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BAILED OUT BY BEIJING: Mainland tourists are putting new wind in Hong Kong's sails

The Ties that Bind
	Hong Kong's economy is perking up, helped by Chinese tourists and closer links with the booming Pearl River Delta. Is Beijing buying the city's obedience?
	By Michael Schuman | Hong Kong and Neil Gough | Guangdong Province

Posted Monday, June 28, 2004; 20:00 HKT
Sir Gordon Wu says that to glimpse Hong Kong's future, you must look at another island's past. In his cluttered office overlooking Victoria Harbour, the 68-year-old chairman of property-and-infrastructure development company Hopewell Holdings unfurls a map of Manhattan island and environs on his conference table. He points out the Hudson River, the George Washington Bridge that spans it, John F. Kennedy Airport, the seaports in neighboring New Jersey. These are pieces, Wu explains, of an extensive transportation network that carried the output of the American industrial machine and made New York the world's premier city. Next to the U.S. map he lays down another, this one of Hong Kong and the Pearl River Delta. Most of it is dominated by China's Guangdong province, which has rapidly become the workshop of the world, its thousands of factories making everything from Barbie dolls to Nike sneakers. Hong Kong, outside the river's mouth, sits on "the 50-yard line," Wu says, and is perfectly placed to catch the burgeoning China trade, just as New York was ideally situated during America's Industrial Revolution.

Then Wu extends a pudgy finger, peers through his Coke-bottle glasses, and traces the route of a colossal bridge, starting on the west side of the Pearl River at Zhuhai, sweeping through Macau, and into Hong Kong. Construction companies are expected to start bidding later this year for the $3 billion project, which Wu dreamed up 20 years ago but until recently could not get Beijing's approval to build. Wu contends that the 29-km transportation link, which he predicts will be completed in 2007, will be as important to Hong Kong as the Lincoln Tunnel is to New York: bringing exports from mainland China to Hong Kong's bustling ports more quickly, and opening up the underdeveloped region west of the Pearl River to new investment.

Beyond these practical benefits, the bridge is a steel-and-cement embodiment of what amounts to a New Deal for Hong Kong. Around the time of the city's dramatic July 1 protests for democracy last year, Beijing, seeking to placate the territory's restive residents battered by SARS and a chronically sluggish economy, introduced a series of measures designed to jump-start Hong Kong by integrating it more thoroughly into the vibrant Pearl River Delta.

In addition to giving the green light for Wu's bridge, the central government began lifting travel restrictions so that millions of big-spending mainland tourists could visit the city; Beijing also approved the Closer Economic Partnership Arrangement (CEPA), which granted Hong Kong-based businesses preferential treatment over other foreign firms in investment and trade with the mainland. While pro-democracy advocates fret that Hong Kong's political freedoms will be undermined as the territory is brought closer to China, local tycoons like Wu have applauded the economic embrace. "We should be independent in a political sense," says Wu. "But economically, hell no. Let's integrate."

Few doubt that the city's long-term prosperity depends upon how completely it participates in the China boom. For much of the past decade, doomsayers have predicted that the former British colony would gradually become marginalized as an entrepôt and gateway to China. In the past, Hong Kong's unique status as a capitalist city governed by British law guaranteed its importance as a middleman for the mainland. But as China implemented capitalist reforms of its own and cities such as Shanghai grew more powerful, Hong Kong—which years before had transferred its manufacturing base to neighboring Guangdong—seemed destined for increasing economic irrelevance. In a 1995 article titled "The Death of Hong Kong," Fortune magazine famously opined that "the naked truth about Hong Kong's future can be summed up in two words: It's over."

Indeed, Hong Kongers have had little to cheer about since the Brits handed the territory back to China in 1997. Although Hong Kong's economy grew at an average annual rate of 5.1% from 1990 to 1997, it slumped into a recession in 2001, and the annual growth rate over the last three years has averaged just 1.9%. Residential property prices plunged by more than 60% between 1997 and 2003; meanwhile, unemployment last year rose to a record 7.9% (from 2.2% six years prior). And the more quickly mainland China developed, the more Hong Kong's future seemed to dim. Eleven years ago, 67% of China's exports passed through Hong Kong's ports and airport; today, only 28% do, as other Pearl River Delta cities have begun to develop their own ports and transport links. But Beijing couldn't afford to let Hong Kong become a latter-day Malacca or Samarkand, once dominant cities that lost their economic reason to exist. For one thing, a slowly rotting territory would be an international embarrassment, a demonstration that "one country, two systems" doesn't work. In addition, ongoing economic problems would likely spur increasingly strident calls by Hong Kong's democracy advocates for a directly elected Chief Executive. China needs a strong Hong Kong because it plays a crucial role as a financial center for the mainland economy, says Laurence Brahm, a Beijing-based political scientist and consultant both for foreign companies and the Chinese government. China's leaders "can't afford to have Hong Kong seen as being unstable," he says.

Now, it appears that Beijing's economic CPR, along with an improving global economy, is reviving Hong Kong. The city's gross domestic product surged 6.8% in the first quarter of 2004, the strongest growth in three-and-a-half years; private-consumer spending is up; and residential property prices have risen as much as 45% since August 2003. "Hong Kong may be dying," says S.K. Fung, a Macau-based textile manufacturer who advises the Guangzhou government. "But it has a great doctor, and his name is Beijing."

Tourism, increasingly a growth engine for Hong Kong's $150 billion service sector, has been the most obvious beneficiary of the central government's largesse. According to the Hong Kong Tourism Board, about 2.9 million mainlanders visited in the first three months of this year, a 37% increase over the same period last year and more than twice the 2002 figure. The improvement is a direct result of Beijing's decision to let Chinese tourists from cities such as Guangzhou and Shenzhen travel to Hong Kong as individuals rather than as part of organized tour groups. Joseph Tung, executive director of Hong Kong's Travel Industry Council, says mainlanders now make up more than half of all visitors to the territory, and their spending constitutes the principal source of the sector's revenue. The number of visits made by mainlanders is expected to rise further after Hong Kong Disneyland opens by early 2006.

Luxury stores are a favorite destination for richer Chinese tourists. Walk into a Gucci outlet in Hong Kong and you'll likely be greeted in Mandarin, not the city's traditional Cantonese dialect. "If Hong Kong grows today, it grows because of tourism from mainland Chinese," says Etienne de Gramont, Asia director of International Watch Co., a maker of Swiss watches. Upscale hotels are also increasingly catering to mainlanders. "China has become an important source of income for us," says Ainslie Cheung, marketing communications manager of the Hyatt Regency Hong Kong. "The gates have opened. It's an economic pillar for Hong Kong."

Despite this windfall, it's not yet clear whether Hong Kong's recent recovery will last. One problem: because of the territory's relatively high wages, it is difficult to generate new jobs in meaningful numbers. While the labor force has grown slowly from 3.2 million to 3.5 million from 1997 to 2003, the number of unemployed has almost quadrupled from 71,000 to 277,600. As Gordon Wu's maps suggest, the logical solution is for Hong Kong to redouble its efforts to be the Pearl River Delta's financial center, key transportation and logistics hub, and tourist haven. "I see ourselves continuing to be a service center, going through very much the same evolutionary changes as New York or London," says Henry Tang, Hong Kong's Financial Secretary. "New York is a thriving capital of finance and corporate services today. And I think this is what Hong Kong is."

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