Plenty at stake over renewal of MFN

AS US President Bill Clinton's decision on granting Most Favoured Nation (MFN) trading status for China appeared imminent yesterday, Hong Kong businessmen, politicians, investors and economists were willing him on, to grant a renewal with the minimum of strings attached.

While the prospect of a blanket abolition of the status was being totally discounted, the action on the stock market was revolving around the land auction in the New Territories, not the decision-making process in the Oval Room.

If Mr Clinton abolished China's MFN, the impact on China and Hong Kong would be staggering, and far more damaging than most estimates of the initial impact.

At stake would be between $133 billion and $187 billion worth of trade relating to China, which would mean up to a $25 billion loss of revenues to the import-export industry.

There would also be an estimated $10 billion in losses from related exports and re-exports, meaning a direct loss to earnings of up to $36 billion or more than four per cent of gross domestic product.

Stock market meltdown would be instant, but that would only be the beginning.

In the longer term there would be a hollowing out of the economy as investment dried up, expensive production plants became idle, and the fast-growing services industry and the financial sector would find themselves losing a large part of their client base.

The next worse case being contemplated with concern yesterday was an MFN with wider ranging conditions. Unless these were spelt out with absolute clarity, the China picture would be scarred by uncertainty, which is the enemy of investment.

This could see a diversion of primary investment from China to the rest of the region - a process that has already been started thanks to the European Union quota's now being imposed on some Chinese-made products.