China Link May Boost Hong Kong

In an ironic way, China’s economic reform program may turn out to benefit capitalistic Hong Kong more than it does Peking or any other of the major cities in China.

One of the most important goals of the reform program is to decentralize China’s economy. The government has decided to allow a far greater share of economic and business decisions to be made by individual enterprises and by provincial and local governments, rather than by central authorities in Peking.

This means that the manager of a Chinese enterprise in, say, Shanghai or Canton or Manchuria has far greater freedom to deal directly with a foreign businessman or investor. In fact, he is not only permitted to contact potential foreign partners, he is encouraged, sometimes even pressured, to do so.

And foreign business representatives are welcoming the change. A Peking-based businessman said there recently: “When I first moved to Peking, three years ago, all the final decisions were made in the ministries. That’s not true anymore.”

As a result, foreign companies seeking to do business in China no longer find it so necessary to maintain a presence in Peking. And Chinese enterprises looking for foreign partners or capital find that Peking is not the only place to look.

The alternative, of course, is Hong Kong. Under China’s decentralization program, foreign companies are finding that they can set up shop in Hong Kong and venture out from there to do business in China.

“The governors of Chinese provinces have been streaming in here, opening up offices, looking for business,” Burton Levin, the U.S. consul general in Hong Kong, said recently. “In a very zealous, unsophisticated way, they hear there is money here. And they just keep coming down, mission after mission.”

Entry Point for China

Levin said U.S. firms are also discovering that Hong Kong “is an entry point, a good place to do business in China.”

China is also becoming an increasingly important outlet for Hong Kong’s exports. Last year, it passed Britain and moved into second place behind the United States as a purchaser of goods from Hong Kong.

Hong Kong businesses have been trying to help meet the booming demand in China for consumer goods--television sets and washing machines, for example--a demand that cannot, for now, be met in China. Foreign businessmen here say they expect the China trade to help keep Hong Kong’s economy healthy.

“We’re looking for trade with China to lead the way for all of Hong Kong’s economic prospects,” said Francis G. Martin, director and chief manager of Bank of Canton, which is owned by Los Angeles-based Security Pacific Corp.

The rapid development of Hong Kong’s economic ties to China is one of three factors that have helped bring about a remarkable rebound in Hong Kong’s economy. Another has been the agreement between China and Britain on Hong Kong’s future. Under this agreement, Hong Kong will be permitted to retain its capitalist economic system for 50 years after it returns to Chinese sovereignty in 1997.

At least in the short run, that assurance appears to have eased the fears of Hong Kong investors about the stability of their money. The Hang Seng index, which is based on the stock market value of leading Hong Kong companies and was in the 700 to 800 range last July, has since risen to more than 1,300.

The third factor propelling Hong Kong’s economic recovery has been trade with its principal customer, the United States, which buys about 45% of Hong Kong’s exports.

“The U.S. is and will continue to be Hong Kong’s most important trading partner,” Martin said. “1984 was a spectacular year for Hong Kong exports to the U.S., and we expect that to continue in 1985, although the growth rate will be moderated somewhat.”

Martin acknowledged that not everything has been rosy for the Hong Kong economy. Over the past two years, while China and Britain were negotiating Hong Kong’s future, companies were reluctant to make new investments in Hong Kong.

‘Confidence Has Been Restored’

“We’re hoping to see, finally, an improvement in investment in plant and equipment this year, as confidence has been restored,” Martin said. “It was almost nonexistent for the past two years.”

Martin admitted that wealthy Hong Kong citizens are continuing to move capital out of the colony.

“There’s been a flow of capital from Hong Kong into the U.S.,” he said. “It’s gone mostly into the property market. I think the high-net-worth individual in Hong Kong will continue to invest partly out of Hong Kong. That’s nothing new.”

Martin said that, despite the flight of capital, there has been a net inflow of capital into Hong Kong, because investors from Southeast Asia--from Indonesia, the Philippines and Malaysia, among other places--are bringing money into the colony.

“The banks here are awash in liquidity,” said Levin, the consul general. “There’s money all around.”

Looking back to the time, three years ago, when the Sino-British negotiations on Hong Kong were stalled and the U.S. economy was in a recession, Levin said he is amazed at the recovery that has taken place here.

“Everything’s looking up here,” he said. “It’s an incredible turnaround.”