As ’97 Nears, China Invests in Hong Kong : Commerce: More than 1,000 mainland firms are there, easing fears that Beijing will alter the colony’s capitalist system.

With just five years to go before China resumes sovereignty over Hong Kong, the financial community here is nervous.

Remembering its losses when the communists took over China in 1949, Hong Kong & Shanghai Banking Corp. has hedged its bets on 1997 by merging with Britain’s Midland Bank and transferring all shares to a holding company that, although headquartered in Hong Kong, is incorporated in England.

At least 60,000 people a year simply leave, depriving the colony of many well-trained and enterprising professionals.

But some business executives see a compelling reason to be optimistic that there won’t be an economic upheaval when the communist government takes over in 1997: the huge investment of Chinese government-owned enterprises in Hong Kong.

More than 1,000 mainland businesses run by senior Chinese officials are now in the colony, allaying fears that Hong Kong’s free-wheeling capitalism will be destroyed by communist bureaucrats.

With an estimated $10 billion or more invested, China is the biggest player in the colony, and the Chinese have become entrenched in all areas of Hong Kong’s commercial life. They own pieces of airlines, banks, bus companies, real estate, shipping fleets and trading companies.

Still, much of the optimism about China’s investment is tempered by a paucity of details about specific investors and the difficulty of discerning China’s motives.

“Beijing is using Hong Kong to make money,” said Robert Broadfoot, managing director of Political & Economic Risk Consultancy Ltd. “This is Beijing’s free economic zone. There is not a (Chinese) leader’s kid or relative that isn’t controlling business in Hong Kong.”

In July, a consortium led by Chinese firms purchased a classy pink granite building in the middle of Hong Kong’s central financial district. The prestigious $490-million office and retail development has been seen as illustrative of desires by cash-rich mainland entities to place assets out of the central government’s direct reach.

Little is known about the main shareholders, Surelight and China Weal, but it is believed that they are linked to the city governments of Foshan, Nanhai and Zhongshan in China’s economically booming southern province of Guangdong.

“I think it is more likely that these companies are backed by a provincial government because provincial government companies are much more loosely controlled,” said David Faulkner, a partner in the Hong Kong property consultancy Brooke Hillier Parker. “If it is investment coming directly from Beijing, the companies would have fairly strict guidelines of what they can and cannot do.”

The consultancy estimates that Chinese firms purchased property in Hong Kong worth $849 million during the first six months of this year, compared to $939 million for the whole of last year.

The Bank of China has the most impressive piece of China-owned property. Chinese-American architect I. M. Pei designed the 72-story, $260-million building with distinctive angular shapes that many local Hong Kong Chinese think is bad fung shui --an ancient Chinese system meant to ensure that man is in harmony with nature.

The Bank of China encompasses 13 banks in the colony and one in the Portuguese enclave of Macao, itself due to revert to Chinese rule in 1999. It also has investments ranging from a 30% stake in Mingwah Shipping Co. to a 40% stake in Kerry Trading.

Chinese government-backed organizations such as Bank of China, China International Trust & Investment Corp. (CITIC), shipping conglomerate China Merchants, trading giant China Resources and tourism leader China Travel Service are among the most influential firms in the colony.

China Resources is one of the largest mainland trading operations, with a broad investment base in Hong Kong and Macao valued at $400 million.

By the end of 1991, CITIC had become one of Hong Kong’s biggest investors, with more than $2.6 billion injected into the local economy.

CITIC, China’s de facto investment bank, which reports directly to the People’s Republic’s State Council, established CITIC Hong Kong to diversify its investments.

Its publicly quoted company CITIC Pacific Ltd.--in which CITIC Beijing has a 43% stake--holds a 12.5% stake in Cathay Pacific, Hong Kong’s main airline; 46% of Dragonair, a regional carrier; 20% of Macau Telecom, the Macao telephone company; and several pieces of Hong Kong property.

“CITIC Pacific will be given the opportunity to expand,” said Peter Lee, executive director of CITIC Pacific Ltd. “CITIC Hong Kong is considering transferring its good-quality assets from the CITIC group into CITIC Pacific from time to time.”

Lee said the corporation’s main aim has been to create a Hong Kong conglomerate similar to the big British trading companies, or hongs, such as Jardine Matheson and Swire.

Yao Kang, executive director of Swire Pacific Ltd., said CITIC Pacific is well on its way to becoming a conglomerate. “CITIC Pacific needs more time to acquire more assets,” Yao said. “We would welcome CITIC Pacific to become one of the hongs. It would be good for Hong Kong.”

Last month, Hong Kong & Shanghai Banking Corp.’s holding company, HSBC Holdings, sold its remaining stake in Cathay Pacific to China National Aviation Corp. (CNAC) and China Travel Service, giving 10% of the colony’s designated flag carrier to these China-backed companies. This is in addition to the 12.5% already held by CITIC Pacific.

CNAC, a subsidiary of China’s Civil Aviation Administration, also recently purchased a 10% stake in Hong Kong Air Cargo Terminals Ltd. from the Hong Kong government’s Exchange Fund for a reported $13.7 million.

Meanwhile, leading officials from the Shanghai Securities Exchange met their Hong Kong counterparts last month in a bid to speed up the timetable for allowing Chinese companies to trade their “B” shares in Hong Kong. These are shares issued only for purchase by foreigners using hard currency.

It is expected that some of the biggest companies in China will be raising money with primary listings for their shares on the Hong Kong stock exchange well before 1997.

Peter Fu, director of Peregrine Capital Ltd., said recently that China Overseas Holdings Ltd., a China-owned company, is planning to float its real estate investment arm on the Hong Kong stock exchange. He said the company will issue $109.3 million worth of new shares to the public.

In June, the diversified conglomerate China Merchants said it will list shares in its local subsidiary, Hai Hong Holdings Co., on the Hong Kong stock exchange. It would be the first mainland company to list a subsidiary directly on a foreign market.

“By going public, the market will supervise us,” saiY. Wang, director of China Merchants. “This is a way for us to enter the international market as well as earn a little money.”

Guangdong Gov. Zhu Senlin said during a five-day visit to Hong Kong in May that Guangdong Province hopes to use the Hong Kong stock exchange to raise funds for economic development.

He said Guangdong is keen to establish a “business relationship” with Hong Kong by allowing China “B” shares to enter the Hong Kong market.

Guo Weiqiang, director of the nonprofit Hong Kong Chinese Enterprises Assn., says Hong Kong’s greatest use to China has been as its door to the outside world.

“Hong Kong’s prosperity and stability should be maintained by the joint efforts of many countries, if not the whole world,” he said. “Hong Kong will remain very important to the Chinese economy and to the Chinese national policy of opening to the outside world.”

John Mulcahy, director of research for Peregrine Brokerage Ltd., says if one takes a sanguine view of China as just another entity looking at Hong Kong as a commercial trading center, it’s natural that in the process of assuming sovereignty, China will make the environment for its commercial interests as healthy as possible.

Whether optimists or pessimists, right up until June 30, 1997, when the Union Jack will descend for the last time in the colony, local financiers will doubtless pay close attention to the activities of Chinese investors for clues about Hong Kong’s future.