A Strong Tailwind in Hong Kong

Can Beijing quell Hong Kong's dissent by fixing the island's economy?

Clutching her Ferragamo handbag, Xu Meifeng helps her sister choose a Burberry top and matching skirt in Hong Kong's swank Landmark shopping mall. Her 16-year-old son, Chen Kan, sports Versace jeans and a Ralph Lauren shirt purchased on a previous Hong Kong shopping trip and has just bought himself a $385 Nikon video camera. Xu's husband, Chen Xiaohui, looks on, his wallet at the ready. "The prices are better in Italy," says Chen, a trader from Shanghai who took the family on an Italian shopping adventure two years ago. This time, though, the Chens opted to stay closer to home. "Italy is a long way, and the language is a big barrier," says Chen. "Hong Kong is much more convenient."

Things are going to be even more convenient on the Chen family's next Hong Kong shopping spree. Beijing is relaxing restrictions on mainlanders who want to visit Hong Kong. Before the change, Chinese citizens could only travel to the former colony in tour groups. For the last month, residents of four nearby cities have been able to get individual visas allowing them to come and go on their own. On Sept. 1, that privilege will be extended to residents of Guangzhou, Shanghai, and Beijing (though people living in other cities still must abide by the old rules).

The measure is certain to be a boon for Hong Kong retailers. So far this year, mainlanders have made up 54% of visitors to Hong Kong, up from 19% a decade ago. Easing restrictions could boost their number by a third, to 10.4 million, next year and spark the flagging Hong Kong economy. Partly as a result of the policy shift, Citigroup has upped its Hong Kong growth forecast for 2004 to 5.8% from 3.8%.

The new rules are part of a broader campaign by mainland authorities to jump-start Hong Kong's economy. Although Beijing once took a hands-off approach to the territory, Chinese officials now want to shore up Hong Kong's beleaguered chief executive, Tung Chee-hwa. Both he and his city could use some help. Property values have sunk by two-thirds since Hong Kong was handed over to China six years ago. Unemployment now stands at a record 8.7%. And prices have been sliding for nearly five years, dropping an alarming 4% in July alone from the year-earlier period.

Beijing sees Hong Kong's economic woes as a key reason behind massive demonstrations in July. That's when a half-million Hong Kongers took to the streets to protest a proposed antisubversion law backed by Tung. Although the measure, known as Article 23, was the catalyst for the marches, mainland officials figure that if they can get the economy moving again, the opposition to Tung will melt away. "The government has concluded that dissatisfaction with the political situation is underpinned by dissatisfaction with the economy, and especially property prices," says Michael Spencer, chief economist for Deutsche Bank Asia in Hong Kong.

So Beijing hasn't been shy about dishing out the goodies. China has recently signaled that it will approve construction of a $2 billion-plus bridge and tunnel linking Hong Kong with Zhuhai and Macau on the western edge of the Pearl River Delta. This summer, Chinese officials have hinted that mainlanders soon may be allowed to invest in Hong Kong stocks, w hile banks in the territory may be allowed to trade the Chinese yuan -- a big step in opening up the country's closed currency. "We need a helping hand in Hong Kong, and China is obliging," says Ajay Kapur, Hong Kong-based regional strategist at Citigroup Smith Barney.

Perhaps Beijing's most thoughtful gift is a trade agreement allowing Hong Kong-based companies preferential access to the mainland market. Although companies worldwide will be able to operate more freely in China by yearend 2006, under the terms of the country's accession to the World Trade Organization, the Hong Kong deal will give companies in the territory a head start over foreign rivals. When the measure goes into effect Jan. 1, it "will do for Hong Kong's service economy what Deng Xiaoping's opening of the Chinese economy in 1978 did for our manufacturers," says Victor Fung, chairman of Hong Kong trading giant Li & Fung.

Officials in the neighboring province of Guangdong have been doing their part, too. Recently installed Guangdong Governor Huang Huahua has warmed the often frosty relations between the city and the province. Noting that 80% of Guangdong's exports are shipped through Hong Kong and that two-thirds of the province's foreign investment comes from Hong Kong and Macau, Huang says, "Our relationship is like teeth and lips."

Hong Kong companies now employ an estimated 12 million workers in Guangdong, nearly twice the population of Hong Kong itself. The 150-kilometer corridor stretching from Hong Kong to Guangzhou is home to more than 25 million people, including many of China's most affluent citizens. The Delta is also headquarters for China's most entrepreneurial companies, and it's expected to benefit immensely from China's WTO membership if cross-border cooperation continues to grow. "Guangdong's success would not have been possible without Hong Kong's help," says Huang.

With so much at stake, Huang seems ready to strengthen ties with Hong Kong. Since taking office in January, he has become a staunch supporter of the Delta Bridge project. And on Aug. 5, Huang and Tung said they would create eight new committees to deal with cross-border issues, on top of the existing seven. "There's now a realization in both Hong Kong and Guangdong that their economic fates are linked, and there's a willingness to work together as equal partners," says Michael J. Enright, a professor at Hong Kong University and a leading scholar on the Pearl River Delta.

The payoff from the partnership could be huge. When completed, perhaps as early as 2007, the 29-km bridge will spur growth on the relatively underdeveloped western side of the Delta, which is also part of Guangdong. Thanks in large part to their proximity to Hong Kong, cities on the eastern side of the delta have grown at least three times as fast as those in the west. Better ties to Hong Kong could bring similar prosperity to western cities such as Zhuhai and Zhongshan -- and would boost Hong Kong as well. Increased trade due to the bridge might create 55,000 new jobs in the city. Higher growth in Hong Kong and the western Delta could pay for the cost of the bridge in just a few years, says Enright.

Hong Kong has been through a rough patch recently. But with the help of their mainland brethren, including shoppers like the Chens, the city's residents may once again show the world their storied capacity for resilience.

By Mark L. Clifford and Frederik Balfour in Hong Kong

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