Beijing's Brokers

Cheah Cheng hye's life is a rags-to-riches saga with an Asian twist. As a boy in Malaysia, Cheah sold pineapples by the roadside to support himself after his father died. Years later, Cheah left behind a career in journalism to start Value Partners, now Hong Kong's most successful independent investment-fund firm, with $7.2 billion under management.

Cheah built his business helping foreigners invest in Chinese companies. But now, he says, that script has been flipped: China wants help investing abroad. When Value Partners went public in November, Chinese insurance giant Ping An snapped up 38% of its offered shares, hoping to tap Value Partners' expertise. "The thing about China is it has taken them a long time to shift from what I call a starvation psychology," Cheah says. "They think they're a poor economy, so they should attract money from abroad. Now they're realizing they should be trying to export capital. It's a remarkable U-turn with global importance."

Nowhere is it more important than in Hong Kong. China is on course to overtake Germany as the world's third largest economy. As the country prospers, it is looking beyond its borders for places to park its wealth. And Hong Kong, with its world-class financial-services sector and bustling stock market, is perfectly positioned to become China's Wall Street at the dawn of the Asian century. "We have clear advantages," says Franco Ngan, Value Partners CEO. "We're part of China. We understand the culture and speak the same language. There's a natural tendency for people to invest with managers near them. No one wants to take a 14-hour flight to see who's managing their wealth."

Even when it was a British colony, Hong Kong benefited mightily from a symbiotic relationship with the mainland. In the 1990s, the city prospered shipping goods manufactured in southern China by Hong Kong-owned companies. As south China's export-manufacturing economy exploded and the mainland's budding entrepreneurial class began seeking overseas investment, Hong Kong became a willing and able broker. This transition is reflected in the changing composition of the Hong Kong Stock Exchange. In 2003, Chinese companies accounted for only about 29% of Hong Kong's total market capitalization. By last September, that number had risen to over 50%. Chinese companies have made Hong Kong's stock market one of the world's most dynamic. In 2006, Hong Kong raised more than $40 billion through IPOs, second only to London, because of a rush of mainland listings.

Although the Chinese government is also trying to nurture stock markets in Shanghai and Shenzhen, Beijing still views Hong Kong as crucial because it offers an entrée to the outside world. China's capital markets, largely closed today, are being gradually opened, meaning ordinary citizens will eventually be free to invest some of their wealth outside the country — with Hong Kong, which is a Special Administrative Region of the mainland, as the likely first stop. Beijing last year proposed a new program, nicknamed "the through train to the Hong Kong stock exchange," that would allow individual Chinese to buy stock in Hong Kong for the first time. The city is a natural platform for Chinese investment, says Saskia Sassen, a Columbia University professor and a leading expert on global financial networks. "On one hand, Hong Kong's base is China," she says. "On the other, it's part of the global economy." Sassen recently ranked 50 cities based on their suitability as global financial hubs. Hong Kong rated fifth, just after Chicago, but before any Asian city other than Tokyo.

Coping with Competition
But that doesn't mean Hong Kong's future as Asia's preeminent financial center is assured. Singapore in recent years has boosted its banking sector. Shanghai is booming. And even Seoul aspires to be a financial hub. Faced with these long-term competitive threats, Hong Kong's leaders are laying the groundwork for even closer links with China. In August, a local think tank with ties to the city's top political leadership released a proposal for increasing economic integration with Shenzhen, the Chinese boomtown located next to Hong Kong. A mere fishing village when it was designated, in 1979, as the hothouse of China's economic reforms, Shenzhen now has a population rivaling that of New York City, a deep and comparatively inexpensive labor pool, and a robust manufacturing and high-tech sector — all attributes that Hong Kong would like very much to take advantage of.

Among other measures, the proposal calls for smoothing immigration and customs procedures, coordinating airport and train facilities, and allowing money to flow more easily across the border. The proposal is rooted in a much grander vision than merely cutting bureaucratic red tape, however. The goal in melding Hong Kong and Shenzhen, the report said, is to create a megacity that, by 2020, would surpass London and Los Angeles as an international economic juggernaut. It's a quintessentially capitalist solution befitting a quintessentially capitalist city. Need to grow to keep pace with competitors? Find a merger partner. "I think a closer relationship with the mainland is inevitable and by now is accepted by both sides," says Shiu Sin-por, a member of the Hong Kong government's Central Policy Unit.

In fact, Hong Kong's flirtation with Shenzhen and the surrounding Pearl River Delta is already being consummated. Last month, top officials from Hong Kong and Shenzhen signed an agreement to study jointly developing infrastructure along the border region between the two cities. And, in July, Chinese President Hu Jintao christened a new bridge linking Hong Kong with the Shekou area of Shenzhen, which creates a fourth land crossing for trucks and tourists to stream back and forth.

Hong Kong's port operations, too, have evolved to complement its neighbor, says Michael DeGolyer, a professor at Hong Kong Baptist University who has studied relations between the city and its mainland economic hinterland. "What Shenzhen ports have been doing is straight-through shipment," DeGolyer says. "You fill a full ship with Wal-Mart stuff, and it goes straight to the U.S." That has left Hong Kong's port — which is managed by Hutchison Whampoa, the same Hong Kong conglomerate that operates Shenzhen's — to concentrate on more logistically complex operations, including breaking down containers for shipment to multiple destinations. DeGolyer says the overtures toward Hong Kong-Shenzhen integration are an outgrowth of this natural symbiosis. "China likes the idea that bigger is better, more is better," says DeGolyer. "What they're saying with this report is, It's better for us to hang together, than to hang separately."

Innovation or Oblivion
Hong Kong and Shenzhen could still run into the bugbear of all corporate mergers: a clash of cultures. Hong Kong has the world's most open economy, according to U.S.-based think tank the Heritage Foundation; one with low taxes, a mature legal system and international standards of corporate transparency and regulation. The mainland, for all its explosive growth, remains hamstrung by corruption and a centrally planned economy. Beijing has taken slow, measured steps to open its financial markets, but obstacles remain. Because China's currency, the yuan, is nonconvertible, capital can't flow freely between Hong Kong and the mainland. And Chinese officials recognize that a flood of mainland money could disrupt Hong Kong's markets. Last year, Chinese authorities cracked down on underground Shenzhen traders funneling yuan illegally into Hong Kong. Aware that speculative investment could destabilize Hong Kong, Chinese financial officials also appear to have indefinitely delayed the "through train," the program that would allow individual Chinese to invest in the Hong Kong stock market.

But hurdles are meant to be leapt. According to Sassen, Hong Kong's native genius is to continually recalibrate its relationship with China, while still maintaining its status as a cosmopolitan, consummately networked global financial hub. "Hong Kong has to innovate or it sinks," Sassen says. "That's what it's always been so good at."