THERE is one thing for sure; given even bearish economic forecasts, Hong Kong's leading blue chip companies are due to get bigger and they are due to invest more in China. The growth of multi-national companies' interests in China, frequent interaction with the mainland and incorporation of Chinese-style business culture also feature in the picture that local economists paint for the territory's business scene beyond 2000. Hong Kong companies have been under the influence of the Chinese economy for decades, and they will continue to be affected by the mainland and its people right through the change of sovereignty in 1997. However, economists do not expect major changes in the way businesses are run in the next decade and believe Hong Kong will maintain its status as a regional financial hub, backed by the booming Chinese economy. Peregrine Brokerage senior economist Ma Guonan said: 'With Hong Kong's traditional role as a financial hub and China-Taiwan relations not expected to normalise, Hong Kong will remain a gateway to China.' Even given some of the most bearish economic outlooks, Hong Kong Incorporated is due to become bigger in size in the next few years and its exposure to China will also grow. The degree of expansion and level of investment in China, as a proportion of total assets, will depend on how the economic cycles turn. Only two per cent of Hong Kong company assets, amounting to around $300 billion of Hang Seng index constituent company assets, are estimated to be in China, according to leading brokerage surveys. Similarly only two per cent of their earnings will rely on China. Beyond 2000, earnings from China are expected to grow, to maybe 15 per cent, but Hong Kong will remain the prime source of earnings. Many leading corporates indicate they would like to see 10 per cent of their assets in China, or about $1,400 billion. Mr Ma said a key factor in establishing Hong Kong's importance was the Government's adoption of a laissez-faire policy towards business. This allowed firms to flourish in the 50s and 60s in textiles, toys and property. By the 70s, the new Chinese business elites were in place and they supplanted the ailing British business influence as the dominant force by 1985. Their expansion into China and the role of the territory as a financial hub, said Mr Ma, would only increase in the next decade when China could become one of the world's biggest economies. 'This role could not be easily replaced by neighbouring cities such as Singapore or Manila.' Mak Nak-keung, senior economist at Standard Chartered Bank, points to a change in the local business culture beyond the year 2000. 'We are going to see more and more multi-nationals operate in a 'Chinese-style' in order to keep themselves up to date with the changing Hong Kong economy, which has close ties with that of China,' he said. Hong Kong entrepreneurs have been the most successful investors in China this century and are well equipped to maintain their position in the next. Business in Hong Kong and China relies heavily on family and personal connections. The reign of the professional executive has not been a feature of corporate development to date. As the founding fathers grow old, their sons are expected to take over, backed by a growing army of professionals able to guide these groups through the pitfalls. Multi-nationals, said Mr Mak, would ape their Chinese counterparts. There are many examples of bilingualism in putting up notices and conducting meetings, and increased hiring of locals and mainlanders in managerial positions. 'Many multi-nationals used to employ their own staff from abroad in their Hong Kong offices, but this is going to change if they are going to operate under the big umbrella of China,' Mr Mak said. 'They'll have to vacate more managerial positions to locals or mainlanders who have a better understanding of the fast-changing Chinese economy, or they will lose their competitive edge.' Mr Mak predicts that mutual business interaction between China and Hong Kong will grow rapidly as the geographical boundaries dividing the two places would become obscure following the change of sovereignty. 'Hong Kong companies are expected to invest more in China and vice versa. We have been seeing many companies in Hong Kong investing in China, but there is a growing trend of mainland companies coming to Hong Kong as well.' He added: 'As Hong Kong becomes a special administrative region of China, I expect major mainland companies making footholds in Hong Kong to pave the way for their business extension to other parts of the world.' Hong Kong is an ideal springboard for mainland companies to raise funds in the cash-rich overseas markets. It remains a key location from which groups can tap China's strength as a low-labour-cost manufacturing base. But, beyond 2000, this will be replaced by an advance to higher levels of technology that produce higher quality goods with added value. The big blue chip companies have been transforming themselves, almost chameleon like, to better position themselves to go into China. For example, Hutchison Whampoa is fast becoming a port, telecommunications and power company in the country, having seen earnings supported by property development and retail in the 90s. Cathay Pacific has moved into airport management in several Chinese cities, New World Development is in infrastructure and Hopewell has switched from being a traditional Hong Kong property company into a fully-fledged power and road builder in southern China. China offers Hong Kong Incorporated huge opportunities, but at high risk, because the country's legal system in respect of commerce and ownership is under-developed. Business risk reduction will be the key component in Hong Kong companies' development in China in the years ahead. Infrastructure is seen as a low cost, low risk way of gaining exposure to China and building valuable experience of doing business there. Property will be a major focus of investment, but developers will tend to stick to prime urban sites, building commercial, office, retail and residential complexes on a scale not seen before in China's history. Business and project risk will be reduced by Hong Kong groups striking strategic alliances with mainland interests. Big is going to be beautiful in China. Only those groups with a large capital and the financial strength to survive the vagaries of China's volatile economic cycles will be able to stay in the game. Hong Kong Incorporated is not on a one-way street of growth and profits in the years ahead in China. China's huge potential as a market for consumer goods, from toothpicks to toothbrushes, remains illusive to outsiders. For small firms, life in China can be brutal and short. There will be, in the years ahead, a development among Chinese firms to enter Hong Kong as a gateway to world markets and funds. Enterprise reforms are pivotal to China's economic and political development, as the mainland plans to turn a third of the state-owned companies into private entities by the end of the century. During the painstaking process of transformation, Hong Kong will continue to play a significant role as the natural stock exchange for the cash-strapped enterprises which want to raise foreign funds. This is despite the threat from Shanghai, whose growth will be underpinned by the phenomenal development of the Pudong area. However, some analysts predict Hong Kong will become complementary to Shanghai in the future. 'In the United States, Chicago and New York are both financial hubs. That could also apply to China,' said Mr Mak and Alex Tang, Yamaichi International's research director, expects Shanghai can only surpass Hong Kong in the next century if the economic development gap of the twin cities is bridged. Still, Hong Kong would not lose its importance as an international window for the mainland, he said, noting that the territory would become a financial centre for southern China and Shanghai for the northern and middle parts of the country. 'Hong Kong will continue to play a role even after the change of sovereignty in 1997 because China will fully utilise the territory's existing infrastructure to tap overseas funds,' said Tang. Before Shanghai can challenge Hong Kong's position, China has to overcome several hurdles. Mr Tang pointed to the yuan's convertibility. Although China hopes the yuan will become fully convertible in five years, he does not believe it is likely to happen in this period, leaving much room for Hong Kong to play. Another problem is China has yet to merge its different categories of shares into one single kind of stock. At present, 'A' shares are designated for mainland individuals, while 'B' shares are restricted to overseas investors. The China Securities Regulatory Commission, the mainland's securities watchdog, has ranked the merger of the two kinds of shares as the long-term goal. 'I suspect that China will continue to impose restrictions on foreign ownership just like Korea, even if the domestic stock market is open to foreign investors,' said Mr Tang. In fact, China's strategy of encouraging state-owned enterprises to issue shares abroad will help enhance Hong Kong's status as the mainland's cash-raising venue. Already, 15 Chinese state-run enterprises have been floated on the Hong Kong Stock Exchange as H shares and another 11 will come soon. Only five Chinese enterprises plan to list in the United States. 'The Chinese authorities will realise the benefits of listing enterprises in Hong Kong because fund managers just cannot ignore the territory in view of the market capitalisation,' said Mr Tang. Excluding the Japanese shares, he reckoned that Hong Kong accounted for 32 per cent of the stock market capitalisation in the Pacific region. ''With the forthcoming listings of more H shares, Hong Kong's market size will become bigger.' Mr Tang estimated that US mutual funds, which amounted to US$5,000 billion, would set aside 15 per cent of the money for overseas investment over the next two years, up from the existing seven per cent. It is logical to assume that the funds will be allocated for the Hong Kong market for mainland stocks, instead of the stock markets in Shanghai and Shenzhen, which are not mature or liquid enough. 'Compared with China's domestic stock markets, foreign investors are more confident of Hong Kong's regulatory framework,' said Mr Tang.
