Next Step : Investors Bullish on Hong Kong’s Future : Political uncertainties fail to rattle the markets as long as Beijing pursues economic reforms.

Bank failures, collapses of the property and stock markets and a weakening currency were the results here a decade ago when London and Beijing feuded over this British colony.

But in what observers here describe as an indication of new confidence in Hong Kong’s future, neither a Sino-British confrontation in recent weeks nor the election of a U.S. President whose attitude toward China could exacerbate tensions has so far provoked similar upheavals.

China lashed out bitterly last month at Hong Kong Gov. Chris Patten’s plans to expand democracy in the colony during the run-up to its scheduled 1997 return to Chinese sovereignty. Beijing claims Patten’s proposed democratic reforms violate Sino-British agreements, an argument the British-appointed governor flatly rejects.

“If the other side is determined to have confrontation, we cannot but have the honor of keeping it company,” Lu Ping, director of the Chinese government’s Hong Kong and Macao Affairs Office, said angrily at an Oct. 23 news conference in Beijing. Lu’s comments came after Patten said he intended to press ahead with political reform despite Beijing’s opposition.

Hong Kong residents have also worried that the colony’s economy may suffer if trade relations between the United States and China deteriorate.

Concerns have focused on the possible policies of a Clinton Administration. During his campaign, President-elect Bill Clinton said normal trade relations with China should be conditional on improvement in its human rights record.

Because its economy is so linked to that of China, Hong Kong could face considerable damage if Beijing were to lose its “most favored nation” trade status--which puts China on an equal basis with most U.S. trading partners.

“Hong Kong is very much an innocent party sandwiched in the middle of the Sino-U.S. trade disputes,” said Paul Cheng, chairman of the Hong Kong General Chamber of Commerce.

But a 2.4% gain in the blue-chip Hang Seng index in the two days after Clinton’s election pushed that indicator to an all-time high of 6,347.77 and suggested confidence that his presidency doesn’t necessarily threaten Hong Kong. (By Monday, the Hang Seng had given back some of that gain, closing at 6,267.)

One major reason for Hong Kong’s increased ability to withstand these sorts of shocks is that China, although still under Communist rule, is openly embracing the free market in many aspects of its economy.

“I think the problem in the 1980s was that the Hong Kong people were uncertain about what the future was going to hold,” said John Mulcahy, director of research for Peregrine Brokerage Ltd. “China’s economy has changed dramatically over the last decade. . . .”

Another factor: the strong endorsement of economic reforms at last month’s 14th Communist Party Congress by China’s paramount leader, Deng Xiaoping.

China’s recent agreement with the United States to open its markets to increased imports has also contributed to Hong Kong’s confidence. Many residents hope that China will be similarly pragmatic on its policy here.

Moreover, Hong Kong is seen as the pivotal gateway to a thriving zone of quasi-capitalism in southern China. Hong Kong’s geographical proximity, common culture and established business and social connections with China make it uniquely suited to the role of China’s entrepot.

“If you talked to the general public in Hong Kong, I would say that more than 20% of the population would be in some way or another involved or related to someone involved in trade with China,” said Gilbert Chu, director of Prudential Asia Fund Management Ltd.

Hong Kong now accounts for 36% of China’s worldwide trade--mostly in the form of re-exports--and 60% of its total foreign investment. China is the leading foreign investor in Hong Kong, with more than $10 billion of equity in real estate and businesses such as airlines, banks, shipping fleets and travel agents.

This cross-investment between China and Hong Kong helps build confidence in the colony’s economic future.

And worries about Clinton’s possible policies are still too vague to have a really powerful effect.

“I believe Clinton won’t come up with an Asia policy before the second quarter of 1993 . . . ,” said Edward Chan, research director for Standard Chartered Securities. “Besides, at the end of the day, Clinton will realize that he doesn’t want to jeopardize the United States’ relationship with China, which remains an enormous export market.”

People here seem more interested at this stage in economic stability than political reform.

Patten has proposed changes to broaden the voter base of the next legislative election in 1995. Supporters hope this would give the Hong Kong people a way to empower local leaders who could speak with stronger voices against any post-1997 abuses.

But for China, Patten appears to pose a threat. Chinese officials have said that if Patten presses forward with changes opposed by Beijing, China will replace certain parts of Hong Kong’s government when it takes over in 1997 despite having promised the colony 50 years of “a high degree of autonomy” in the 1984 Sino-British agreement.

China’s warnings have apparently struck a chord among some here. The business community, in particular, doesn’t want to rock the boat and damage relations with China.

“To push ahead with a whole lot of proposals without getting China’s approval first is just asking for trouble,” said Howard Gorges, managing director of South China Brokerage Co. Ltd. “It is not really worth having that kind of relationship because Hong Kong is going to end up being ruled by China in five years’ time anyway.”

Others argue that Patten needs to continue nurturing democracy in Hong Kong and reducing the power of interest groups dominated by China. Martin Lee, chairman of the liberal United Democrats, said he hoped Patten would do what was right for the Hong Kong people even if Beijing opposes the governor’s proposals.

To most here, however, China’s market reforms and Hong Kong’s role as the door to China are what really matters.

Upward Bound

By any measure--the Hong Kong stock market, investment plans, confidence levels--business is optimistic about the British Colony. Month-end closing figures for Hang Seng Index 1/31/90: 2,751.60 10/30/92: 6,190.69 How companies view the overall business climate 1991 Very favorable: 9% Favorable: 69% Not favorable: 22% 1992 Very favorable: 25% Favorable: 64% Not favorable: 11% Companies planning to change investment strategy in Hong Kong and/or China 1991 Decrease investment: 65% Increase investment: 35% 1992 Decrease investment: 19% Increase investment: 81% Sources: The American Chamber of Commerce in Hong Kong, Trade Line, Los Angeles Times and wire reports Compiled by Times researcher Kevin H. Fox