International Business: Spotlight on HONG KONG : A Fading Crown Jewel? : Uncertainties Abound as Power Transfer Nears

In about 1,000 days, the British rulers of Hong Kong will hand over control of the crown colony to China. While that makes many of Hong Kong’s freewheeling capitalists uneasy, those concerns are well hidden by the sights and sounds of a fast-growing economy.

At Hong Kong’s Kwai Chung container port, for example, cargo ships jam up against the docks piled high with Chinese-made products bound for export. In the main business district, growing legions of foreign business people brave traffic-choked streets, briefcases and cellular phones in hand. On a nearby island, construction workers have begun laying the groundwork for a $21-billion airport and related facilities.

“Business is booming,” said Meocre Li, managing partner for Arthur Andersen’s Hong Kong and China operations. In fact, one of Li’s biggest problems in the territory’s tight labor market is expanding Andersen’s 500-employee Hong Kong office while competitors try to lure away his workers.

But Hong Kong’s powerhouse economy faces numerous problems, including lingering disputes between British and Chinese officials, high inflation and a slumping stock market. In addition, the colony’s traditional and lucrative role as a middleman between China and the West is being challenged by Shanghai and other rapidly developing Chinese cities.

“Hong Kong is still a very important stepping stone for American (and other foreign) companies to China,” said Wei Li, who follows the Chinese economy as an assistant professor at the Fuqua School of Business at Duke University. But “as China becomes more sophisticated, the importance of Hong Kong as a stepping stone will decline.”

Still, Hong Kong’s economy is expected to grow about 6% this year and next. The economic well-being of Hong Kong and its approximately 6 million residents depends primarily on the economy and policies of neighboring China. Under an agreement between Britain and China, the Chinese have vowed to keep their hands off Hong Kong’s free-market economy, policies and currency until 50 years after the power transfer in July, 1997.

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But the Hong Kong and Chinese economies are already intertwined. Since China began to open its doors to foreign investment in the late 1970s, Hong Kong companies have poured an estimated $74 billion into the country through 1992, according to the Hong Kong Trade Development Council.

Lured by factory wages that are about half as much as those in the colony, Hong Kong textile mills, electronic manufacturers, toy makers and other firms have moved into China. As a result, about 80% of the estimated $134 billion in Hong Kong’s 1992 exports originated primarily in China, and about half the companies listed on the Hong Kong Stock Exchange have significant Chinese operations or sales.

“When the Chinese economy will slow down, the Hong Kong economy will also slow down,” said Richard Drobnick, director of the International Business Education & Research Program at USC.

Many foreign companies have established headquarters in Hong Kong to take advantage of its experience and guanxi-- “connections”--that play a crucial role in China’s business dealings. Guanxi , said Wei Li, “can get you a factory built, a long-term contract with a supplier . . . cheap loans from Chinese banks.”

Hong Kong’s growing investment in China has altered the colony’s economic landscape: Blue-collar industries have declined while finance and services have grown.

“It has become the services and management center of southern China,” said Richard Farrell, director of Guinness Flight, a London-based investment firm.

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In fact, China ranks as Hong Kong’s biggest source of foreign investment. By 1992, Chinese investment in Hong Kong totaled $12 billion to $13 billion and was growing fast, according to economic statistics.

But Chinese and other foreign investors are fearful about a possible collapse of the territory’s overheated real estate market. Those fears have spread to the Hong Kong stock market, which has declined 20% since January as real estate stocks nose-dived.

“We see that property-related stocks are still substantially overvalued and may go down,” said Daniel J. Duane, senior portfolio manger at Prudential Mutual Funds. “If they go down, they will drag the whole market down with them.”

Disputes between British and Chinese officials have also hampered projects considered vital to Hong Kong’s role as a center for global trade.

The opening of a new shipping terminal for container ships, for example, has reportedly been delayed by at least 1 1/2 years because of China’s reluctance to approve the project. The construction of the new airport has also been threatened with delays as the British and Chinese argue over financing.

Hong Kong needs to expand both facilities if it “is going to continue to be a financial and service center,” said Meocre Li of Arthur Andersen.

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In addition, Hong Kong needs to improve its expertise in high technology, which lags far behind those in many neighboring countries, such as Japan, Taiwan and South Korea, economic observers say. China has a large appetite for high technology, but it must go elsewhere for such expertise.

“That’s the sad part,” Li said of Hong Kong’s limited number of colleges and research centers. “They have to upgrade . . . in order to compete in the world market.”

The opening of the Hong Kong University of Science and Technology 2 1/2 years ago is a badly needed investment, he said.

Hong Kong’s stature as a gateway to China is also being challenged by the rise of Shanghai, Canton and other Chinese industrial centers. Increasingly, Western companies are dealing with Shanghai-based firms and bypassing Hong Kong middlemen. Ironically, many Shanghai entrepreneurs fled to Hong Kong in 1949 in the wake of communist rule and helped build the colony’s postwar industries.

“People are willing to pay a premium at the moment . . . for being in Hong Kong,” Duane said. But what happens, he said, “if everyone wakes up one day and realizes that there is an alternative to Hong Kong? That’s the big mystery for the market.”

A Bad Year

The Hong Kong stock market, one of the world’s most active, has declined this year, mostly because many listed companies are heavily involved in Hong Kong’s inflated property market. Weekly closes for the Hang Seng index, except latest: Wednesday: 9,532.35, up 170.03