Hong Kong’s Healthy Market Belies Concerns

Over a pepper steak lunch at his private club, a Hong Kong tycoon juggles calls on his mobile phone to close a $12-million property deal--an apparent vote of confidence in Hong Kong under its future Chinese rulers.

But another recent purchase, he says, is a $6-million home in the United States. “For insurance,” he explains, carving a piece from his steak, “just in case things go wrong.”

With 100 days to go until China reclaims Hong Kong from the British, it’s not just business as usual here--business is better than ever. Property prices are mind-boggling, the stock market is robust, and investment in China-based companies is breaking records. But at the same time, polls reveal that pessimism about Hong Kong’s political future is growing, and anxiety about the unknown remains high.

Well-performing markets are indeed reassuring, especially after doomsday predictions of chaos during the countdown to the July 1 takeover by Communist China. Healthy economic indicators show faith in China’s continued growth and its benefits for Hong Kong, the property tycoon says, but they are not a pure measure of confidence.

“It’s fear, and it’s greed” that are driving the markets to new heights, he says. “People feel like we’ve got to get it while we can.”

Michael DeGolyer, who has been tracking people’s attitudes about the hand-over since 1989 for the Hong Kong Transition Project, an independent research group, agrees. “The economic underpinning of confidence in Hong Kong’s future cannot be overemphasized,” he says.

In the latest quarterly survey, the group finds that 60% of those polled describe themselves as “confident” about Hong Kong’s economic future, but only 42% say they are confident about the political future--the biggest disparity so far.

“Economics are holding things together,” DeGolyer says. “Politics are ripping them apart.”

The stock market index once was considered a barometer of both: When Beijing thundered insults at Hong Kong’s reform-minded British governor, Hong Kong’s Hang Seng index would immediately drop; market levels reached their lowest when arguments between Britain and China peaked in 1994.

But recently, Hong Kong’s residents have shown that they subscribe to Bill Clinton’s mantra from the 1992 presidential election: “It’s the economy, stupid,” suggesting that a healthy economy can ease political concerns.

Hong Kong’s 6.3 million residents earn, on average, $25,300 a year--far more than their colonial masters in Britain, who make about $18,000. The territory’s economy has been growing at a rate of about 6%, piggybacking on China’s double-digit economic expansion. This combination helps produce the highest levels of satisfaction with standards of living that Hong Kong has seen in years, pollsters say.

“Clearly, Hong Kong people will regard this time as a ‘golden sunset’ during which life was good and so was government,” DeGolyer says.

That feeling of financial well-being contrasts starkly with the fear of the unknown and could strengthen any backlash if Hong Kong’s new leaders cannot fulfill expectations of continued prosperity.

Although China had promised that Hong Kong can keep its capitalist, quasi-democratic way of life for 50 years, the territory’s future leaders have already prepared a handpicked legislature to replace Hong Kong’s popularly elected body and will implement laws restricting public protests and political ties with foreign groups. Such deviations spark concern about what else will change along with Hong Kong’s sovereignty in 100 days.

Mainland Chinese investors who share those concerns have been flooding into the market in the last few months before China takes over, brokers say. Just as Beijing is bolstering the border to prevent a mad rush from the mainland after the hand-over, some Chinese investors fear that the government will make it more difficult to invest in Hong Kong once it is part of China.

The mainland money is helping create an upward spiral, especially in the performance of “red chips,” mainland companies listed on the Hong Kong stock exchange.

Howard Gorges, director of the South China Brokerage Co., tells the Asian Wall Street Journal that Chinese entities “encourage friendly parties in Hong Kong to buy” red chips to bolster confidence. Local investors have followed suit, making the red chips’ success a self-fulfilling prophecy.

Mainland money has also helped push up property costs here, with prices for luxury residences going up 60% in the last year. A 1,500-square-foot apartment in Hong Kong’s exclusive Victoria Peak area costs about $2 million. Long-term home buyers are joined by speculators who purchase in hopes of flipping property for a fast profit.

Although the market has come down a bit since January--when one luxury house sold for nearly $70 million--prices are expected to rise again this year.

“Cash out of China is fueling the fire,” says Nicholas Brooke, senior partner at real estate company Brooke Hillier Parker. “There are certain individuals who have made a lot of money--those at the top of privatizing state-owned enterprises, entrepreneurs or in import-export--who would rather keep the cash in Hong Kong than bring it back into China,” where it will be heavily taxed.

Although mainland magnates’ enthusiasm for Hong Kong’s premier properties seemingly boosts confidence here, rising prices make it more difficult for the average home buyer to afford an apartment. Already, the average family invests up to 80% of its total income in mortgage payments, Brooke says.

But people will spend all day waiting in line for a chance to buy a new apartment because they believe prices will keep rising. “In Hong Kong, people believe property is the most secure form of investment there is,” Brooke says.

Corruption, manipulation of the market and interference in business dealings are what Hong Kong residents fear after the transition, according to polls. The same economic indicators meant to show confidence reveal elements that may be less reassuring, DeGolyer says, but he adds that as long as business continues as usual, under a legal framework that also protects political freedoms, Hong Kong will remain robust.

“It’s not necessarily a false confidence,” says Michael Enright, a former Harvard professor who has just completed a study of Hong Kong’s competitiveness. “Hong Kong is so closely intertwined with the mainland economy that whatever benefits China benefits Hong Kong, but Hong Kong is also the most susceptible to [China’s] flu.”