Hong Kong's China-view: dusk or dawn?

Cradling a bone-china teacup, banker David K. P. Li talks assuredly about the future of this island of anything-goes capitalism. ``Because China is developing, Hong Kong will be for Asia the entry into China,'' predicts the director and chief manager of the Bank of East Asia. ``There is no other major financial center on the [Asian] continent.''

Mr. Li is also vice-chairman of the 59-member Drafting Committee of the Basic Law determining Hong Kong's future. He says, ``I can tell you that China is very sincere in its commitment to Hong Kong and to accommodate Hong Kong people. . . . China needs so much capital. It needs Hong Kong.''

It is, of course, in the interest of a banker (and, most probably, a man who will be a leader of the future Chinese city of Hong Kong) to spread the news of Peking's accommodativeness. For, at the moment, most observers here agree, it would take only one word -- spoken carelessly, negatively, and by a high-level official in Peking -- to shatter confidence.

That is what bankers and businessmen say about the financial atmosphere in this colorful jewel of a city as it enters the twilight of 150 years of British rule. They are cautiously optimistic, however, that Peking is now showing abundant good faith and backing up that faith with financial commitments in Hong Kong. The 1997 factor overshadows all

``Things are very calm now, although there are still uncertainties with the PRC [the People's Republic of China],'' says Peter Wrangham, general manager of the gigantic Hong Kong & Shanghai Bank -- the private bank that actually issues most of the currency for this curious economic entity.

Almost all banking, investing, construction, and commerce in Hong Kong is defined by one word: 1997.

That is the year that China replaces Britain as ruler of this haven of laissez faire capitalism.

Chinese leaders have said repeatedly that they will honor their agreement to leave Hong Kong's economy untouched for 50 years beyond '97. But, skeptics wonder, isn't it in the nature of even nominally communist central planners to want to ``direct'' the economy?

It is not clear that there is enough confidence in the future for developers to invest today in, say, a new high-rise office complex, knowing that the leases will go past 1997 and it may take that long or longer for a decent payback.

Putting to rest such questions is what was behind British Prime Minister Margaret Thatcher's expeditious negotiations and agreement with China in 1984 on the future of Hong Kong. For at that time the Hong Kong property market was collapsing, confidence was eroding, the Hong Kong dollar was deteriorating, and inflation was soaring -- all because of mounting uncertainties over 1997.

After the Sino-British agreement, and after the Hong Kong dollar was pegged to the United States dollar, confidence began to return.

What has kept the investment and business climate relatively stable since then, bankers and businessmen here say, has been Peking's confidence-building measures, along with Peking's apparent realization that casual statements about Hong Kong are not helpful.

The continuing need for good-faith gestures is one big reason for all the ceremony attached to Chinese Communist Party chief Hu Yaobang's visit to Britain last week. It is a way of showing that the two powers that signed the accords on Hong Kong's future are improving their relations and thus ensuring a smooth transition. Why China and Hong Kong need each other

``China represents opportunity,'' says Verne McKay, general manager for Asia-Pacific of the Royal Bank of Canada. ``But those who think Hong Kong will continue as it is are betting one way. Those who do not are betting the other way. Whoever calls it right is going to win a lot of money.''

Mr. McKay's own prediction is that ``by 2007, Hong Kong will be the economic center of China.''

Mr. Wrangham of the Hong Kong & Shanghai Bank says that ``people feel they have to have a reasonable presence here to reach the China market.''

With his close ties to Peking, Mr. Li of the Bank of East Asia sees the situation this way: China needs investment capital, which flows into Hong Kong mostly from the overseas Chinese communities in Indonesia, Singapore, Thailand, and Malaysia.

China's need for Hong Kong is based firmly on past experience. One of the main reasons that China allowed Hong Kong to remain a capitalistic entrep^ot after the 1949 communist takeover is that it served as China's almost exclusive source of foreign exchange and vitally needed goods for the mainland.

For years, Hong Kong has been China's top export market, and the $2 billion-plus trade surplus that China has been running with Hong Kong provides an estimated one-third of China's annual foreign-exchange earnings. Li notes, moreover, that some 60 percent of foreign direct investment in China in recent years has come from Hong Kong.

In the post-1949 era, the saying went, if China had wanted to take Hong Kong it could have done so with a telephone call.

At present China maintains 14 banks in Hong Kong (see table this page). It has in recent years stepped in and bailed out several Hong Kong business enterprises and investment banks. And Li says the head of the Bank of China has indicated that its ``sister banks may go public'' soon.

All of these, he notes, are good signs. The jitters persist

Not wanting to disrupt the flow of money into Hong Kong, says Mr. Li, Peking is unlikely to do anything to alter Hong Kong's economic ground rules. He notes that ``if they don't treat the Hong Kong Chinese well, it will be a bad face problem.''

Hong Kong, say Li and almost everyone else, is the test case for Taiwan. If China cracks down, Taiwan will remain aloof; if China takes a live-and-let-live attitude, then Taiwan may be encouraged to begin reunification talks.

Assuming capitalism is allowed to flourish, there are benefits to Hong Kong in the merger with China, too. In 1984 China surpassed Britain and West Germany to become Hong Kong's second-largest export market. And Li notes that ``during these days when protectionism is a rising threat to our export sector, the importance of China as a major export market is increasingly vital.''

Charles Sin, vice-chairman of the Hong Kong Stock Exchange, says he believes that ``China is doing its utmost. It is putting its money where its mouth is. I feel the Chinese are 100 percent genuine in trying to maintain the status quo in Hong Kong. . . . Not only will they wait until 1997, but there will be no changes for another 50 years. That is as long as anybody can guarantee anything.''

So why are there still qualms? When the Hong Kong-based Far East Economic Review ran a cover story saying Hong Kong '86 is a ``jittery city,'' many business leaders were upset.

``It was not helpful, and it was not true,'' says banker Wrangham.

``Foreign interests,'' points out Eric Nickerson, chief Asia/Pacific economist of Bank of America, ``are confident about what is happening in the PRC. The biggest concern is on the local level.''

Foreign investment, however, is only 10 percent of the Hong Kong economy, Mr. Nickerson notes. The confidence-building game

Local Chinese, most economists and bankers admit, are still hedging, making arrangements to live elsewhere and send their capital elsewhere if Peking reverts to its old capitalist-bashing ways. There are no statistics on human or capital flight; they undoubtedly persist.

But the mainland Chinese are not the only ones involved in the high-stakes game of confidence building. The new architectural wonder of this city, the space-station-like headquarters building of the Hong Kong & Shanghai Bank, was built in part to show faith in Hong Kong. Similarly, the Bank of China is erecting an I. M. Pei-designed tower here that will be the tallest building in Asia.

The bank towers are meant to demonstrate that Hong Kong has a future as dynamic as its past. But architecture alone can't keep the jitters away. Nor, apparently, can continued assurances from Peking. As 1997 approaches, the jitters may come and go, especially, some observers say, at the turn of the decade when the countdown will really begin.

Even after the changeover is accomplished 11 years from now, there will still be questions. But if mainland China has continued to liberalize, by then the fundamental question about whether communism can tolerate laissez faire capitalism may be moot.

A T-shirt for sale in some of the ubiquitous shirt shops shows two Chinese junks -- one large, the other tiny -- approaching each other at sunset. The rather tenderhearted caption reads: ``Hong Kong 1997. Don't worry, we still love you.''