It seems obvious that Hong Kong will not be a mart of trade...our commercial transactions will be carri-ed on as heretofore at Canton; but they (the British residents) will be able to go and build houses to retire to in the desert island of Hong Kong. "" Lord Palmerston, British foreign secretary, in a letter in 1841 to Captain Charles Elliot, British superintendent of trade in Canton.
Dont blame Lord Palmerston. Nobody could have predicted Hong Kongs rise to become the worlds seventh largest trading economy, with greater average wealth than its colonial ruler. A century and a half after his pronouncement, as the territory makes an unprecedented leap from capitalist to communist sovereigns, everything has changed. All except the question will the sceptics be proved wrong?
The answer has significance far beyond the barren island once disparaged by the British foreign secretary. Hong Kong is one of the worlds most dynamic business centres, home to more than 150 foreign banks and the seventh largest stock market. As the source and conduit for much of the investment into China since Deng Xiaoping opened the door in 1979, the territory provides a motor for modernisation on the mainland. Multinationals and Asias fast-rising businesses, attracted by the territorys free market policies and its corporate culture, have chosen it as a base for regional expansion.
Those policies and the entrepreneurial energy of its 6 million residents leave Hong Kong in a strong position to tackle the uncertainties ahead. Sir Donald Tsang, financial secretary, presides over accumulated fiscal and forex reserves of more than US $90 billion. Annual output has risen beyond US $155 billion, almost one-fifth the value of production across the border.
Business believes this momentum will be sustained. Just as the communist victory in 1949 led to Shanghais decline and Hong Kongs rise, so the territory is again in the right place at the right time. The shop window in the front, the factory in the back, call it whatever you like, says Vincent Cheng, executive director at Hongkong Bank. The fact is that Hong Kong is positioned to supply the capital and expertise for Chinas modernisation.
Such sentiment is evident in the markets. Ten year bond yields trade at a modest 50 basis point premium to their US equivalents, a mark of confidence in economic prospects and in the currency link with the dollar.
This confidence is conditional on a successful transition. But is it misplaced? While few expected Hong Kong to approach the handover in such robust shape, there are pitfalls that must be overcome if its performance is to be maintained under Beijings rule. Sceptics, most common in the pro-democracy camp, fear post colonial decline.
Risks lie both without and within. Heavy-handed intervention from China would wreck the economic machine it seeks to exploit. Failure inside Hong Kong to stand up for its promised autonomy would prove equally damaging, threatening the level playing field, rule of law and the cosmopolitan character essential for the territorys success.
Concern has been prompted by Beijings replacement of the elected legislature with an appointed body and the introduction of tougher legislation on demonstrations and the organisation of political parties.
Pro-democracy forces and some local diplomats fear that Beijing does not recognise a link between social freedoms and economic success. Because they have managed high growth without political freedom they think they can do the same with Hong Kong, says Martin Lee, leader of the Democratic Party, the largest pro-democracy grouping.
The result, he believes, will be a weakening of defences against corruption and favoritism, a bending of the rule of law and a tilt in the business playing field towards Chinese interests.
A more subtle threat "" potentially more serious "" is that the territory will second-guess Beijings interests, creating a climate of political correctness and self-censorship. Jimmy Lai, a self-made media mogul and a vocal critic of Beijing, has found no bankers willing to list his business on the stock market. Several brokers have found themselves out of a job after critical reports of mainland companies.
The danger is not a sudden collapse, more a gradual slide. It will be very damaging if Hong Kong becomes more like China, says Rajiv Lall, executive director of E M Warburg, Pincus & Co. China doesnt need another Chinese city. They already have thousands. For Hong Kong to succeed after the handover, he believes, its horizons must extend beyond the mainland.
Hong Kong must also maintain broad continuity in economic management, according to many in business and finance. Several members of the post-handover administration regard the return as a watershed in economic policy. Hong Kong can be the Silicon Valley of greater China as well as its Manhattan, says Raymond Chien, a member of the post-colonial cabinet and a champion of increased policy support for high-tech manufacturing. This is fashionable thinking in Asias tiger economies, but a potentially costly departure from Hong Kongs non-interventionist approach.
Some worries reflect legitim-ate concerns, says Tung Cheehwa, the shipping tycoon who will head the post-colonial administration. But, he insists, they will not be realised. Freedoms will be maintained, according to Mr Tung, although a proper balance must be struck between civil liberties and social order. Democracy, in his view, must be introduced at a gradual pace. Although a fan of Lee Kuanyew, Singapores elder statesman, he dismisses a shift to the city states interventionist economics.
The character of Hong Kong is very different, he says. Business leaders support Mr Tungs line. The priority, they argue, is to sharpen Hong Kongs competitive edge. And the risk, as they see it, comes from too much politics, not too little.
Sir Gordon Wu, managing dire-ctor of Hopewell Holdings, who is typical of the territorys entrepreneurial tycoons, argues that a ra-pid shift to democracy would lead to increased welfare spending as parties compete for votes. That will kill our entrepreneurial spirit, he says. Mr Wu is not against democracy his son is called Thomas Jefferson. But he believes Hong Kong needs time to develop mature political parties and must follow the timetable for democratic reforms laid down in Chinas constitution for the territory.
That may sound like stalling. And should the clock be turned back in terms of political liberties, the creativity praised by Mr Wu might be stifled. But it also underlines the difficult balance that must be struck with China. We would be fools to ignore Chinas concerns, says the managing director of one of the territorys big property developers. He argues that curbs on demonstrations are aimed at preventing challenges to Chinas government, specifically from Taiwan.
Such arguments are backed by mainland leaders and by the new Chinese corporate elite that has moved to Hong Kong. China does not want to interfere, but it also doesnt want interference from Hong Kong, says Zhu Xiaohua, chairman of China Everbright, the fast-growing conglomerate controlled by the state council in Beijing.
Mr Tung believes an identity of interests justifies optimism. Displaying the conviction he showed in helping to wrest his family shipping business from bankruptcy in the 1980s, he predicts the sceptics will again be confounded once the transition is passed. But unlike the company, Hong Kong is not in need of rescue. The rocks will best be avoided if the new government and new sovereign keep a light touch on the tiller.
John Riddin
