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FEATURE-Hong Kong, hit by global slowdown, woos U.S.
By Andrea Ricci
NEW YORK, June 9 (Reuters) - Hong Kong, once the bustling bastion of capitalism on communist shores, is no longer the lifeline linking mainland China to the rest of the world -- and that is making the territory a hard sell to U.S. business.
With economic growth an anemic 0.1 percent rate last year, investors are skeptical about Hong Kong, especially when mainland growth is topping 7.0 percent per year as Beijing aggressively stimulates China's economy.
So, Hong Kong Financial Secretary Antony Leung on his first official visit to the United States last week sought to put on a brighter spin, telling the Asia Society here he was "optimistic" the economy could achieve the government's forecast for 1.0 percent growth this year.
Hong Kong has posted negative year-on-year growth in each of the past three quarters. But Leung emphasized that the economy actually grew 0.3 percent in the January through March period when measured a different way -- quarter-on-quarter.
Most economists also expect a pick-up later in 2002 on rising export demand for everything from sweaters to software to financial services from the territory's major trading partners, notably the United States.
For the finance minister to build U.S. confidence in Hong Kong is important. The United States is the territory's second-largest trade partner after mainland China and the two economies are closely linked by virtue of the Hong Kong's dollar's peg to the U.S. dollar through a strict currency board system.
But more than that, many U.S. banks and companies have their Asian headquarters in Hong Kong, and American businesses have been using the territory as a base for their China ventures for years.
CHINA'S PIE
Few dispute that Hong Kong will stage a mild cyclical recovery this year. More at issue is its long-term future.
Hong Kong, a territory of 6.8 million people, became China's southernmost city when it was returned to the mainland by Britain in mid-1997, after some 150 years of colonial rule.
It was two years before the handover, in 1995, when Fortune Magazine famously predicted the change would bring the death of Hong Kong, which for decades had prospered as a free-wheeling entrepot for mainland China, unfettered by the Communist mainland and protected by British-style laws.
Hong Kong didn't die, but five years later, Leung finds himself fighting the perception that Hong Kong is in trouble, not because it is becoming too much like China, but because China is becoming more and more like Hong Kong.
China's joining of the World Trade Organization in December last year narrowed the gap further. As the mainland becomes more open to foreign business, more and more companies are looking to access China directly and bypassing Hong Kong.
But Leung did not seem worried. Hong Kong may have to share more of the China pie, but the pie is getting bigger.
"We see links (with the United States) expanding in future, now that China is a member of the WTO," he told the Asia Society.
Most analysts have said it's too early to tell how many firms would go directly to the mainland, and indeed the number of companies establishing Asia headquarters in Hong Kong in recent months has risen.
But the expectation is that an increasing number of firms will take the China route.
"More and more companies will set up directly in China," said Pieter van der Schaft, Asia regional economist at Barclays Capital in Hong Kong, "But there will always be ancillary business in Hong Kong, in finance, insurance and legal services.
"That, however, doesn't mean Hong Kong doesn't need to restructure," he added, pointing to rigidities in the property market and aviation sector and to weak anti-trust laws.
In some areas at least, the government is trying. For example, it is making efforts to improve efficiencies at its border crossings with China, improvements aimed at keeping shipments from going directly to the mainland.
Hong Kong ports are considered by many shippers to be the most efficient in the world. But they are far more expensive to use than their counterparts on the mainland.
PEG TO STAY
In his U.S. trip, Leung also met with Federal Reserve Chairman Alan Greenspan, where he played up Hong Kong's free-market mentality, rule of law and level playing field for business. He also met with members of Congress and business leaders as well as Lawrence Lindsey, the White House chief economic adviser.
He also visited the Heritage Foundation think tank, which in 2002 named Hong Kong the world's freest economy, as it has every year since starting the rankings in 1995.
But while Hong Kong retained the top spot, the foundation chastised the government for what it called interference in the judiciary and the press, charges Leung is sure to answer.
In New York, Leung discussed the U.S. economy with officials from the New York Fed and met with representatives from ratings agencies Moody's Investors Service, Standard and Poor's Corp and Fitch.
Both Moody's and S&P have expressed concern about Hong Kong's budget deficit. The gap, which is more than 5 percent of GDP, has been exacerbated by years of deflation which has eroded tax receipts while spending continues unabated.
Leung said deflation was just part and parcel of Hong Kong's increasing integration with lower-cost mainland China. While painful, the adjustment process ultimately would make Hong Kong more competitive, helping it to achieve its aim of remaining China's most important city and the gateway to southern China's populous and prosperous Pearl River Delta.
The Hong Kong dollar peg, which has been a source of stability for the economy and comfort to foreign investors since its inception in 1983, has contributed to deflation.
Because the exchange rate cannot absorb changes in the economy, adjustments must come through asset prices.
But Leung dismissed concerns about the currency regime. repeating the government's long-held policy.
"We have no plan to change the currency peg," he said.
06/09/02 12:03 ET
