New Game, New Player for Hong Kong's Market

The makers of Monopoly put a special "Hong Kong '97" edition on the market here, but the player snapping up the best pieces is China.

They're calling it Red Capital here, and it signals China's move to control key players in Hong Kong's free-market economy.

But despite some suggestion of strong-arm tactics on China's part, many local investors see little hint of a red scare. They're finding that China's money is the same color as anyone else's.

Companies affiliated with China's government have already taken significant stakes in the telephone monopoly, one of two electric companies, and both airlines.

And investors are scrambling to guess who's next.

Earlier in June, for example, China's Ministry of Posts and Telecommunications bought part of Hong Kong Telecom. Investors bid up the share price 11 percent before the announcement.

And on June 18, when the investment arm of China's Foreign Trade Ministry bought 50 percent of a bank owned by Indonesia's Lippo Group, speculators jumped into finance companies across the board, expecting China to expand in the sector.

"It is no longer in the psychology of Hong Kong people that [Chinese] interests holding onto a strategic company is a bad thing," says Laurence Brahm, author of the book "Red Capital." "It's almost a vote of confidence ... because China has an interest in making [that industry] thrive."

But some observers worry that Chinese companies will exploit their political connections, at the expense of Hong Kong's free-market economy.

"What happens when politicians get a hold on the economy? What happens when an economy becomes a sort of joint venture between public officials and business leaders?" outgoing Gov. Chris Patten asked in his farewell speech to the American Chamber of Commerce.

"We all know what happens. Look around the region. Where those conditions exist, you get endemic corruption."

Governor Patten did not name China, but his comments sounded a clear warning to Beijing and the incoming Hong Kong government.

Hong Kong's economy has not always been a model of competition. For decades, large British trading companies, "hongs," dominated the colony.

"It was no accident that most of the important industries were really controlled by the British companies," says Leonard Cheng, economics head at Hong Kong University of Science and Technology.

Now China wants a change - a matter of control and prestige.

But politics provides only one motivation for China's march around Hong Kong's monopoly board. Good business sense propels another.

Monopolies such as China Light and Hong Kong Telecom boast strong rates of return, profitable investments for Chinese companies.

Mainland firms also get new technology and management techniques. Hong Kong Telecom, for example, is one of the world's most sophisticated telecommunications companies.

Professor Cheng argues that China's strategic acquisitions pose little threat - as long as the Chinese government and its corporate arms respect the rule of law.

In the months ahead, investors will watch anxiously for signs that the rule of law is still the law of the land.

CHINA PASSES GO, ROLLS AGAIN

June 18: The investment arm of China's Foreign Trade Ministry, China Resources, buys 50 percent of Hong Kong Chinese Bank, owned by Lippo Group, for $260 million.

June 17: China Everbright transfers 20 percent of Everbright Bank of China to its Hong Kong subsidiary.

June 6: China Telecom of China's Ministry of Post and Communications buys 5.5 percent of Hong Kong Telecom from Britain's Cable & Wireless, with the option of eventually becoming an equal partner.

May: Citic Pacific (China International Trust & Investment Corp.), a China-related company, sells its 7.7 stake in Hong Kong Telecom to China Everbright, which has even closer links to Beijing as the investment arm of China's State Council.