June 26, 1995
(FORTUNE Magazine) – It's time to stop pretending. Supposedly, Britain's handover in less than 750 days of Hong Kong, the world's most aggressively pro-business economy, to China, the world's largest still officially communist dictatorship, is going to be a nonevent. Like the loyal retainers in the tale of the emperor who wore no clothes, Chinese and Western dignitaries continue to insist--despite growing evidence to the contrary--that, as Lord Young, chairman of British telecommunications giant Cable & Wireless, declared recently, "the best years for Hong Kong lie ahead." In fact, the naked truth about Hong Kong's future can be summed up in two words: It's over.
Let's be clear about what we mean. With its six million enterprising citizens (mostly Overseas Chinese), its magnificent harbor, and financial wealth that includes some $52 billion in government reserves alone, Hong Kong will remain the gateway to fast-growing South China (see following story). As such it will continue to be, as one local billionaire puts it, "a place where you can make plenty of money."
What's indisputably dying, though, is Hong Kong's role as a vibrant international commercial and financial hub--home to the world's eighth-largest stock market, 500 banks from 43 nations, and the busiest container port on earth. Last year this cosmopolitan metropolis's unique blend of unfettered capitalism and minimal taxation earned it the title of "world's best city for business" in a survey of executives conducted by Fortune. But as Hong Kong becomes a captive colony of Beijing and increasingly begins to resemble just another mainland city, governed by corruption and political connections rather than the even-handed rule of law, it seems destined to become a global backwater.
What will change after midnight on June 30, 1997? Everything. Within months of the transition to Chinese rule, the now dominant use of English, the universal language of business, will give way to far more extensive reliance on Cantonese and Mandarin. "There won't be as many foreigners around," predicts Robert McBain, managing director of Eastgate Partners, a Hong Kong investment bank, and an American with long experience in Asia. "And there certainly won't be as much of a level playing field for businesses started by foreigners."
Troops of the People's Liberation Army, which has already formed links with the powerful local criminal gangs known as "triads," will stroll the streets. From Beijing, whichever faction emerges on top in the post-Deng Xiaoping struggle for power will control every branch of Hong Kong's government--replacing elected legislators with compliant members, selecting cooperative judges, and appointing the chief executive. All those local officials, moreover, will be closely monitored and guided by hundreds of Chinese Communist Party functionaries who will move in from the mainland. Hong Kong's real rulers will operate out of the skyscraper headquarters of China's Foreign Affairs Ministry, scheduled to start rising soon on a hilltop overlooking the city center.
Descrying this bleak post-1997 scenario doesn't require a crystal ball. It's based on simply taking seriously what the leaders of the People's Republic of China (PRC) are saying and, more important, doing now to shape Hong Kong's future. Example: the government in Beijing has loudly and repeatedly promised to dismantle the newly elected legislature--even though that move, as a recent U.S. State Department report observes, would have "a most deleterious impact upon confidence in Hong Kong." Beijing has also struck terror into the efficient Hong Kong civil service by demanding immediate access to confidential personnel files on senior officials. Several Hong Kong Chinese in key government positions, men in their 50s, have just decided to take early retirement, as have 140 members of the police force.
Chinese gunboats roared into Hong Kong waters on March 18, confronted the local maritime police with submachine guns, and abducted two Hong Kong crew members, along with a pair of vessels containing 47 autos. Beijing claims that its gunboats were chasing smugglers. Chinese authorities have since released the Hong Kong citizens but kept the cars--highly valuable in the mainland because of the stiff import tariffs there. That shocking incident, says an internal report of the Hong Kong police, "has heightened fear that we have already lost control to PRC authorities."
Big Brother in China has also pressured Hong Kong's lively press, which includes 52 daily newspapers, into prudent self-censorship. Last year Hong Kong reporter Xi Yang was seized while visiting Beijing, secretly tried, and sentenced to 12 years' imprisonment just for disclosing in his Hong Kong newspaper that China planned to meet its debts by selling gold.
Most damaging, China is refusing to move ahead with plans to establish a new court of final appeal, the equivalent of the U.S. Supreme Court. Brushing aside earlier pledges to maintain Hong Kong's judicial independence, Beijing now claims ultimate authority over cases that concern "affairs which are the responsibility" of China's central government, a mandate so vague it can include virtually anything the PRC wants.
Says Hugh Davies, a senior British official negotiating details of the turnover with Chinese authorities: "We keep trying to explain to them that Hong Kong's capitalist system is not just a question of making money as fast as you can but is also based on freedoms and legal systems that have taken many years to build up." China's persistent failure to understand that point threatens the essence of Hong Kong's global appeal, which Lehman Brothers economist Miron Mushkat rightly describes as "a happy marriage between the animal spirits of capitalism and the certainty of British common law."
None of this was in the air nearly 11 years ago when China's leaders and Britain's Margaret Thatcher signed the formal treaty governing their unprecedented handoff. Under this document, known as the Joint Declaration, China pledged that when the British departed, Hong Kong would be run as a capitalist enclave, largely by its own people, for at least 50 years--enjoying freedoms unknown on the mainland, such as independent courts and an uncensored press--under the concept of "one country, two systems."
Those fine promises began looking shaky as early as June 1989, when China crushed pro-democracy demonstrators in Beijing's Tiananmen Square with tanks and automatic weapons. Suddenly aware of just how much they might lose under their future sovereign, more than 500,000 Hong Kongers took to the streets in protest marches; others quietly helped Chinese pro-democracy demonstrators escape the PRC. For their part, Beijing's leaders saw Hong Kong in a new light--no longer merely as an economic honey pot but also as a buzzing hive of political unrest. Soon after Tiananmen, the People's Republic enacted a new Basic Law, roughly equivalent to a constitution for the territory, that when it takes effect will require Hong Kong to prohibit "treason, secession, sedition, [and] subversion" against the regime in Beijing.
Despite China's persistent backpedaling from its initial commitments to freedom and noninterference, the party line continues to be that the "one country, two systems" model still has substance. On a recent tour of the U.S., Lu Ping, the senior PRC official handling the turnover, tried to justify China's plans to replace Hong Kong's elected legislature with appointed members this way: "Yes, after '97 the legislature will disband, but the new legislature will be entirely composed of Hong Kong people, so Hong Kong people will run Hong Kong."
As Beijing's tattered promises pile up, however, it's hard to find anyone in Hong Kong--at least in the security of private conversation-who puts much stock in such double talk. "We never thought for a moment that Hong Kong could do things free from the influence of China," says a leading Hong Kong property developer, sipping Chinese tea in his boardroom. "It's dreaming to think that Beijing won't run Hong Kong after 1997."
The prospect of the eventual demise of Hong Kong as a freewheeling but stable global business center is forcing international companies to rethink the way they operate there. Among foreigners, American companies, with direct investments totaling $10.5 billion and 178 regional headquarters, have the most at stake. So far most of them, despite their worries, are staying put. In search of at least a modest degree of security, though, about half the 528 companies listed on the Hong Kong stock exchange have shifted their legal domiciles to Bermuda. Some investors, reports Ms. Anson Chan, Chief Secretary of the Hong Kong government, have even gone so far as to insert clauses in the contracts they draw up with local partners explicitly declaring that these deals will not be subject to the future jurisdiction of Hong Kong's courts.
Meantime, fearing the worst, some 500,000 Hong Kong Chinese, or about 8% of the local population, have already voted with their feet and fled to other lands in the past decade. Among those who remain, the debate these days is not over whether Beijing will let Hong Kong run itself but over how best to cope with the certainty of its political interference. Essentially, the elite of Hong Kong have polarized into three camps: liberals who openly support greater democracy; active collaborators with China; and--probably the largest group--straddlers who advocate an ostrichlike strategy of sticking to business as usual and avoiding any action that might upset Beijing.
The liberals are essentially betting that only by actively shoring up the glass walls the British have lately been trying to erect around Hong Kong's fragile democratic institutions will they be able to prevent Beijing from shattering them. These include measures to give the colony's citizens more of a say through local elections, and new laws codifying such basic rights as freedom of worship and travel.
Chris Patten, 51, the dynamic former Conservative Party leader who's serving as the last British governor of Hong Kong, naturally thinks that's the right approach. Over coffee in his office recently, he made light of the invective that China's propaganda officials constantly hurl his way (epithets such as prostitute, liar, "a Buddha's serpent," and "the criminal of all time") and mocked Beijing's obsession with potential British double-dealing: "Chinese officials continue clearly to be transfixed by the fear that somehow, between now and the last moment, Britain will pack up all the gold bars into the hold of a naval vessel." Despite the bad blood, he also remains hopeful, telling Fortune, "Hong Kong will survive as a decent and successful place if people want that and are prepared to stand up for it." Judging from opinion polls, about half the populace supports the pro-democracy forces.
By contrast, most wealthy local business leaders, many of whom have their fortunes locked up in inflated--and immovable--Hong Kong real estate, accuse Patten and the democrats of needlessly alienating China. A sizable minority of these nominally conservative entrepreneurs and professional people have gone further and become official advisers to and public apologists for the new powers-to-be in Beijing. Says a member of this group, David Chu, 51, who owns a thriving investment firm and has given up his U.S. passport to become a more credible adviser to the PRC: "Hong Kong people must have faith in China and accept its imperfections."
As a result of these divisions, Hong Kong, like the U.S. during its Civil War days, is now rife with wrenching human dramas in which friends and family members are deeply split over the best means for survival. Gladys Li, an advocate of democracy and the elected chair of Hong Kong's Bar Council, can no longer talk politics with her father, Simon Li, a former judge who advises China on the transition and professes to believe its promises. Says he: "It's not a question of faith, but of reality. Hong Kong remains useful to China." Replies Gladys: "We're poles apart." She doubts that Hong Kong will really enjoy much autonomy, and terms Britain's act of sealing its fate in secret negotiations with China "morally if not constitutionally disgraceful."
Many Hong Kongers in each of these three groups have quietly obtained foreign passports--just in case their bets go wrong. But Martin Lee, 57, an eloquent barrister, member of the legislature, and leader of the Democratic Party--the group that has so far won most elections--has no intention of ever joining the ranks of the "yacht people," as some have branded these wealthy refugees. He vows to resist China's attempts to undermine the rule of law, even if it means going to jail. Still, in yet another family split, Lee's sister-in-law, Nellie Fong, 46, deputy managing partner of Arthur Andersen & Co. in Hong Kong and China, both advises and ardently embraces Beijing, saying, "The real economic success of Hong Kong will come after 1997 when we become much closer to China."
What unites both straddlers and outright collaborators among Hong Kong's super-rich is the conviction that they and their city are so important to China's prosperity that Beijing will never harm them. The links have certainly grown stronger in recent years. About two-thirds of the foreign investment in the People's Republic flows from the hands of Overseas Chinese via Hong Kong. Moreover, mainland business operatives have themselves in recent years put some $25 billion--much of it skimmed from state-owned enterprises--into Hong Kong, making China the colony's largest foreign investor.
But how much security does that web of interdependence really offer against hamhanded politically motivated meddling? After all, as Jimmy McGregor, 71, a Scot who has lived in Hong Kong for 45 years, has a Chinese wife, speaks Cantonese, and serves in the local legislature, observes: "A Rolex watch is being taken over by a garage mechanic."
A more notable skeptic, Nobel Prize-winning economist Milton Friedman, predicts that within two years of taking control, Beijing will impose capital controls and replace Hong Kong's independent currency pegged to the U.S. dollar with Chinese renminbi. Explains Friedman, who discounts Beijing's assurances that this will never happen: "I cannot conceive of a proud sovereign country like China entertaining the prospect of having two currencies at the same time." The slightest hint of such actions, he notes, will cause "drastic loss of confidence in one aspect of Hong Kong, namely as a place to store money."
Certainly Hong Kong's early encounters with the kind of crony capitalism that prevails on the mainland haven't exactly been encouraging. Consider the recent, much-talked-about case of Zhou Beifang. Several years ago billionaire Li Ka Shing, 67, one of the richest entrepreneurs in Hong Kong, teamed up with Zhou, 41, a newcomer from Beijing. His father, Zhou Guanwu, a close comrade of supreme leader Deng, ran as almost a personal fiefdom a huge Chinese conglomerate called Capital Iron & Steel.
With Li's help, young Zhou acquired companies listed on the Hong Kong exchange and injected into them state-owned assets from the mainland--a legally hazy but common practice among the barons running Chinese enterprises. Zhou then recruited one of Deng's sons to serve as chief executive for part of the new enterprise--Shougang Concord International, a group of five Hong Kong companies that attained a peak market value of $1.4 billion.
Suddenly in February the political winds blew from a new direction in Beijing, and Zhou Beifang found himself arrested for alleged "serious economic crimes" at home; his father instantly resigned as chairman of Capital Iron & Steel. The Shougang affair, apparently the result of a broad and ongoing campaign by Communist Party chairman Jiang Zemin to consolidate his power in Beijing, shook Hong Kong hard. Billionaire Li himself seems to have suffered no damage, as senior Chinese officials later publicly cleared him of any involvement in criminal activities. Still, as Christine Loh, an independent liberal legislator in Hong Kong, observes, "The Shougang affair should be sending a shiver down the spines of our business people. When there's no rule of law, the friends you make today can no longer help you tomorrow."
In another ominous move, China has begun making clear that it wants only companies it regards as politically correct to gain Hong Kong government contracts. PRC officials now have the right to sign off on projects that extend beyond 1997--and have been using that leverage to wreak an incredible amount of mischief. One behind-the-scenes incident not previously revealed: Chinese officials initially barred approval of a new telephone franchise for the blue-chip Wharf Group in Hong Kong on grounds that its billionaire owner, Peter Woo, had failed to build announced infrastructure projects in Wuhan, a city in east-central China. Woo, a big promoter of investment in the PRC, managed to regain his footing--and his franchise--only by convincing the Hong Kong-based functionaries who were blocking him that his Wuhan projects had themselves been held up by bureaucratic delays in Beijing.
In addition to stalling completion of Hong Kong's new $21 billion airport, the PRC has sabotaged construction of a much needed $1.5 billion container shipping terminal. One of the losers is the U.S. company Sea-Land, which had been awarded 14.5% of the new terminal. Beijing is blocking the deal--now two years behind schedule--because one of the biggest contractors (with 20%) is Jardine Matheson, a British conglomerate infamous in Beijing's eyes for its role in originally encouraging Britain to take Hong Kong from China through warship diplomacy some 150 years ago. Such incidents, coupled with Beijing's constant propaganda assaults against "special colonial privilege," suggest hard times ahead for British companies such as Jardine and Swire Pacific, which hold lucrative monopolies in cargo handling and food catering at the airport.
Lately the noise level of Sino-British clashes in Hong Kong, though little noticed outside, has become ear shattering and incessant. Nothing happens without conflict. When the British propose building a pipeline to reduce the dumping of sewage in Hong Kong harbor--hardly a controversial project--Chinese officials raise objections. When local administrators invite PRC representatives to observe the budget-making process, the Chinese officials agree and then cause trouble by insisting on their right to wield veto power--now. Democratic legislator Christine Loh explains such tactics this way: "The Chinese aim to throw things into such confusion that when 1997 comes, people will feel relief that the British are gone." Then she anticipates that China could turn on those "considered to have conspired with the British, maybe me among them."
To further its immediate control--and avoid dealing with Governor Patten or elected legislators--the PRC has tapped 37 Hong Kong business and professional people to join 32 mainland officials and serve as Beijing's transition team. Last year party leader Jiang told the group, which is called the Preliminary Working Committee, that its main job was immediately to make "China the dominant player" in Hong Kong. Though derided by local critics as "instant noodle patriots," these capitalist backers of China insist they don't merely parrot Beijing's line. Says committee member Nellie Fong of Arthur Andersen: "Irrespective of what people think, we are Hong Kong people and speak our minds to the Chinese government."
Above all, these China boosters, who are motivated by a varying mix of self-interest, ethnic Chinese loyalty, and political ambition, genuinely believe that they can protect the business environment of Hong Kong by working actively with Beijing. Case in point: Paul M.F. Cheng, 58. A Wharton MBA and native of China who grew up in Hong Kong, Cheng holds a U.S. passport, is chairman of two British companies--Inchcape Pacific, a marketing and services conglomerate, and the Hong Kong branch of investment bank N.M. Rothschild & Sons--and now proudly sits, as he puts it, "in the sanctum of China's Preliminary Working Committee."
At the moment, Cheng admits, business confidence in Hong Kong is fraying as 1997 approaches. One sign: a softening in auto sales over the past six months. "The feel-good factor is really not there," says he, "and this may trigger another sort of exodus in 1996 before it comes back."
But he maintains that Hong Kong's future is bright, especially if it can secure a new government chief executive "strong enough to command respect from Beijing." Next year China will choose that successor to the British governor from among candidates proposed by yet another committee of handpicked Hong Kong locals. Says Cheng, sounding as if he were presenting his campaign platform: "I like to think of Hong Kong as the international division of China Inc. What's happening is that Hong Kong is changing the head office from London to Beijing. As we all know from working in large corporations, the head office has certain policies and guidelines that have to be followed. Do that, and you're left relatively alone. If you're too much of a maverick, the head office will have to rein you in a little tighter."
Another prominent Working Committee member, investment banker David Chu, is probably the only China adviser in Hong Kong to have sacrificed U.S. citizenship for the cause. Says Chu, sitting on the sunny deck of his yacht near Hong Kong's Aberdeen Harbor: "I plan to play an important role during the transition and in the future government." Certainly his ideas, which include remolding Hong Kong into a more dutiful Confucian society, are in harmony with Beijing. As Chu puts it, "Making Hong Kong economically well is the biggest contribution we can make to China, not by staging demonstrations or participating in its internal affairs."
A Shanghai native, Chu laughs at the central paradox of his life, coming to America with his parents at the age of 14 "as a refugee from communist China, of all places, and now going back." It's certainly a surprising turn for a Harvard MBA who lived in the U.S. for more than two decades and worked for such companies as General Electric, American Optical, and yes, Jardine Matheson--a career move Chu now defends as part of a deliberate attempt to "learn about the British colonial system."
Chu blames agitators for frightening local people about the pending turnover, saying, "The British government and the populists should cease plotting against China." As he sees it, there's nothing to worry about because Hong Kong--"like a parasitic shrimp living in the mouth of a big fish"--is invaluable to the PRC. Besides, as a member of the future local government he promises to defend Hong Kong's interests: "If China were going to do something unfavorable to Hong Kong, I'd be able to show that its officials would get a gigantic toothache or headache."
Such faith in the local strongman as savior is echoed by many tycoons in Hong Kong, including those, such as property developer Payson Cha, 52, who have no political ambitions. Last year, HKR International, Cha's family-owned company, sold half of a giant resort-style community for 10,000 residents that it had built on Lantau, Hong Kong's largest island, to a leading PRC-controlled company, Citic Pacific. Explains Cha, who figures that property values had reached unrealistically high levels: "I wanted to hedge my bets, and I wanted a strong partner for 1997." Citic is both well connected and influential; Larry Yung, its Hong Kong chief executive, is son of the PRC's vice president.
"China is a society where human relations are most important," says Cha, whose father left China in 1949 and reestablished his textile-dyeing business in the British colony. "Whether Hong Kong does well depends on getting a government chief executive who can win China's trust. If he's weak, then we're in for very serious trouble."
In fact, this widespread belief in the notion that Hong Kong's fate depends on elevating its own version of someone like Singapore's Lee Kuan Yew seems either delusional or deliberately disingenuous. The only real hope for Hong Kong's survival as a global commercial center is the unlikely prospect that between now and July 1, 1997, its future rulers in Beijing--whoever they may be--will develop a far deeper awareness than they have so far displayed of the crucial link between the rule of law and capitalism.
One hopeful sign: Recently Li Ruihuan of China's ruling seven-member Standing Committee issued the following warning about Hong Kong to his fellow party leaders. Said Li: "If you don't understand something, you are unaware of what makes it valuable, and it will be difficult to keep it intact." He likened Hong Kong to a fragile old Yi Xing teapot that can be ruined by scraping it too hard. If Beijing fails to get the message, added Li, many people in the world "will laugh at us." Not quite, comrade. They won't, because they'll be too busy mourning the death of what had once been one of the world's great business cities.
