opposed to the government intervening in business.

The true test of Tung's leadership will be forging a team from the territory's British-trained civil servants and his own entourage of China supporters. There are signs of strain, gripes a civil servant, because "C.H. is not taking advice on most things from us." Outgoing Governor Patten gave his top lieutenants, such as Chief Secretary Anson Chan and Financial Secretary Donald Tsang, a great deal of autonomy in running Hong Kong affairs. But some tycoons are snubbing Chan at receptions. Other leaders, such as the influential sociology professor Lau Siu-kai, of the Beijing-selected Preparatory Committee, say senior civil servants have a "haughty and self-righteous attitude." Says Chan: "Part of the problem is that they don't really know me and perhaps I don't really know them."

Tung also wants to win over public support by reducing the cost of housing and improving the territory's education standards. These are appealing bread-and-butter issues. Yet Tung's refusal to say anything that publicly distances himself from Beijing worries those people who want a leader who can stand up for Hong Kong. (His aides, however, point out that behind the scenes, Tung did go to bat to retain the current lineup of top civil servants, despite some objections from Beijing.) Even Tung supporters admit that the new chief executive isn't politically savvy and that he doesn't have much of a power base. "There is no strong and powerful leader on the political scene," admits one Tung adviser.

Some analysts believe that's precisely the way China wants it. Beijing has been cultivating numerous pro-China groups rather than standing squarely behind the Democratic Alliance for the Betterment of Hong Kong, the most popular pro-Beijing coalition. "Beijing does not want to depend on one group," says China specialist Joseph Yu-shek Cheng, who adds that China often rewards the most obedient factions.

Representatives from rival Chinese government ministries are also in Hong Kong, including the Hong Kong & Macau Affairs Office and Xinhua (the New China News Agency), which represented China while Hong Kong was under British rule. Now, with the Foreign Ministry about to move into a 22-story office on July 1 and the People's Liberation Army arriving, these groups could establish alternative power bases, undermining Tung's authority. "There is only one cook in the kitchen now and that's C.H. Tung and the Hong Kong SAR government," warns industrialist Raymond K.F. Chi'en, a member of the Tung Cabinet.

As long as the Beijing-backed provisional legislature is in power, Tung is likely to get his way. But by March, when elections for a legitimate legislature might take place, Tung will need to build stronger political alliances to retain his effectiveness.

CHARGED ISSUE. For the next few months, if not years, Hong Kong will be under intense scrutiny for any hint of interference by Beijing. "I tell my Chinese friends that while they may be able to make a case for some of the changes they plan in a court of law, they must consider the court of international public opinion in dealing with this community after July 1," U.S. Ambassador to China James R. Sasser recently told a Hong Kong audience.

Should China mishandle the situation, Hong Kong is likely to become a highly charged foreign policy issue, particularly in the U.S. Congress. In good times, it's a battle every year to get China's most-favored-nation trade status renewed. If Hong Kong's free society is perceived to be in danger, the chances sharply escalate that Congress might make good on its threats to deny MFN status. "There is too much of a spotlight on us," says a concerned Victor K. Fung, chairman of the Hong Kong Trade Development Council and chairman of trading company Li & Fung Ltd.

Maybe so, but for Hong Kong, no moment in recent years has been so charged with importance of every kind--economic, political, and civil. Without many resources or much land, the citizens of Hong Kong have long proven to be amazingly resilient. In July, they face perhaps their greatest challenges, and it's up to them to prove the skeptics wrong.