THE warnings come with monotonous regularity - it's getting harder to do business in Hong Kong and inflation on both sides of the border is hurting. According to a Knight-Ridder's survey of business confidence, an average of 72 per cent of the respondents from the finance, manufacturing and retail sectors expect to have to pay sharply higher wages. While retail sector respondents were largely commenting on wage increases in Hong Kong, it is interesting to note that manufacturers expected sharp rises on the mainland. It is even more interesting considering that only 33 per cent of those polled in the previous poll believed that they faced sharp increases. No other sector revised up its forecasts so drastically, and it looks as if China's inflation is set to make inroads on profit margins of Hong Kong manufacturers. Take the fast-food restaurant sector: it is the most vulnerable of the four sectors surveyed because of its need to cover the territory regardless of property costs to avoid being squeezed out by rivals. It is kneecapped by the soaring cost of food from China, where prices have rocketed up to 50 per cent in some cities - to quote one company which supplies the mainland with seafood products. It now has to renegotiate sharply higher rentals to take into account the property price rises of the past three years - 1994 excepted. And its rentals are high because the Cafe de Corals and Maxims of the world have to be where the people are - in the main streets and the shopping malls. Only last week, Cafe de Coral reported sharply lower interim profits despite higher turnover and it is unlikely to be the last such report. It still has to face competition from an increasing number of foreign entrants into a market that may already be saturated. Unlike other sectors that can easily relocate to a cheaper centre, fast-food chains face the option of closing down or shrinking their operations. It will be interesting to see what toll the stubbornly high and rising operating costs take of the other chains like Cafe de Coral. They are in the frontline, but the rest of the retail sector, and eventually the rest of Hong Kong's structurally over priced business sector, will suffer.
