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May 09 16:06
May 09 21:06
May 10 05:06
By William Mellor
May 9 (Bloomberg) -- Tim Freshwater, Asia vice chairman of
Goldman Sachs Group Inc., gazes across the Hong Kong skyline from
his 68th-floor window toward a rectangular building that houses
the barracks of China's People's Liberation Army.
``Remember all that fuss about the PLA marching in?'' says
Freshwater, 62, recalling the dawn scenes on July 1, 1997, when
4,000 Chinese troops rolled across the border hours after Britain
handed sovereignty back to Beijing, ending 156 years of colonial
rule. ``There was all sorts of drama about what might happen to
the war memorial.''
Ten years later, Britain's memorial to the war dead remains
undisturbed. The PLA's soldiers are mostly confined to barracks,
surrounded by a growing army of bankers, fund managers, lawyers
and accountants. The newcomers pay as much as US$17.50 a square
foot a month -- rivaling London and New York -- to lease the
glass-and-steel offices that now tower over the beige, 28-story
symbol of Chinese military power.
When mainland Chinese leaders fly down from Beijing to
celebrate the handover anniversary on July 1, they will find that
the teeming, 450-square-mile (1,165-square-kilometer) enclave on
the Pearl River delta has even stronger capitalist characteristics
than it did in its colonial days.
Hong Kong is now home to the world's sixth-biggest stock
market (up from eighth in 1997), and last year it overtook New
York to become the biggest market after London for initial public
offerings.
Its island-studded harbor, overlooked by the gravity-defying
apartment blocks that cling to the slopes of Victoria Peak, was
last year the world's second-busiest container port.
World's Freest Economy
In January, Hong Kong was named the world's freest economy
for the 13th year by the Heritage Foundation, a Washington-based
advocacy group, which cited its low taxes, openness to investment
and lack of tariffs. Hong Kong's corporate tax rate is 17.5
percent, compared with a top corporate rate of 20 percent for
Singapore. ``Our main target is to turn Hong Kong into a New York
or London of the East Asia time zone,'' says Donald Tsang, Hong
Kong's Beijing-sanctioned chief executive.
Not all of the changes since the handover have been for the
better. The city today is swathed in pollution, with air quality
so poor that the government advised people with asthma or
cardiovascular disease to stay indoors on 41 days last year.
The city is facing increased competition from Shanghai and
other locations such as Singapore. Hong Kong's leaders are
struggling to deliver on promised democratic reforms, while the
gap between rich and poor is growing.
`Just So-So'
``We have a split economy,'' says Marc Faber, 61, who
oversees $300 million at Marc Faber Ltd. in Hong Kong and has
managed money in the city for 34 years. ``The super-rich, the
money shufflers and lawyers, are doing exceedingly well. However,
the lower and middle classes are doing just so-so. Hong Kong today
is extremely dependent on the financial sector, and it could
suffer rather badly in a downturn.''
Under the arrangement known as ``one country, two systems,''
the city in 1997 became a Special Administrative Region of the
People's Republic, with Beijing guaranteeing it autonomy over its
own affairs, except over defense and foreign policy, for 50 years.
China's communist leaders pledged not to tamper with Hong
Kong's way of life and its laissez-faire economy. It would retain
its own currency -- the Hong Kong dollar, which is pegged to the
U.S. dollar -- and its British common law system, administered by
judges in horsehair wigs.
Beijing also agreed to let Hong Kong keep other forms of
economic and legal independence, including separate membership in
the World Trade Organization.
Move to Bermuda
Unconvinced, 545,000 people -- one-twelfth of Hong Kong's
population -- mostly refugees or the children of refugees from
communism, emigrated between 1984 and 1997.
The oldest British-owned company, Jardine Matheson Holdings
Ltd., moved its headquarters to Bermuda and its stock listing to
Singapore. Fortune magazine ran a cover story titled ``The Death
of Hong Kong.'' Milton Friedman, the late U.S. Nobel Prize-winning
economist, predicted that within two years of the handover,
Beijing would impose capital controls and do away with the Hong
Kong dollar.
Instead, China stuck to the deal, says Chris Pratt, chairman
of Swire Pacific Ltd., a British-owned company that opened its
first office in Hong Kong 137 years ago. Swire controls Cathay
Pacific Airways Ltd., the world's eighth-largest airline by market
value, which in 1997 did not fly to the mainland.
Flights to Mainland
Today, Cathay has 400 flights a week to the mainland --more
than any foreign-owned carrier -- most through its Dragonair
subsidiary. Cathay bought the 82.2 percent of Dragonair it didn't
already own last year for $1.1 billion and doubled its stake in
Air China Ltd., the mainland carrier, to 17.5 percent.
``We took the view China meant what it said about Hong
Kong,'' says Pratt, 50.
Hong Kong's history has been marked by boom-and-bust cycles.
London started calling the shots in 1841, when it seized Hong Kong
island, whose name means ``fragrant harbor'' in Chinese, a 26-
square-mile chunk of granite one mile off the South China coast,
after a war sparked by Britain's illicit trade in opium. In 1860,
China ceded the tip of the adjacent Kowloon peninsula as well.
Then in 1898, Britain more than doubled the size of Hong
Kong's territory by acquiring another chunk of mainland, known as
the New Territories, on a 99-year lease.
Hongs
British companies that set up there were known as hongs, or
trading companies, and the men in charge were taipans, which means
great managers in Cantonese. Four of the hongs grew into global
companies.
In addition to Swire, they are: HSBC Holdings Plc, founded in
Hong Kong in 1865, and now the world's fourth-biggest bank by
market value; Hutchison Whampoa Ltd., now owned by billionaire Li
Ka-shing, and the world's biggest port operator; and Jardine
Matheson, once known as the Princely Hong and controlled by the
Keswick family, descendants of William Jardine, which operates the
Mandarin Oriental hotel chain.
During World War II, British Prime Minister Winston Churchill
considered Hong Kong indefensible. He was proved right. On Dec. 8,
1941, a day after the Japanese bombed Pearl Harbor, they attacked
Hong Kong. Defense forces strung across the New Territories, known
as the Gin Drinkers' Line, fell within a day.
Hong Kong island surrendered on Christmas Day after barely a
week of fighting. Three years and eight months later, the British
survivors emerged from their prison camps to find Hong Kong in
ruins and the population reduced to 600,000 from 1.6 million
before the war.
Boom and Bust
That was soon swelled by the arrival of millions of refugees
from the civil war in China and subsequent victory of Mao Zedong's
communists.
Energized by Chinese entrepreneurs and cheap labor, Hong
Kong's economy boomed and adapted. Yet crises in China
reverberated across the border. In 1967, during the Cultural
Revolution, pro-mainland protesters waving Mao's Little Red Book
battled police, overturned cars and stoned hotels. The stock and
property markets crashed.
By the end of the 1970s, the question of renewing the leases
on properties that expired after 1997 forced Britain to start
talking to China about Hong Kong's future.
In 1984, Prime Minister Margaret Thatcher and paramount
leader Deng Xiaoping signed a joint declaration guaranteeing the
one-country, two-systems solution until 2047.
Fears for the future were heightened in 1989 when Chinese
troops cracked down on democracy activists in Tiananmen Square. In
Hong Kong, the stock market plunged 37 percent in three weeks, and
a million people took to the streets in protest, according to the
Hong Kong government.
Residents Flee
Others headed for the airport. China's economic growth
slumped to 4.1 percent from the 11.5 percent it had averaged over
the previous seven years.
In 1991, the mainland economy resumed its rapid growth. By
the mid-90s, returnees outnumbered those leaving the territory,
now with the security of foreign passports. At the time of the
handover, the Hang Seng Index had risen eightfold to 15,196 in as
many years since Tiananmen, and property prices had hit records.
Just one day later -- on July 2, 1997 -- the Thai baht
collapsed, sparking a regional financial crisis. Hong Kong's stock
market plummeted 60 percent in a year.
In 2003, a mysterious pneumonia-like disease, Severe Acute
Respiratory Syndrome, or SARS, swept across the border, killing
299. Shops, hotels, restaurants, subway lines, airplanes and even
the normally packed Edwardian-era trams that still trundle between
bank towers downtown lost business overnight.
Those who did venture out hid behind white and blue surgical
face masks. ``SARS was in a sense worse than the Japanese
occupation,'' says Ronald Arculli, 69, chairman of Hong Kong
Exchanges & Clearing Ltd., who has childhood memories of the war
years. ``This time, the enemy was faceless.''
Housing Slump
Caught in a deflationary spiral that lasted until 2005,
homeowners found their properties lost two-thirds of their value.
Such a home price plunge would be unthinkable in the West, says
Peter Churchouse, 57, a former Morgan Stanley property analyst
who's now director of Hong Kong-based property consultant Lim
Advisors Ltd. ``If you had a decline like that in America or
Europe, there would be blood on the streets,'' he says.
China came to Hong Kong's aid, signing a trade agreement that
allowed Hong Kong companies freer access to Chinese markets. It
eased travel restrictions on mainlanders visiting the territory,
saving the SARS-ravaged tourism industry.
``That was a huge boost that turned the economy around,''
says Amar Gill, 43, an analyst at CLSA Asia-Pacific Markets. The
official China Daily agreed. ``The central government gave Hong
Kong a big gift,'' it said of the free trade deal.
China's Advance
China also allowed more of its giant state-owned enterprises
to sell shares on the Hong Kong market, which helped to boost
stocks to 20,706 on May 8, down from May 7's record 21,070.
Chinese companies now make up half the market capitalization
of the Hong Kong exchange, up from 10 percent a decade ago. Eight
of the 15 largest stocks in the Hang Seng Index are Chinese
companies.
Hong Kong's economy has grown 7.6 percent annually for the
past three years, and gross domestic product per capita on a
purchasing power parity basis will be $37,385 this year --higher
than the $31,585 of its former colonial ruler.
Property prices for offices in the central business district
and luxury apartments and houses on the slopes of the peak are
also back to 1997 levels, according to Lim Advisors.
This time, Hong Kong isn't heading for another bust, says
billionaire Victor Fung, a former Harvard Business School
professor who's chairman of Li & Fung Ltd., a supplier of Chinese-
made goods to retailers such as Wal-Mart Stores Inc. and Target
Corp.
1997 `Bubble'
``Looking back, we were going through a bubble in 1997,''
Fung, 62, says. ``Now we are on very solid ground. We are much
more important as a financial center.''
Although mainland China has two stock markets of its own, in
Shanghai and Shenzhen, Hong Kong remains the No. 1 source of
capital for the world's fastest-growing major economy.
Hong Kong IPOs raised $43 billion in 2006 compared with $10
billion in 1997. That total included $16 billion of the $22
billion raised last October by Industrial & Commercial Bank of
China in the world's biggest-ever share sale (the other $6 billion
was raised in Shanghai).
Shares in ICBC, as the bank is known, have since increased
by 41 percent to 4.32 Hong Kong dollars on May 8, making China's
biggest lender the world's ninth-biggest company by market value.
In April, Hong Kong hosted the biggest initial public offering so
far this year when Beijing-based China Citic Bank Corp. sold $5.95
billion of shares in a dual listing in Hong Kong and Shanghai.
Country Garden Holdings Co., China's most profitable developer,
also sold $1.9 billion of shares in Hong Kong last month.
Billionaires
In terms of personal wealth, Hong Kong is home to the most
U.S.-dollar billionaires per capita, says Kathryn Shih, Hong Kong-
based Asia-Pacific head of wealth management at UBS AG. That's 29
in a population of 7 million. One in every 50 residents is a
millionaire, Merrill Lynch & Co. and Capgemini SA reported in a
2006 world wealth survey.
Total funds under management in Hong Kong are $579 billion,
three times as much as in 2000, according to the Hong Kong
Securities and Futures Commission.
To win a share of Hong Kong's booming investment banking and
wealth management markets, foreign banks have been boosting their
presence. UBS, which last year topped the league tables for
arranging Hong Kong and Chinese overseas share sales, according to
Bloomberg data, has doubled its Hong Kong staff to 2,000 in the
past three years, Shih says. UBS arranged $7.4 billion worth of
Chinese share sales last year, including part of the $11.2 billion
IPO of Bank of China Ltd., the country's No. 2 lender.
``There's no opportunity I have seen anywhere in the world
that compares with what we have before us here today in Hong
Kong,'' says Steven Barg, 45, UBS's head of equity capital markets
for Asia. Barg previously headed teams in Europe and the U.S.
Growth at Goldman
At Goldman Sachs, profits from Asia exceeded those from
Europe since 2005 and last year more than doubled to $4.02 billion
compared with $3.01 billion in Europe. Goldman now has 1,300
employees in Hong Kong, up from 800 in 2003.
``In the 10 years since the handover, Goldman Sachs in Asia
has gone from being marginal to a genuine third leg of the global
business,'' Freshwater, the Asia vice chairman, says.
Goldman was the No. 2 underwriter of China IPOs last year,
arranging $7 billion, including the Bank of China sale. The U.S.
bank has a paper profit of $8.75 billion on the $2.6 billion
investment it made in ICBC last year before the share sale.
``No one would have dreamed the amounts of equity raised
through listings here could have been done in that period of
time,'' says Freshwater, a Briton who has spent 30 of the past 40
years in Hong Kong and who, as president of the city's law society
in 1984, witnessed Thatcher and Deng sign the joint agreement.
No Need for New York
Hong Kong is now so good at raising capital that IPOs no
longer need to be dual-listed in New York, says KL Wong, 57, Hong
Kong-based chairman of Asia Origination at Merrill Lynch, which
helped arrange the record ICBC share sale.
`Last year, the largest IPO in human history was just a Hong
Kong listing,'' he says. ``Our regulatory regime, governance and
secondary market liquidity are now all acceptable.''
China's big, newly listed lenders are also transforming Hong
Kong's banking landscape, says David Li, the Cambridge University-
educated chairman of Hong Kong-based Bank of East Asia Ltd. ``I'm
very much an underdog,'' says Li, 68, who advised Beijing on the
handover and also holds a British knighthood.
``During colonial days, I was under the threat of the big
British banks here. I'm under the threat of different big banks
now.''
Profits Surge
Some underdog. Last year, Bank of East Asia's net profit
soared 25 percent to 3.43 billion Hong Kong dollars ($439 million)
from HK$2.78 billion as the bank expanded into China. In the year
ended on May 8, the bank's share price rose 44 percent to HK$47.00
-- more than double that of the Hang Seng Index and four times
that of the Hang Seng finance sub-index.
Because of Li's mainland connections, the bank now has 31
outlets on the mainland -- nearly twice as many as Citigroup Inc.
Hong Kong's wealthy domestic market is still fertile pickings
for the two London banks that have operated there for almost 150
years. HSBC and Standard Chartered Plc are issuing banks for Hong
Kong's currency. Standard Chartered makes 26 percent of its
profits there. HSBC makes 23.5 percent.
``It's remarkable that Hong Kong, with 7 million people, can
be the biggest contributor to group profits,'' says Peter
Sullivan, 59, Standard Chartered's Hong Kong CEO.
Banks aren't the only ones profiting from Hong Kong's
prosperity. At Sam's Tailor, open since 1957, owner Manu Melwani
says business jumps every year at bonus time as his clientele has
changed from British army officers to bankers, lawyers and
accountants.
Lack of Corruption
Chief Executive Tsang, who was reelected in March, says one
of his priorities in his second five-year term is to make sure
Hong Kong doesn't lose its edge to Tokyo, Singapore or China's
domestic financial center, Shanghai.
Tsang, 62, a policeman's son who picked up a British
knighthood before the handover, ticks off Hong Kong's advantages
for foreign investors: a well-regulated market, the British-based
legal system, free media and minimal corruption.
Hong Kong ranks 15th cleanest -- higher than the U.S., Japan
and Germany -- out of 163 countries in the 2006 corruption
perception index compiled by Transparency International, a Berlin-
based advocacy group. China is 70th.
``We are part of the Chinese nation, but we are a unique
jewel,'' Tsang says. ``There are certain things that we represent
that are lacking in the mainland.''
Olympics
Hong Kong will even share in Beijing's Olympic glory in 2008.
As the only place in China apart from Macau where horse racing is
legal, it will host the equestrian events for the 2008 games.
Casting a shadow over Tsang's vision is mainland China's
commercial capital, Shanghai. Shanghai's stock market trades in
so-called A Shares that are reserved mostly for Chinese investors
using yuan. Increasingly, Chinese companies listing in Hong Kong
are getting a second listing for their shares in Shanghai.
Last year, 71 percent of the $62 billion of funds raised on
Chinese stock markets was in Hong Kong, according to
PricewaterhouseCoopers LLP. This year, 64 percent of an estimated
$58 billion will be raised in Shanghai and Shenzhen as companies
already listed in Hong Kong sell more shares domestically, the New
York-based accounting firm says.
In the first quarter of 2007, Shanghai's container port also
overtook Hong Kong to become the world's second-busiest after
Singapore, according to mainland and Hong Kong statistics.
``If you are complacent, you risk being overtaken one day,''
says Fred Ma, Tsang's secretary for financial services.
The momentum may already be moving away from Hong Kong, says
Simon Murray, Hong Kong-based founder and chairman of General
Enterprise Management Services, a $750 million private equity
fund.
A Shares
``Hong Kong's such a great stock market because foreigners
can't invest in A Shares,'' says Murray, 67, a former Asia
chairman of Deutsche Bank AG and CEO of Hutchison Whampoa, Hong
Kong's biggest conglomerate.
Eventually, China will make its yuan convertible to the
dollar and other currencies. ``When that changes, we will all be
up in Shanghai,'' he says. ``If you want to catch fish in China,
you have to be up there. From Hong Kong, you need a very long
rod.''
Murray, a marathon runner, says pollution could also drive
investors away from Hong Kong. ``To be a successful financial
center, you need to be not just transparent in your systems but
also in the air you breathe,'' he says.
In the 1980s and '90s, Hong Kong moved its manufacturing
industry across the border to Guangdong province, where labor is
cheaper. Now, the pollution from 60,000 Hong Kong-owned factories
wafts back across the border, adding to the city's homegrown haze.
Pollution
In November, Merrill Lynch cut its ratings on three Hong Kong
property developers over concerns that Hong Kong's pollution
problems could cause a brain drain. ``The air quality in Hong Kong
is now regularly so poor that the long-term competitiveness of
this city-state is, in our minds, in some doubt,'' former Hong
Kong-based Merrill analyst Spencer White told clients in a note.
By comparison, rival Singapore has the best air quality of
any major city in Asia, says ECA International, a London-based
human resources consulting firm. Even Shanghai's is less polluted,
ECA says.
In October, Tsang's government unveiled plans to enforce
emission caps on power companies and give tax breaks for cleaner
vehicles. He says he's also talking to his counterparts in
Guangdong. ``We will certainly do all we can in Hong Kong, but
that will not be half enough,'' he says. ``It will take hard work
and continuous monitoring for the next five years.''
Wealth Gap
Tsang says he's committed to narrowing the wealth gap by
boosting spending on public works and investing more in education.
Though unemployment has fallen to 4.3 percent from 8.6 percent in
2003, the proportion of families with monthly incomes of less than
HK$6,000 has grown to 22 percent from 13 percent since the
handover, he says.
Philip Ng, 70, is one of those who missed out on the boom.
He operates a cigarette and soft drink stall in the shadow of
HSBC'S Norman Foster-designed downtown headquarters.
Working seven days a week, Ng clears HK$2,700 a month, which
leaves him nothing after he's paid for food and HK$1,600 to rent a
120-square-foot (11-square-meter) room in a 600-square-foot flat
he shares with three other single men.
``If you are a property developer or in finance, of course
this is the best time,'' Ng says. ``But people like us at the
bottom of society see none of these benefits. We don't have
savings to invest. It's difficult and getting more difficult.''
Democracy
As important as economic issues, Tsang says, is winning
approval from both Hong Kongers and leaders in Beijing for a plan
to introduce a democratic system of government. Although China is
a one-party state, it has promised that the people of Hong Kong
will one day be able to choose their own chief executive.
Currently, the 60-member legislature has just 30 directly
elected members. The chief executive is elected by 800 people,
mostly Beijing loyalists.
Tsang says his goal is to set a timetable for introducing
universal suffrage for the territory before he leaves office in
2012. To get approval for the necessary reforms, Tsang -- who won
649 votes after being challenged by a pro-democracy candidate,
barrister Alan Leong -- has to win approval from Beijing plus two-
thirds of Hong Kong legislators.
Pro-democracy legislators, including Leong, 49, want
universal suffrage to happen in time for the next election.
Beijing's leaders are more cautious, Tsang says. ``I will try and
maneuver and find something that is acceptable at the end of the
day,'' he says.
Free Speech
While Hong Kong may lack democracy, it doesn't censor the
media or ban freedom of speech, according to the 2006 U.S. State
Department report on human rights practices in Hong Kong. Before
the handover, the leading democracy activist of the time,
legislator Martin Lee, was nicknamed Martyr Lee by people who
believed he would be imprisoned or worse once the British left.
Today, the British-trained barrister, 69, still sits in the
legislature, practices law and attacks both the Beijing and Hong
Kong governments for what he claims are breaches of the
constitution.
He says that while the handover declaration promises Hong
Kong will be governed by its people, Tsang and his Hong Kong-born
government team are really mouthpieces for Zeng Qinghong, the
Chinese vice president with overall responsibility for Hong Kong
affairs.
`Promises Broken'
``The big promises have been broken,'' he says. ``Hong Kong
people are no longer ruling Hong Kong, and democracy has been
delayed.''
Although he's escaped martyrdom, Lee has only been allowed to
visit the mainland once -- for a day and a half -- in the past 18
years after he led demonstrations in Hong Kong against the
Tiananmen crackdown. ``I can visit every country in the world
except my own,'' says Lee, whose father was a Nationalist general.
That hasn't stopped Hong Kong's people from demonstrating. In
2003, when former Chief Executive Tung Chee-hwa tried to introduce
an anti-sedition law, 500,000 people, including Bank of East Asia
Chairman Li, took to the streets in protest.
This year, the government was confronted by an angry mob when
it demolished the downtown pier for the Star Ferry, which has
shuttled between Hong Kong island and Kowloon for 100 years.
Is Tsang confident he can deliver on his democracy pledge?
``That's not the right word, but I am determined,'' he says. Tsang
has shown resolve in the past, says Goldman Sachs's Freshwater. In
1998, at the height of the financial crisis, the Hong Kong dollar
came under attack from hedge funds that had profited from the
collapse of the Thai, Indonesian and South Korean currencies.
`Gutsy Call'
Tsang, then financial secretary, fought back, spending $15
billion to buy up blue-chip Hong Kong stocks and shore up the
market.
Tsang, who stands 5 feet 6 inches tall and wears a bow tie to
work every day, says he didn't inform Beijing until 30 minutes
after he entered the market. ``Someone in Beijing said I must have
swallowed a tiger's gall bladder,'' says Tsang, referring to a
Chinese expression for someone who shows unexpected strength.
``It was a very gutsy call,'' Freshwater says. ``Some people
say it was a tougher decision than it would have been in 1996
because under a British governor, that decision would have been
made by the Bank of England in London.''
Impeccable Behavior
Tsang hasn't won all his battles. An attempt to introduce a
goods and services tax was blocked in the legislature. In a city
where the maximum income tax rate is 15 percent, Tsang says, Hong
Kong still urgently needs to broaden its tax base.
Still, he says one thing he doesn't have to worry about is
the PLA. He says the Chinese soldiers are more disciplined than
their British predecessors, who were famous for rowdy nights in
the bar district of Wanchai.
``We have never had any incident -- not even a speeding
ticket,'' Tsang says. ``These people behave impeccably.''
Even with their bird's-eye view into the PLA compound,
Freshwater and his Goldman Sachs colleagues say they never see
signs of military activity. If so, the barracks may be the only
place in today's Hong Kong where nothing much is happening.
To contact the reporter on this story:
William Mellor in Beijing at
wmellor@bloomberg.net (Related)
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