China

The Lo Wu crossing station between Hong Kong & China is the busiest along the Chinese border. Thousands stride daily over the double-decker concrete walkway. Whatever their reasons for travel and whatever their thoughts, all are reminded by two large signs – one on each side – of the most important event facing Hong Kong and Southeast Asia.

One sign – like a clock at a football game ticking off the last minutes of the fourth quarter – displays the number of days remaining until Hong Kong returns to China’s sovereignty on July 1 after 150 years under British control. The other sign depicts the red flag of China over a bronze bas relief of the city and proclaims – reassuringly or defiantly, depending on the viewer – “Hong Kong Will Have A More Beautiful Future.”

Despite such official assurances from both sides of the border, uncertainty about the future of Hong Kong remains. The one question that always comes up in conversations between Hong Kong businesspeople and visitors is how business might be affected.

It’s more than just idle curiosity.

Asia’s center: Hong Kong has become the business and trading center of Asia – almost 20% of all intra-Asia trade goes through Hong Kong – and 85 of the world’s top 100 banks have offices there. It also has become a major player in the global jewelry and watch industries in recent decades:

  • The top 40 jewelry retailers in the U.S. and most of the world’s major watch brands have products or parts made or assembled in Hong Kong.

  • Hong Kong is Asia’s major gold, diamond and jade trading center and is becoming a major player in pearls.

  • The September Hong Kong Jewelry and Watch Show is the showcase for Asian jewelry and is one of the most important fairs in the world.

The change in sovereignty from Great Britain to China is a matter of serious interest for western jewelry buyers, manufacturers and retailers – many of whom have memories of the televised events during the 1986 Tiananmen Square massacre in China – and for other jewelry industries in Asia, especially Taiwan. What affects Hong Kong affects all of them.

Americans and Europeans far from Asia may worry about Hong Kong’s economic stability and prosperity after July 1. But in many Hong Kong business circles, the mood seems downright bullish. “The business and public confidence level is actually rising as we get closer to the date,” says Patrick Wong, deputy senior manager of the Hong Kong Trade Development Council. Recent surveys by The Asian Wall Street Journal, Dun & Bradstreet Inc. and MasterCard International find foreign and domestic businesses optimistic about Hong Kong’s future under Chinese sovereignty. This outlook is spurred by expectations of new markets and more orders.

Meanwhile, regular surveys of residents by Hong Kong TV find confidence in a peaceful transition and in China’s commitment to Hong Kong’s Basic Law rising several percentage points every quarter.

There is also “concrete evidence” of confidence in Hong Kong’s future. This crowded metropolis on the Pearl River is in the midst of a building boom pushed by Chinese and foreign investment. More than 60% of current investment in Hong Kong is from China. Hong Kong has become China’s “small box” – or piggy bank – where the nouveau riche and local Chinese governments invest wealth generated from economic reforms they don’t want taxed, say local experts.

Real estate in high demand: Hong Kong’s commercial space is becoming the most expensive in the world. (An 80-sq.-ft. jewelry shop in the heart of Hong Kong rents for $800,000 per month.) Residential property prices, the Hong Kong stock market and currency deposits in Hong Kong dollars (rather than foreign currency) have risen significantly in the past year.

Meanwhile, Hong Kong’s government is improving and expanding its infrastructure in hopeful anticipation of greater business opportunities. A new airport that can handle 87 million passengers a year (up 32%) – will open in 1998 along with an expanded cargo depot that will be the bulk cargo hub on the Pearl River delta. Improved roads feed into highways in China, and faster rail links between Hong Kong and China – like the new Beijing-to-Hong Kong line – will increase the flow of cross-border goods. (Of the 22,000 vehicles that use the four Hong Kong-China border crossings daily, 95% are commercial carriers.) To handle a growing calendar of events and trade shows, the Hong Kong Trade Development Council is racing to expand its Hong Kong Exhibition and Convention Center by 50%. And in typical business-first Hong Kong style, even the transfer to Chinese sovereignty has been commercialized: an official mascot logo – a leaping dolphin – has been designed for a multifaceted marketing program promoting the change.

“We foresee no deterioration in the economic well-being of Hong Kong, now or later,” says Wong. “Since Hong Kong prospered under the British, China will try to keep it as prosperous as possible.” Indeed, many in the watch and jewelry manufacturing industries think Hong Kong’s free-wheeling business manner and lifestyles will have more influence on China – at least in the regions next to Hong Kong – than China will have on Hong Kong. “China isn’t taking over Hong Kong,” jokes a leading jewelry manufacturer. “We’re invading China.”

Opinion changes: That’s quite a change from the 1980s, when the Sino-British agreement that authorized the transfer was signed. At that time, many in Hong Kong’s business community hurried to get new citizenship and passports in other British Commonwealth countries for themselves and their families. Some also set up second company headquarters elsewhere. One of the city’s largest watch manufacturers, for example, moved its legal address to the Bahamas, while the Hong Kong-born president of a leading fine jewelry company is now a Canadian citizen.

But China has taken steps to reassure Hong Kong residents and businesses. In fact, many refer to the upcoming transfer as a non-event. “I don’t expect any dramatic changes,” says Peter Sutton, director of Miller Freeman Ltd.’s September Hong Kong Jewelry & Watch Fair. “In fact, we expect the show to grow because of it.” He expects new buyers and exhibitors, including more from China.

Other examples of the lack of fear include Swiss luxury watch brand Patek Philippe’s decision to open a distribution and service center in Hong Kong and expansions being undertaken by several Hong Kong jewelry chains, including Just Gold. The change won’t hurt Hong Kong’s jewelers because they are good entrepreneurs and are competitive, says Leung Sik Wah, chairman of the Hong Kong Jewelers & Goldsmiths Association and the jewelry industry’s candidate for election to Hong Kong’s post-1997 parliament. They also have cultivated “close relations” with China’s government and its jewelry industry for several years, he says.

Since the 1984 agreement outling Hong Kong’s transfer to China, most of the territory’s major jewelry manufacturers – fine and fashion – have made substantial investments and opened factories in China. The skills of the thousands of Chinese workers in these factories have improved steadily, says Leung. As a result, production has expanded from lower-value to higher-value jewelry that appeals to the middle market, he says. This trend should continue after the change in sovereignty. “The local [Hong Kong] industry will definitely be much stronger with the back-up of the mainland industry,” he says. “We will appear as a whole, and with a new, strong face.”

Firmly entrenched: Hong Kong’s jewelry makers are already so entrenched in China that the Hong Kong Jewelry Manufacturers Association – whose 183 members include most of the territory’s fine jewelry makers – cosponsors the annual Beijing International Jewelry & Watch Fair, held every November. And in late 1995, HKJMA Chairman Karl Shin led a delegation to Beijing to meet with senior officials responsible for gem and jewelry import, export and promotion and with officials of major Chinese gem associations and educational institutions. The purpose, says Shin, was to better understand each other and accelerate industrial development, promote China-Hong Kong industrial cooperation and encourage new exploration in the jewelry industry. China seems responsive. It has relaxed some restrictions that hindered the jewelry industry. For example, it recently lowered the duty on imported jewelry. And the 1996 September Hong Kong show had a visit from Liu Sheng Yu, vice general manager of the China National Pearl, Diamond, Gems & Jewellery Import & Export Corp. That was a “significant gesture,” says Shin, and indicates his office and the Chinese government recognize this event and the Hong Kong industry as important.

Another “positive sign,” says Jonie P.K. Lai, area manager in North Asia for the World Gold Council, is relaxation of state control of prices. Until now, China fixed the prices of gold jewelry based on the cost of labor and materials. But based on a WGC proposal, China is experimenting with basing prices on the labor cost, the wholesale price and a 5% sales tax. Lai says this means jewelry prices will be more influenced by design and value. And this will encourage design creativity and market development. The new regulation has been tried only in Shenzhen, near the Hong Kong border, but she hopes to see it expanded to other areas this year.

Members of the Hong Kong jewelry industry are encouraged by such gestures. “In the past few years, I’ve seen more cooperation and understanding by the [Chinese] government,” says Gaston D’Aquino, chairman of The Diamond Association, which represents Hong Kong’s leading diamond traders. “We’ve found that if you talk business with them, they will talk business with you. As long as Hong Kong behaves itself politically, there won’t be any problems.”

Underlying concerns: Still, scratch the optimism and you will find some real reservations about what will happen after 1997, admits the head of a major Hong Kong trade association.

In China, platinum, gold and silver are tightly controlled because they are considered strategic metals. Will this affect Hong Kong and its efforts to build a jewelry market in China after 1997? Most manufacturers think not, especially if China joins the World Trade Organization. But no one is sure.

Red tape and corruption bedevil business in China, say businesspeople in and outside of Hong Kong. Some fear this will seep into Hong Kong’s capitalist dynamo, despite the territory’s promise to be tough on corruption.

In addition, the Chinese leadership is engaged in an ideological struggle over who will succeed ailing Deng Xiaoping. Broadly speaking, there are two camps: those who adhere to “classic” Dengism (economic progress and reform first, political ideology second), and those who promote “spiritual values” (in this case, Communist ideology first, economics second). If those who oppose economic progress win, it would affect business in Hong Kong and China’s economic free zones.

The newly elected governor of Hong Kong – Tung Chee-hwa, a local shipping magnate – is considered “Beijing’s man” by many in Hong Kong, according to published reports. The reputation is due to a loan China gave his company several years ago when it was in financial trouble. The new governor says citizens should be more concerned with their responsibility to the community than with individual rights. This concerns Hong Kong’s civil rights activists, already worried about restrictions on journalists.

He also says he wants to develop post-1997 Hong Kong like Singapore – a state-controlled example at odds with Hong Kong’s laissez-faire ways.

The pending change has already aggravated the effects of a year-long recession that dampened the jewelry business in Southeast Asia. In Hong Kong itself, “a lot of spare money is going into gemstones and diamonds, which people stash away until they see what happens [after 1997],” says a leading gem dealer. “Right now, people have other priorities higher than buying jewelry.”

A long-time Hong Kong jewelry manufacturer with substantial sales in the U.S. and investments in Hong Kong and China, puts it this way: “For the first five years, 95% of what happens in Hong Kong will be unchanged and only 5% will change. We don’t know what, or how important, that 5% will be.”

BUSINESS IN POST-’97 HONG KONG

This July 1, Hong Kong becomes a “Special Administrative Region” of the People’s Republic of China. Agreements worked out in the past 13 years between China, Great Britain and Hong Kong dictate how this will affect Hong Kong’s business and capitalist system. Here’s the impact, in a nutshell, based on information provided by the Hong Kong Trade Development Council:

  • Hong Kong’s economic stability is protected by three elements – the Sino-British Joint Declaration of 1984, which returns Hong Kong to China; Hong Kong’s involvement in China’s economic modernization (50% of China’s trade goes through Hong Kong, and Hong Kong companies employ at least 5 million people in China); and China’s stated goal of a peaceful reunification with Taiwan.

  • The Basic Law of Hong Kong, issued in 1990 by China, promises a “one country, two systems” policy.

  • The 1984 Sino-British Joint Declaration allows Hong Kong to keep its free enterprise system for at least 50 years.

  • The Hong Kong dollar (now HK$7.7 to US$1) will remain the official currency.

  • Hong Kong can administer itself and pass its own laws and taxes. Tax rates should stay low because Hong Kong won’t make fiscal contributions to China’s government.

  • Hong Kong’s legal system and laws will continue, as will the post of commissioner against corruption.

  • English and Chinese will remain official languages of Hong Kong.

  • • Hong Kong’s separate membership in international organizations will continue.

  • The Hong Kong Trade Development Council – the territory’s official trade promotion and marketing arm – will continue to operate a global network of offices and schedule of events.

  • Hong Kong will continue to have its own customs authority, which will issue certificates of origin for products made locally.

  • Hong Kong is negotiating or has signed “Investment Promotion and Protection Agreements” with major countries to reassure overseas investors their investments in Hong Kong will be protected.

  • The Hong Kong government will have the authority to safeguard the free operation of business and the free flow of capital.

  • Hong Kong will remain a free port, with a free trade policy, open economy, low taxation and independent finances.