There will be no more important global event this decade than the handover of Hong Kong, the most advanced economy in Asia (excluding Japan), to its neighbour in the north, the People's Republic of China.

When the Union Jack is finally lowered at midnight on the last day of June, the international community will look towards Chinese controlled Hong Kong as evidence that economic thinking in Beijing is mature enough for it to be a responsible custodian of one of the most rampantly capitalist and liberal trading systems in the world. Even more critically the major western countries will regard the Chinese handling of human rights, freedom of the press and democracy in Hong Kong as a vital test of their ability to build a long-term strategic relationship with the People's Republic.

The West is already engaged in a wide ranging effort to let China know that Hong Kong can never be just another Chinese province, but is of special importance to the West. The opportunities for western exports and inward investment are too important to wetern growth and jobs for matters to be allowed to slip.

The richest industrial countries, the Group of Seven, have made strenuous efforts to underline Hong Kong's special status in economic terms. The province's monetary authority has been given an independent seat on the board of the Bank for International Settlements in Basle, emphasising its financial importance. Human rights leaders and the chief executive designate of Hong Kong, the Chinese-backed shipping magnate Tung Chee-hwa, have been feted in Washington as part of the effort to underpin the US commitment to human rights in the region. And the next major international gathering of financial and banking leaders from the G7, the World Bank and the IMF is scheduled to take place in Hong Kong in September, in a symbolic gesture of support for a free, open and global economic system.

The West's interest in the Chinese takeover of Hong Kong is based on realpolitik. In the unsettled period in Beijing following the death of China's longtime leader Deng Xiaoping earlier this year, western governments are determined to make China's new rulers aware that another Tiamanmen Square clampdown would mean an interruption of the economic relations which are the key to China's prosperity.

Asia, excluding Australia, Japan and New Zealand, has become an economic powerhouse which no sensible business can afford to ignore. The IMF now estimates that the region accounts for one quarter of world gross domestic product and, on current trends, could account for one third of global output by the year 2005. Moreover, over the last decade the developing countries of Asia have seen their exports nearly double to one fifth of the world total. With Hong Kong and China among the key players, these countries have taken a growing share of industrial country exports, helping to cushion them from recession and benefiting the global economy.

Meanwhile the globalisation trend has been pronounced in the Chinese economic area. The shift of labour intensive industries from Hong Kong to the mainland, while Hong Kong has developed as a trade and financial services centre, provides a dramatic example of the changing global economy.

Portfolio investment into Chinese enterprises like Citic, and traditional trading groups like Swire, has been strong. The market capitalisation of the Hong Kong stock market, which now hosts a number of Chinese companies, is larger as a share of GDP than equity markets in such large western economies as Germany, France and Italy.

Hong Kong has become the main conduit for investment in China and is now responsible for arranging most of the syndicated loans behind investment not just in the PRC but in the whole region. In a recent speech in Hong Kong IMF managing director Michel Camdessus, who is not given to dishing out plaudits easily, noted that 'Hong Kong is an example of a country which has managed rapid structural transformation in an increasingly integrated world economy in a most successful way.' He pointed out that China, which is moving towards greater openness in its economic affairs, could benefit substantially by moving further towards the Hong Kong model.

Barring political upsets, the IMF believes that China's growth prospects remain strong. After three years of almost double-digit inflation a soft landing was engineered last year with price increases declining to 6 per cent and growth maintained at 9.5 per cent. The outlook for 1997 is seen as favourable.

The IMF recommends, however, that Beijing drive economic reforms hard. This means tangible progress in restructuring and increasing efficiency in state-owned companies, including further privatisation. The Fund also believes that China, following the Hong Kong model, needs to establish stronger financial structures and improve its tax collections.

The airline industry, with more than two dozen carriers of which only a handful are deemed profitable, has begun to consolidate but is in need of heavy investment. With the exception of China Eastern, the first to have held an initial public offering, airlines remain state or provincially controlled.

In the coming months, the eyes of the world will be on China and Hong Kong. The fear in the West and Hong Kong is that indirect rule from Beijing will mean that the political and economic corruption which is rampant in the PRC will spoil Hong Kong's capitalism and drive some of the service sector away to rival financial centres like Singapore. However, with a lighter touch on the tiller, which preserves human rights and does not interfere with open markets, the combination of Hong Kong's entrepreneurial skills and China's industrial strength and vast market could lead to the establishment of a powerful new pole in the global economy.

 

Source: Airline Business