PROFITS of Hong Kong companies are under threat with an expected squeeze in the second half of this year, thanks partly to rising interest rates, and the effect of soaring property prices. The immediate outlook for the business environment also is poor, according to the latest report on the territory issued by the Political and Economic Risk Consultancy (PERC), although the consultancy added that it was yet not time to start sounding for alarm bells. The PERC's assessment of increased risk factor in the territory is the result of the surge in property prices and rents, which have both companies and households complaining. The territory also faces the consequences of the precarious state of China's economy and the negative implications this has for Hong Kong trade and investment with the mainland, says the consultancy. Adding to the overall uncertainty which is raising the risk factor of Hong Kong are concerns over strategies on the mainland. The PERC says a possible problem is the pressure for a slowing of the economy in Guangdong and a crackdown on its free-wheeling ways. ''Implementation of the currency, tax, and banking reform measures announced late last year is going very badly from Beijing's perspective, due to stiff provincial resistance, with Guangdong leading the way,'' the PERC say. It said Beijing could look like an emperor with no clothes if the efforts to pull power back to the political centre are frustrated by the provinces. This means two distinct risks for the territory this year. One is a ''slipping of economic gears'' which could cause market players to adopt a much less aggressive posture on investment. The second is problems resulting from a crackdown on Guangdong by Beijing authorities. ''Either way the territory's trade and investment in the mainland would be seriously disrupted, as would the activities of the mainland companies in Hong Kong,'' the PERC says. ''This would detract from Hong Kong's international reputation, at least in the short term.'' Hong Kong's domestic economic risks have risen sharply this year with soaring property prices pushing costs levels up sharply. ''Profit margins are starting to be eroded as much of the cream from the economic boom of the past two years is being siphoned off into the pockets of the landlords,'' concludes the PERC. It says that costs are threatening the territory's viability as a base for some businesses. Investor confidence also is being hit by the rise in interest rates, which also could dampen the prospects for growth in banking, fund management, and broking, which have been among the most buoyant industries in Hong Kong, the consultancy says. It expects interest rates in Hong Kong to rise by a further half to one percentage point this year, depending on United States policies. The rise by itself will not be enough to lead to a consolidation in property, or to end the territory's economic boom, it says, but taken with other bad news emerging, its effects could be felt. ''The cumulative effect could lead to a much more profound change in Hong Kong's business mood than the relatively modest interest rate rise would suggest,'' the report says. Although the PERC forecasts an unchanged gross domestic growth rate of 5.5 per cent this year and next, it argues that the official statistics do not reflect the real position of trade as much of the real economy is in China, and not captured by official statistics. ''Just as the Government's figures understated the extent to which Hong Kong has been benefitting from China's boom, the same numbers will also down-play the negative impact of a hard landing for China's economy - an event that is looking increasingly possible,'' the report warns.