Hong Kong's wealth resting on an Achilles' heel

City & Business

I'M JUST back from a week in Hong Kong. The changes have been dramatic since I worked there briefly 17 years ago. The very skyline is altered - the skyscrapers are twice as high and thrice as densely packed. The round-windowed Jardine Matheson building - known jocularly as the tower of a thousand arseholes - was a landmark then. Now it is just another tower block, one dwarfed by the beautiful Bank of China building and a gaudy carbuncle called Central Plaza.

The harbour is busier than ever, though the brown-sailed junks have gone. In the heart of the city, life has been elevated a storey - out of the noisy dusty streets and into sanitised air-conditioned shopping malls.

One startling change is the level of prices. Hong Kong used to be a shopper's paradise. Nowadays there is little on offer that cannot be got for the same price in London and cheaper in New York. I could find only one exception - compact discs.

It's now less than 18 months before the territory is handed back to China. For some, this means anxious analysis of every hawkish statement from Peking. But for most people, it seems to be business as usual.

Indeed, the very hand-over is regarded as a profit opportunity - every hotel in town is already booked solid for the night of 30 June 1997. At midnight, out goes the British Governor, Chris Patten. In comes an executive appointed by Peking. But the capitalist system will continue for the next 50 years, China has promised.

Anywhere else, the impending change would have induced paralysis or flight. But for most Hong Kong Chinese there is no choice but to stay on. And encouragingly, some of those who do have passports have left only to return.

Meanwhile, the boom continues, albeit in muted form. Growth this year is expected to be a healthy 5 per cent. The stock market is buoyant. If there doesn't seem as much construction activity as usual in the city, it is because half the building industry has decamped to Chep Lap Kok, where a new airport the size of Heathrow is rising out of the South China Sea (see page 7). Only retailers are having a tough time, and that may be something to do with their prices. Inflation, a serious problem for the past five years, is at last abating.

Confidence is rising among the business community. The near- universal view now is that Peking, for all the rhetoric and Patten-bashing, is far too pragmatic to risk damaging such a jewel. The territory will be allowed to go on doing what it does best - making money. The new regime may be more corrupt and more bureaucratic, and certainly less tolerant of criticism, but it won't risk destroying the golden goose.

I buy almost all of this, but I nevertheless left Hong Kong with one niggling doubt. The entire economy is built on property, indeed on some of the highest values and rents in the world. Huge personal and corporate loans are secured on that property. That inevitably makes for instability.

My doomsday scenario goes like this. The new authorities act heavy-handedly over a trivial matter. Civil liberties groups respond muscularly, fearing any clampdown as the thin end of a wedge. The dispute escalates with neither side prepared to lose face. A few householders decide to sell their properties, just to be on the safe side. They have no intention of leaving Hong Kong - they just for the moment prefer to have their assets in something portable such as gold bars, and rent an apartment in the meantime. Property prices start to soften. Other householders see the value of their homes shrinking and begin to worry. They know there are 100,000 families in Hong Kong with overseas passports, who could sell up and leave tomorrow. Prices lurch lower still. Panic selling starts. Prices crash. A parallel downward spiral begins in commercial property. The crisis spreads to the banks, whose loans to people and corporations are secured on property. A run begins on an over-extended bank. The stock market plunges. Before you can say "financial meltdown" there is a panicky queue outside every bank in the territory.

There are some safeguards to prevent such a disaster. Banks are only allowed to lend up to 75 per cent of a property's value. But then property prices have already fallen 25 per cent from their April 1994 peak (though reassuringly they have now stabilised). Negative equity for the moment is unknown.

And anyway, I was told by a government official, the well-resourced Hong Kong Monetary Authority, the territory's central bank, would bail out a bank if financial stability was threatened.

Just as I was leaving Hong Kong, a sagacious old China hand quoted me a Chinese proverb: "There are thirty-six ways of avoiding disaster, and running away is the best." It wouldn't need many Hong-Kongers taking that view to trigger serious trouble.

Hanson horror show

BACK to Britain, and Lord Hanson's stunning decision to break up his own empire. I popped in to the Hanson AGM on Wednesday to witness the end of an era.

I'm usually a great believer in AGMs, but this was an object lesson in how they should not be conducted.

First, the entire proceedings were repeatedly disrupted by protesters apparently more interested in the sound of their own voices than imparting any message to their fellow shareholders.

Second, we were forced to sit through a Hanson propaganda film that could have come straight out of Orwell's Ministry of Truth.

Third, when question time finally arrived, almost all the questions were pre-vetted ones and even those were handled pretty feebly. Fourth and most unbelievably, the subject of the breakup - possibly the most seismic event in Hanson's 30-year history - was barely broached.

Lord Hanson faces an uphill struggle convincing investors of the merits of his plan, as we report opposite. The supposed benefits are all rather intangible The extra costs, however, are all too obvious: three extra head offices, three extra sets of advisers, higher borrowing costs and less scope for the tax-avoidance wheezes that have been Hanson's hallmark.

Yet Lord Hanson chose to say next to nothing on the subject. It wasn't just the protesters who should have been turfed out by the burly security guards. The entire board should have been ejected - for wasting shareholders' time.