Hong Kong sweats while China overheats: Peter Rodgers tests the mood in Hong Kong and Shanghai and finds grounds for cautious optimism

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The Independent Online
In September 1997, three months after the formal handover of Hong Kong to China, thousands of politicians, bankers and officials are expected to gather in the territory's plush hotels for the annual meeting of the International Monetary Fund and the World Bank.

One American bank has already chartered a boat for a cocktail party for 200 in the harbour, and hotels have taken substantial bookings, even though there has not yet been any official confirmation of the venue.

In Hong Kong, the plan for the meeting is seen as 'an act of confidence in Hong Kong as a serious financial centre that has a life after Britain has given up sovereignty', according to Tony Nicolle, Standard Chartered's head in Hong Kong and China.

Joseph Yam, chief executive of the Hong Kong Monetary Authority - Hong Kong's central bank governor - says: 'I think 1997 will be very dull unless the meeting comes here.' Formal approval, he says, has been stalled only by the subtleties of how the invitation letter will be worded, since Britain should issue it, but by 1997 China will be host.

The expectations built up for the IMF meeting, even before the details have been approved, illustrate the widespread belief in Hong Kong that it will be business as usual after 1997.

But that has not stopped businesses becoming anxious about politicians they fear are rocking the boat. British and American companies have unintentionally become Peking's most vocal lobbyists against Chris Patten's plans for a new injection of democracy and President Clinton's pressure to improve human rights in China. Most regard both interventions as ill- timed and disruptive because they upset Peking.

Business suspicions of political intervention are not surprising, given the enormous amount of money going into Guangdong, Hong Kong's hinterland, and Shanghai, further north.

Shanghai, where the most exciting action is taking place, is a landscape of cranes and new construction projects from horizon to horizon - when you can see that far through the industrial pollution. To the west of the city at Pudong, an enormous new industrial and financial centre is taking shape, with modern buildings rising through lattices of bamboo scaffolding, and the sites surrounded by the shacks of construction workers. Nearby, Asia's tallest telecommunications tower is taking shape.

In the centre of Shanghai, streets, shops and clubs have a Western buzz and are stocked with consumer goods and expensive clothes. Hopes of resurrecting the city's 1930s stature as a financial centre, if not its image as the jewel of the Orient, are no pipe dream.

Greed for mainland wealth is the simplest explanation for business criticisms of politicians. But there is more to it than that.

Vincent Lo, chairman of the Shui On Group in Hong Kong, owns factories and hotels on the mainland, is an adviser to the Chinese government and a member of a 1997 planning committee set up to sidestep the stalled relations between the two governments.

He says Beijing is interested in preserving Hong Kong as an autonomous financial and business centre only to the extent that it carries out those functions successfully, and is useful to China. So if the British and US governments alarm Beijing by pushing for a faster political evolution than it can swallow, then the leadership is likely to interfere and make it harder for Hong Kong to deliver.

Paul Chow, chief executive of the Hong Kong stock exchange, also believes in evolution not political confrontation. He says his parents, like most of their generation, were poor when they came to Hong Kong. Education was the key to improvement, he says, and with patience it will be the same for China. 'With education, in 20 to 30 years' time, people will appreciate all these things, and democracy and human rights will come naturally. For me, today is the best time for China to inherit Hong Kong. It will provide them with a catalyst.'

There is no sign yet of serious repercussions for business from the stand-off between Mr Patten and the Chinese government, though disagreement over the financing of the new airport continues and there are rumblings from middle- rank Chinese officials about the scale of advisory work given to British merchant banks.

But the truth is Mr Patten's row is not the real threat to business. The Chinese economy is showing every sign of overheating and the central government is finding it hard to stop. Rents in Shanghai have exploded and many skills are scarce.

China has grown 13 per cent two years running, but in the new capitalist regions on the coast considerably faster, and will have a hard task achieving its target of restraining growth to 9 per cent this year without tough new measures from Zhu Rongji, the central bank governor.

US interest rates are rising, and Hong Kong followed last week. The tide of US investment into the Asia Pacific region is slowing. And the looming succession problem in Peking could make economic management erratic.

Hong Kong, the conduit for much investment in China, is itself experiencing a property boom which is at that worrying stage where everybody believes it will never stop.

Hong Kong banks are tightening credit, after realising the risks they run, both from the stock market - already down 30 per cent from the peak - and from heavy property speculation.

Mr Yam, the central banker, acknowledges the risk of an asset price bubble affecting the financial system and says, 'That is why I have been asking banks to be prudent in their property lending.' The Chinese economy, while moving rapidly in the right direction, is also on a 'very bumpy path' and the chances are it could affect Hong Kong, adds Mr Yam.

There is no reason to doubt the enormous long-term growth potential of China's conversion to capitalism, ably assisted by Hong Kong. But as the Hong Kong stock market is already showing, it would be no surprise if the frenzy to invest in China is followed by a sharp setback, a stop-go cycle that could be hard to control. That 1997 IMF meeting may be held against a more sober economic backdrop.