Hong Kong's tiny hiccup

Paul Slade foresees continued prosperity after the handover

"It will be business as usual for Hong Kong, punctuated admittedly by some unique events," said Chris Patten. Hong Kong's last Governor could be accused of a degree of understatement regarding these "unique events", as Vincent Cheng, executive director of the Hongkong and Shanghai Banking Corporation, acknowledges.

"Handing back a territory to a motherland with a different social, political and economic evolution is a scenario unique in constitutional history," says Mr Cheng. "It may have been inevitable that the process would have been perceived as difficult. However, the number of sceptical views I read about the future of the territory - particularly those from outside Hong Kong - astounds me."

Certainly there have been enough gloomy forecasts for the period leading up to Mr Patten's handover to the Chinese on 1 July. Some predict a brain drain from the territory, robbing Hong Kong of the very skills and intelligence which have made it one of the world's most buoyant economies and a vital financial services centre for Asia and the world. But Mr Cheng argues: "We have more people and capital coming into Hong Kong than ever before. We have rising prosperity and declining levels of crime. The problem is how to handle the influx of people, rather than how to deal with an empty city."

Hong Kong's success story is an impressive one. GDP growth over the past decade has averaged 6 per cent a year, three times that of the OECD countries. Per capita income is US$26,000 (pounds 16,250), higher than that of Britain, Australia or Canada. So far, the leading Hang Seng stock market index and the Hong Kong property market have continued to rise in 1997. Ironically, the very strength of Hong Kong property may also prove a weakness for the territory, as high rental values hit its competitiveness as an administrative and financial centre.

One of the most powerful pointers to continued prosperity for Hong Kong under Chinese rule is the extent to which the two economies are already intertwined. Hong Kong has long since exported its traditional role as a low-cost manufacturing economy to China. Hong Kong-based employers - who already employ five million workers in China - can reduce their wages bill still further by relocating factories to the Republic of China.

The territory has reinvented itself as Asia's leading financial services centre - among other things a debt market for financial futures and derivatives for Chinese stocks. Perhaps most tellingly of all, about 30 per cent of Hong Kong currency already circulates freely in southern China.

Hong Kong also operates as an important gateway for the transfer of capital between China and the rest of the world. More than half the entire flow of capital into China over the past 15 years has passed through Hong Kong. And it's a two-way street: more than half of all foreign investment into Hong Kong comes from China. The need for vast infrastructure projects throughout Asia will require capital investment worth US$1.5 trillion by 2001, much of which will be routed via Hong Kong. Asia is also well- placed to provide a refuge for Western investors who fear their own stock markets may soon be in for a downturn. Asian countries now trade extensively among themselves, with less industrialised countries in the region providing the manufacturing base for their more developed neighbours. This makes the region increasingly independent of economic upsets in the West. Sir Alan Donald, a former British ambassador to Beijing, says: "What used to be the state of affairs - the West caught a cold and the rest of the world sneezed - is no longer true.

"The centre of gravity in trade and economic terms is tending to move from the Atlantic to the Pacific. In a couple of years' time, the USA will be doing more trade with Asia than it is doing in Europe"n