Pete Engardio and Joyce Barnathan, veteran BW reporters with extensive experience in Asia, discussed the future of Hong Kong and the global implications of its return to China in the BW Online June 1 conference. The host was Bob Arnold of BW Online.
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BobABW: Welcome to Business Week Online and a discussion of an historic event coming up July 1 -- the return of Hong Kong to China's rule. It's the topic of a Special Report in the June 9 issue of BW, and two of the magazine's veteran Hong Kong and China watchers are our guests:Joyce Barnathan, Asian regional editor and Hong Kong bureau manager, and Pete Engardio, senior international news editor.
BobABW: Joyce's screen name is LESWIDDIC0. Pete is NadavBW. I'm Bob Arnold, editor of BW Online. And with that, let's go. Hi Joyce, hi Pete, and welcome.
NadavBW: Hi, glad to be here!
LESWIDDICO: Hi Bob. I'm ready to answer any questions.
BobABW: O.K., here's the first one, from WhrlPeas:
Question: What is going to happen with the Hong Kong dollar? I still have an account in Hong Kong. Should I take it out as soon as possible?
NadavBW: You can if you want to, but there's no risk with the currency fluctuating too much, because it will remain pegged to the U.S. dollar at about 7.73. So this has already been worked out long ago between Britain and China. And there are no plans to change that link. So as a result, the currency risk is the same as having U.S. dollars.
LESWIDDICO: Precisely. With the Hong Kong dollar pegged to the U.S. dollar ,the risks are minimal. If you look at our special report on Hong Kong, you'll see an interview with the head of Hong Kong's Monetary Authority, who gives solid reassurances about the strength of the local currency.
BobABW: Casamp429 is up next. Joyce, what's the latest on human rights in
China?
Question: Have the Chinese started to take away rights from the people?
LESWIDDICO: According to the Basic Law, which will serve as Hong Kong's constitution, the people of Hong Kong are supposed to enjoy all the freedoms they currently enjoy. The formula worked out is called One Country, Two Systems. In other words, Hong Kong's free system is supposed to remain intact. That said, there have been some disturbing indications recently. There have been some rollbacks in civil liberties legislation that make it more cumbersome to hold protests. There have also been signs that the media here is self-censoring so as not to get China angry. But that won't stop many people here from speaking their mind. On June 4, there will be a big protest here to mark the Tiananmen massacre in 1989.
BobABW: Pavilion 1 is up next, with a basic question.
Question: Is Hong Kong going to change over the years?
LESWIDDICO: Yes, Hong Kong is going to change. That's inevitable.
NadavBW: Well, clearly Hong Kong will change. Just the fact that the British will no longer be running it will mean that a lot of things can change. Even if Beijing doesn't interfere too much, the next government will be dominated by a lot of extremely wealthy Hong Kong/Chinese businessmen who no doubt have a different long-term vision than the civil servants that Britain appointed.
BobABW: While we're on that topic, EBnj1 wants to know exactly when the
transfer will occur. Joyce?
Question: When is the actual transfer to take place?
LESWIDDICO: The transfer will occur at midnight on June 30, 1997.
BobABW: Joyce, do you have answer next for WildXpres?
Question: How do you compare the Hong Kong-to-China exchange to the America-
Mexico-Canada free-trade exchange?
BobABW: Or Pete... would you rather answer Wild?
NadavBW: The major difference is that Mexico and Canada have a free-trade pact where goods move across the border in both directions with minimal tariffs. Eventually this will lead to free trade in services. But Hong Kong will remain a separate entity from the rest of China. The border will still be well fortified, and China will keep its own trade barriers. In other words, American goods passing through Hong Kong won't get into China any easier... they will still have to face the same tariffs. The same applies to products produced in Hong Kong.
So, in other words, there is no free-trade provision yet (between Hong Kong and China). It's important to point out that Hong Kong will keep its own special trade status after the transition. Even though China is not a member of the World Trade Organization, Hong Kong will retain its WTO status. There are some measures that are being discussed that would allow a greater movement of workers across the border -- such as special industrial zones either on the Hong Kong or Chinese side for assembly work... much like Mexico's maquiladoras.
BobABW: I should point out that Joyce is typing her answers from her office
in Hong Kong. Joyce, what's the answer there to OhioSpiri's question?
Question: Are the majority of the people that live in Hong Kong for this change?
LESWIDDICO: Yes. Recent polls say that most people are now in favor of this change. Keep in mind that Britain and China agreed upon Hong Kong's return in 1984. Those who wanted to emigrate had ample time to do so. Those who are here know that the reality is that China will be the new sovereign power. Hong Kong people are very practical, and they also see opportunity in the transition.
BobABW: Joyce, here's a good question from Petedatti.
Question: Do you think that a flight of money and corporations will occur if the Chinese government does not continue to treat the local economy with the same freedom that it now enjoys?
LESWIDDICO: This is an interesting question. Most people here want to continue living with the freedoms they have enjoyed for decades. But the big question is whether those freedoms are essential for a prosperous economy. I argue that they are. But some in the business community, and indeed the foreign business community as well, aren't so sure. If the government here rolls back civil liberties to please Beijing, what concrete impact will that have on business?
Some in the business community argue that they want stability and order, not protests on the streets. So, even if there are some limits on freedom, I'm not sure that will lead to massive capital flight or cause companies to bail out of here.
BobABW: Joyce, here's a related question from Shuster, who has read your Special Report:
Question: Your article in the current BW includes a chart that indicates hundreds of thousands of Chinese have moved to Hong Kong in the past six years. It also includes a photo of border guards searching under trucks for illegal immigrants. What are the rules on immigration from China? Who is allowed in and who isn't?
LESWIDDICO: 150 people from China are allowed to legally come here each day. Many of these people are folks reuniting with family members here. They are vetted by both Hong Kong authorities and Beijing. Let me add, however, that the Hong Kong government will like to find ways of also bringing in some of China's best and brightest to work in Hong Kong. Many here feel that will enlarge the talent pool and significantly improve Hong Kong's competitiveness.
BobABW: Pete has a comment on economic freedom in Hong Kong, then he'll answer Mikejungc:
Question: What about Chinese oversight of financial transactions, especially of an electronic nature... in an effort to gain strategic intelligence?
NadavBW: I haven't heard a lot of people raise that yet. I think that when it comes to a lot of electronic eavesdropping, you would think that can be done already. The real question is, will the Chinese interfere in things like tax policy or money flows in and out of Hong Kong? If they do anything to restrict the free flow of money, or if they change tax policies, there will be a lot of capital flight.
One of the keys to Hong Kong's success is that it is extremely liquid. Anything that will make it less liquid would prompt a lot of people to pull their money out very quickly.
BobABW: Pete, here's a follow of sorts from Spintwin. What's the U.S. angle?
Question: Tom from N.J. How will this reconfiguration affect the U.S..economy and
financial markets? Will it have a positive or negative effect?
NadavBW: It shouldn't make any real difference. Right now investors in Hong Kong are very bullish, but they will continue to have a portion of their funds in the U.S. -- in
the stock market as well as in Treasury bills. You may even see more money coming into the U.S., because Hong Kong will be an even bigger conduit for money from mainland China.
BobABW: Joyce, this one's for you. (And what about opportunities for businesswomen, too?)
Question: Do you see business opportunities for American businessmen going forward? If so, what opportunities?
LESWIDDICO: As long as China continues to grow at such a rapid pace, there will be opportunities for businesspeople from around the world. I believe Hong Kong will make it easier to tap the China market. It will soon be the most sophisticated Chinese city on the mainland. People here have tremendous experience in dealing with China. That said, cracking the China market isn't for the thin-skinned. We recently wrote a Cover Story that Pete edited called "How You Can Win in China (International Cover Story, May 26, 1997), which has some terrific advice.
BobABW: PagaSaty is up next. What do you see, Joyce, from your office 12,000 miles away? Away from New York, that is.
Question: Won't the "One Country, Two Systems" policy cause resentment on the
mainland?
LESWIDDICO: The One Country, Two Systems policy was the brainchild of Deng Xiaoping, who tried to find a way to merge the two places without damaging either one. For Hong Kong, it's essential that its system be defended. No other city in China has a rule of law, a free press, a level playing field for foreign competitors, and the like. But there will be those in China who are envious of Hong Kong's system and who will want to see if they can tap into Hong Kong's wealth either legally or illicitly. It's going to be a real challenge for this tiny place to preserve what it has.
BobABW: RyanCSmit has a forward-looking question. Perhaps you both have an
opinion?
Question: Everyone has been fretting about the effects on Hong Kong when it returns to China, but what effects do you believe Hong Kong will have on China?
LESWIDDICO: That is a key question, too, and one that concerns China very much. After all, if there is a major protest in Hong Kong against the Tiananmen massacre, why shouldn't Shanghai or Guangzhou be allowed the same rights? If people in Hong Kong criticize leaders in China, why won't other provinces in China be tempted to do the same? This is a major fear that China has. But already Hong Kong is influencing China in ways that Beijing cannot control. Hong Kong pop stars are huge hits on the mainland. Hong Kong TV signals can easily be received in southern China. Visit southern China and all the cities there are trying to model themselves on Hong Kong's success. Some say there will be a Greater Hong Kong in the future.
NadavBW: To add to Joyce's comments about Hong Kong and political activism... right now Hong Kong's top civil servants are promising to be extremely vigilant against any attempt from Beijing to interfere in their management of the economy and trade policies. But how far can Hong Kong go without a lot of other provinces becoming very jealous of its autonomy and taking note when Hong Kong gets away with standing up to Beijing?
The question is not really what will happen this year, but 5 or 10 years down the road, when the novelty of One Country, Two Systems wears off in the mainland.
BobABW: Joyce, my guess is that the answer to this question is fat chance. But what do you think?
Question: If the civil liberties in Hong Kong end up the same as they are in China, do you think that American businesses (and maybe those from other countries as well) will boycott Hong Kong?
BobABW: It's from OhioSpiri.
LESWIDDICO: I am not so sure. If you look at Singapore, another city state that is prospering, you can see that it is doing extremely well in terms of foreign investment despite the fact that it is not a free society. The bottom line is that it all depends on degree. If this place starts to look like China, where people can get arrested arbitrarily, where corruption is rife, then companies would start to bail out. But I don't foresee such dire scenarios in the short or medium term. Hong Kong will become a more conservative place, and probably there will be some limits on freedoms. But relatively speaking, it will probably remain one of the freest societies in Asia for years to come.
BobABW: SAbramo88 is next. Joyce?
Question: I have a friend who graduated from Columbia University. Will Americans of
Chinese extraction be treated any diferently after the takeover?
LESWIDDICO: The U.S. government has held extensive talks with the Chinese over this question. About a month ago there was a breakthrough agreement in which the Chinese agreed that all holders of U.S. passports, including citizens of Chinese ancestry, will be considered U.S. citizens. That will afford them every protection the U.S. can offer.
BobABW: Here's a pertinent question, given our current medium:
Question: Do you expect Beijing to try to limit or in any way censor Hong Kong's Internet access? Perhaps by routing all traffic through some central choke point?
BobABW: Pete?
NadavBW: We don't expect it to happen. If Beijing did that, it would obviously be very bad.
BobABW: Here's another one from Shuster, Joyce. (And please define SAR for the
uninitiated):
Question: Joyce: You say in your article in BW that top officials of the SAR "are determined to be more active than the hands-off British," and note that they will probably spend more on education and technology and industrial development, a la
Singapore. So, is it good that they will be "more active?" Or is it rather a cause for concern?
LESWIDDICO: First let me explain what SAR stands for. It is the Special Administrative Region, the name Hong Kong's government will have under Chinese rule. Now, as for a more proactive government...this can cut both ways. There is a crying need in some areas for the new government to take a more activist role. Certainly the school system here, particularly primary and secondary schools, need to be upgraded if Hong Kong wants to stay competitive. Many say that graduating students are poor in both English and Chinese. There are also some people, particularly the elderly, who are slipping through the cracks and they need assistance. So here the government is likely to be more active.
The controversial part is whether they can successfully engineer an industrial policy, in which they don't pick winners and losers, the way they do in Singapore.
BobABW: Pete?
NadavBW: It is good if intervention is well managed and is in the hands of professional technocrats (as it is in many Asian countries). In many areas, Hong Kong doesn't even do things that are done in the U.S. -- such as substantial government assistance for basic science research, local governments that make lands available for high-tech industrial parks, no tax breaks whatsoever for strategic industries. But the worry is that once the government starts getting involved in areas where it has kept its hands off, that politics and favoritism and corruption will start working their way into economic management. In other words, many Hong Kong senior civil servants don't even seem to trust their own bureaucracy, especially with China taking over.
BobABW: Joyce has another point.
LESWIDDICO: Let me add that Hong Kong does not have technocrats that understand technology, say, the way Singapore and Taiwan has. There are huge risks in charting an industrial policy when no one here has the faintest experience in such things.
BobABW: Joyce, Snarffyoh wants to know about China's military:
Question: Prior to Hong Kong's "surrender" to Mainland China... has China's
huge military buildup been addressed? This is a bit suspicious, considering that China is not in a state of war with anyone. Do you feel that China may have expansionist dreams?
LESWIDDICO: I don't believe that China has expansionist dreams. Historically, China
has not been expansionist. That said, China will continue to beef up its military--and that will cause concerns in the region and around the world. Right now, China does not have the ability to project much power outside of the region. The real flash point is with Taiwan, a terribly thorny subject.
BobABW: Pete, can you take this one?
Question: What do you think the competition is between Hong Kong and Shanghai?
BobABW: That's from Sole Range.
NadavBW: I think that China's coastal provinces are so economically dynamic that they could absorb about five cities like Hong Kong. The pat answer among Hong Kong businessmen is that Shanghai and Hong Kong will be compatible. I tend to believe that. In most areas where Hong Kong is strong -- such as finance, as a base for strategic planning, for marketing, for the media -- Hong Kong is so superior to Shanghai or any other Chinese city that it is hard to see serious competition. There are a number of functions that Shanghai can take over if costs continue to go through the roof in Hong Kong -- such as design engineering in electronics, and a lot of back-shop service business. But I think Hong Kong could absorb that competition, because it only has a population of six million people.
BobABW: Joyce, this borders on an earlier question. What do you think? (It's from GYahner).
Question: Can the old communist leadership psychologically accept this new challenge of allowing Hong Kong freedoms others in China do not have ?
LESWIDDICO: I think there is a real worry about Hong Kong becoming a "base of subversion" for China. If the leadership perceives that political activisim here is threatening, then I do not doubt for a moment that they will clamp down. But the new leaders of Hong Kong are determined to do whatever they can to minimize Beijing's feelings of insecurity on this matter. Some argue that they are going too far in
reassuring China on every point.
I'd like to add one thing on Hong Kong and Shanghai. At one point in history, Hong Kong was called Little Shanghai. Shanghai has tremendous resources and potential. It has a large and talented workforce. It has a great location and it has political backing in Beijing up to the highest levels. It is coming on fast in many areas, and it is building a world-class infrastructure. What Shanghai does not have -- and cannot dream to get in decades -- is a legal system, a free press, a corruption-free society. In other words, Hong Kong's "system." Hong Kong's system gives it a competitive edge, and that's why it's so essential to protect it.
BobABW: Here's a terse question from Chkyjoe1. Pete, will reunification affect U.S. workers?
Question: What does this mean to the American union worker?
NadavBW: I don't see it changing anything at all. Already, Hong Kong companies produce 90% of their products in China. They already control factories employing some five million workers. Hong Kong is already the dominant production base in the world for everything from watches to toys and all sorts or electrical appliances. But Hong Kong is not competitive in any of the industries where America is dominant -- and it really can't help China in these areas (in industries like cars, semiconductors, high-tech telecommunications). Hong Kong cannot help China in any of the areas where America is powerful. Those areas are listed above.
BobABW: We have just a couple of questions left. Pete & Joyce, perhaps you both have an opinion on this one:
Question: Realistically, what's the worst that could happen in Hong Kong?
LESWIDDICO: The worst that can happen is that Hong Kong becomes just another Chinese city, replete with corruption and authoritarian rule. It could become a place where guanxi -- or contacts -- count more than a fair bid, say, for securing a project. It can become a place where the markets are rigged. I am not saying this will happen, but there are other cities in China that were once-thriving ports and enclaves that have disappeared into oblivion once the Communist Party moved in.
I think an even worse thing that can happen is that a major power struggle breaks out and political and social chaos happens in China and the leaders in Beijing blame Hong Kong for sparking it. Then... they would crack down hard. That simply depends on what the future holds for China.
BobABW: Joyce, this last one's for you (what's your Monday morning like?)
Question: Joyce, What's the weather like in Hong Kong?
LESWIDDICO: It's slightly overcast and very warm, certainly close to 90 degrees.
BobABW: Joyce Barnathan & Pete Engardio, thanks very much for your time and
expertise. It has been an enlightening evening, and we thank you for sharing your insights with us.
NadavBW: It has been quite a pleasure for me. Take care!
LESWIDDICO: My pleasure.
BobABW: Let me urge everyone to read BW's Special Report on Hong Kong in the current issue. It's a true tour de force. Look soon in our Talk & Conferences area for a transcript of tonight's conference. And check our conference calendar for coming events at Business Week Online. Thanks again, and goodnight.
Copyright 1997 by the McGraw-Hill Companies, Inc. All rights reserved.
