TIGER on the doorstep

Hong Kong's fortunes took a nosedive after the former colony was handed back to the Chinese, but now business is humming, reports Matthew Gwyther.

Last Updated: 31 Aug 2010

It is now nearly eight years since the Union flag was hauled down for the last time over Hong Kong. On the night of 30 June 1997, the 28th and final governor Chris Patten shed his famous tear while Prince Charles maintained a stiff upper lip and the Chinese premier Jiang Zemin beamed a broad smile. The latter's placeman Tung Chee Hwa, chief executive of the new Hong Kong SAR (Special Administrative Region), summed it up for many on the mainland when he triumphantly noted: 'Now we are masters in our own house.'

But the Chinese people, highly superstitious at the best of times, could have been forgiven for wondering what was wrong with the feng shui of their newly reclaimed abode, so rudely taken out of family ownership when the colonial British muscled in back in 1842 (the original 'in perpetuity' occupation was scaled back to a 99-year lease in 1898). What did Hong Kong do to deserve the run of rotten luck that befell it in the years that followed 1997?

First there was the financial crisis that blew through south-east Asia in 1998. Confidence in the markets plunged, property prices in Hong Kong plummeted and a recession marched in. Hard on the heels of these economic woes came the outbreak of a deadly strain of avian flu, which brought about the death of some 1.4 million chickens and six humans, and did HK's image no good. Finally, and worst in terms of Hong Kong's welfare, was the outbreak of Severe Acute Respiratory Syndrome (Sars) in March 2003: 1,700 people were infected and 260 died. (The source of the epidemic is now thought to have been a portion of stir-fried civet, a tree-dwelling relation of the mongoose, served in a Guandong province restaurant.) TV stations around the world broadcast film reports showing Hong Kong residents' frightened eyes above masked faces. The region fell to the bottom of the world's travel itinerary.

Paul Beverley, a man who has done business in the region for many years, remembers these dark times well. 'Sars really hurt Hong Kong. The streets were deserted and the place was dying - everyone was walking about wearing masks. I flew back from Shanghai with fewer than 50 people on a 300-plus seater plane. You had to lower the mask every time you took a mouthful of food and then put it up again.'

Beverley is the English head of PMS International, which sells toys, houseware, giftware and sundries at the value end of the market. PMS will sell stores worldwide anything from cheap sticking plaster to toy fire engines, and provides 90% of the soft toys that are given away as fairground prizes in the UK.

He launched his company with £350 on the seafront at Southend in 1970. It has grown somewhat since and now has an 11-acre site in Basildon, 20,000 square feet in Shanghai and 50 staff in Hong Kong. PMS - now including a licensing brand called Gosh, which acquired the soft-toy licence for Shrek - turns over $150 million a year, and Beverley has hung on to a 75% stake. He moved out to Hong Kong with his wife about 13 years ago.

After the misfortunes of recent years, business is humming again. When MT visited PMS's Hong Kong office in Kowloon, boxes of samples were piled high all over the reception area, phones were ringing incessantly and buyers from all over the world were inspecting Beverley's wares. Business as usual - yet some things have changed...

'When I first started here, 60% to 70% of the factories we used were in Hong Kong,' says Beverley. 'They have now nearly all moved into China because of lower costs. There is no manufacturing here now except sex toys, because there are difficulties producing them in China. You need a special licence and Ann Summers got one. But quite a few women in China refuse to work on sex toys. They are very suppressed.'

More than 50,000 Hong Kong manufacturing companies now operate factories through the Pearl River Delta, the hinterland that fans out from Hong Kong, and they employ 11 million workers in an area that has come to be referred to as 'the workshop of the world'. Just over the border - and there is still a border - lies Shenzhen. Twenty-five years ago, this was a series of sleepy fishing villages. Then it was designated one of China's new Special Economic Zones for free-market development - a good idea, as the Cantonese are famously entrepreneurial (as the Chinese saying goes, they were the first 'to dare to eat a crab').

Fuelled by huge migration from poor rural areas, Shenzhen is now an enormous, sprawling Bladerunner-like metropolis, complete with skyscrapers, sitting right on Hong Kong's doorstep. This is nothing less than an industrial revolution with a huge labour pool and a minimum wage of 610 yuan (£38) a month, although many factories pay less while extracting a 100-hour week from their workers.

Hong Kong has become a vital support centre for the Pearl River Delta industrial power-house, which has managed annual growth of more than 11% for the past dozen years. The Delta area draws in a quarter of China's foreign direct investment and generates a third of its exports (which rose overall by 25% in 2004) on just 0.4% of the country's landmass and with a mere 1.8% of the population.

Hong Kong's new role is to provide shipping and other logistics, banking, a mature legal system, freedom from corruption and a source of finance. 'Hong Kong is still very fast and very efficient,' says Beverley. 'Things are done here with speed and accuracy.'

Hong Kong has always been about one thing - money and the making of it. It is a city of hustlers and oozes mercantilism. Deng Xiaoping may have decided about a decade ago that 'it is glorious to be rich', but Hong Kongers had been well aware of that fact, and vigorously practised what they preached, for nearly two centuries. And what you earn there, you keep more of: the maximum personal income tax is 16%, company profits tax is 17.5% and there is no capital gains tax or transfer tax. Hong Kong remains the 10th-largest trading economy in the world. (It is also one of the most generous: aid donations following the recent tsunami work out at the highest figure per capita in the world - the equivalent of nearly $13.)

Whereas Beverley has been in Hong Kong for 13 years, Jardine Matheson has been there for 170. One of the great trading hongs, Jardines has a history that is inextricably intertwined with the place. The company's lucrative drug-dealing origins led to the Chinese opium wars of the 1840s, which in turn forced China to cede Hong Kong to the British. Not that foreign secretary Lord Palmerston was impressed: 'You have obtained a barren island with hardly a house on it,' he fumed. (Jardines built the first brick dwelling on the island.)

Norman Lyle, Jardines' finance director, arrived on the island in 1997 at almost the same time as the People's Liberation Army marched in from the mainland and took up station in their barracks. He had worked for ICI and Zeneca for 26 years, and friends saw his move to an uncertain future in Hong Kong as eccentric. At the time, many business people were heading in the opposite direction, and taking their money with them.

Jardines had a number of problems in the 1990s. It was a highly diversified conglomerate when such organisations were unfashionable - it is engaged in everything from supermarkets, car dealing, luxury hotels and property to construction. It also took what looked like a defensive stance and shifted its country of registration to Bermuda. However, it survived a predatory potential takeover move from Hong Kong's richest man, Li Ka Shing, and its cross-shareholding makes the family control by the Keswicks virtually bid-proof.

Lyle has overseen a rationalisation: nearly 60 businesses have been sold and the group's merchant bank Jardine Fleming was sold in 2000 to Chase Manhattan. It was burned when it took on the 7/11 convenience store franchise for China - 'there would be a competitor opening up nearby within weeks', says Lyle - but, by contrast, it has expanded in Indonesia, where it bought a stake in carmaker Astra.

Jardines' executives have always been cautious in their dealings with China. 'Outsiders should never think that China is going to be easy,' says Lyle. 'Building businesses on the mainland needs immense patience and a strategy defined in years rather than quarters.'

One downside is the air pollution. With an industrial revolution on its doorstep, Hong Kong now suffers regularly from emissions from the mainland. The view from Lyle's office window over the harbour can look like a Huddersfield pea-souper from the 1950s.

Besides foul air, there are other problems on the horizon. First, the tricky nature of Hong Kong's political relationship with China. While economically the two entities rub along fine - the phrase the Communist party likes is 'one country, two systems' - they remain very different socio-politically. Although it has a free press, Hong Kong is not democratic - nor was it under the British - although a 'high degree of autonomy' and the retention of its capitalist system is guaranteed until 2047. However, in 2003 half a million marched in protest against proposed legislation that they thought could be used to suppress those considered as subversive by the Chinese regime. The Hong Kong administration backed down.

Beijing rarely comments directly on the performance of the Hong Kong government, but in December last year an unusual and ominous rebuke was delivered by China's president Hu Jintao. Contrasting Hong Kong unfavourably with Macau, Hu said that Hong Kong 'should summarise your experience, look for your shortcomings and constantly raise your governance ability'. This was little less than a public scolding, but for precisely which misdemeanours was not clear.

Which leads to the second dilemma: the threat presented by its old rival, Shanghai. Before the Communists took over in 1949, it had undisputedly been China's greatest city, with a trading history as the leading Treaty port. Shanghai has now rediscovered a fearsome commercial momentum of its own and is closer to Beijing than Hong Kong, both geographically and politically, and thus controllable by the authorities on China's main- land. The risk is that Shanghai could threaten Hong Kong's commercial dominance.

Bullish Hong Kongers think this threat is over-stated. 'Hong Kong remains the safe haven to place money,' says Alex Thursby, head of client relationships for the wholesale banking division of Standard Chartered Bank in south-east Asia. 'Just as London as a financial centre absorbs the world, so Hong Kong will absorb parts of China, and Shanghai can't do this. My view is that Hong Kong will have the biggest stock market in Asia Pacific in 10 years.'

And in the meantime, they have won one victory over Shanghai by persuading Disney to build its latest theme park outside the US in Hong Kong. Over on Lantau Island, near the Norman Foster-designed airport, Sleeping Beauty's castle has just been topped out and auditions for cast members are already underway. A grand opening is expected later this year.

1842: First Opium War ends with the Treaty of Nanking. British nationals exempt from all Chinese law and the island of Hong Kong is ceded to the British in perpetuity. Population less than 30,000.

1898: Second Convention of Peking leases the New Territories to Britain for 99 years, increasing the size of the colony by 90%. Population about 250,000.

1949: Communist forces are victorious in China: refugees pour into Hong Kong, population nears two million.

1978: After decades of economic isolation, Chinese leader Deng Xiaoping's Open Door policy encourages foreign investment in China. Business booms as Hong Kong becomes gateway to the mainland once again.

1984: The Anglo-Chinese agreement is announced, following the collapse of the HK dollar in 1983 due to uncertainty over its political future. After two years of wrangling, Britain agrees to hand back Hong Kong island and the New Territories to China in 1997.

1989: A million Hong Kong people brave a typhoon to march in protest against the Tiananmen Square massacre. HK stock market plummets by 22% as Sino-British relations sour and dissidents pour in.

1992: Chris Patten, last British governor of Hong Kong, arrives. His attempts to put back on track the plans for limited democracy after the handover meet stiff Chinese resistance.

1997: Britain hands Hong Kong back to China and it is named a Special Administrative Region - SAR. The south-east Asian economic miracle falters.

1998: Avian flu reaches its high point and 1.4m chickens are slaughtered. Hong Kong International Airport at Chek Lap Kok opens for business. Asian slowdown turns into recession.

2002: Panic selling wipes HK$11m off the market in one hour after the HK stock exchange proposes to de-list all stocks trading under 50 cents - a third of all listed companies.

2003: Severe Acute Respiratory Syndrome breaks out: 1,700 people are infected and 260 die from the effects of the virus in Hong Kong alone. The cost to south-east Asian economies is estimated at $15bn.

2005: Hong Kong Disneyland - the latest Disney theme park - is planned to open in September. The 310-acre site on Lantau Island near Chek Lap Kok airport is the third Disney park to be built outside the US.

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