Hong Kong's Golden Link

Opening up shop in China, where space is big and pay is small

A barren island with hardly a house upon it." Such was British Foreign Secretary Lord Palmerston's contemptuous description of Hong Kong before it was ceded to the British by a weak Chinese regime at the close of the Opium War in 1842. As a fruit of war, it was not considered a peach. But over the past 137 years, the once blighted island has developed into a bustling seaport colony that boasts a thriving economy. Though Britain's lease on 90% of the 400-sq.-mi. area expires in only 18 years, residents expect a glowing future of political stability and more prosperity.

Last month Sir Murray MacLehose became the first Hong Kong Governor ever to pay an official visit to Peking. His warm reception by Chinese Vice Premier Deng Xiaoping (Teng Hsiao-p'ing) was a signal of Peking's intent to allow the colony to maintain its traditional status and increasingly to involve it in the push to modernization. On his return, MacLehose quoted Deng as saying that investors in Hong Kong should "put their hearts at ease." In short, China's pragmatic post-Mao leaders value Hong Kong as a window on the world and a source of foreign exchange, investment capital and expertise.

Reports TIME Hong Kong Correspondent Ross H. Munro: "The Chinese export some $2 billion a year to the colony. They earn a further $2 billion in remittances from Hong Kong residents to their relatives on the mainland and from some 50 Hong Kong-based companies that the Chinese control in shipping, banking, retailing and other fields. Trusted Chinese are assigned to work in these ventures to learn Western management methods. Now the Chinese are trying to draw both investment money and expertise directly into China. This could transform the Hong Kong economy in the next few decades. Hong Kong has embarked on a long, perhaps inexorable process of economic integration with China."

More agile Hong Kong businessmen have started to shift some of their production to China, which has what the overcrowded colony lacks: plenty of space and unskilled labor. Already 200 firms have some operations in China--mostly of the labor-intensive kind--and 200 more expect to set up shop there by year's end. For example, Hong Kong's Asia International Electronics Ltd. sends components for its radio/tape cassette players to factories in Peking, where they are put together before being shipped back to the colony for final assembly and export. The Chinese workers are paid $25 a month, less than one-sixth of what A.I.E. pays its Hong Kong employees. Soon the Chinese will be assembling A.I.E. television sets, which will be sold in the U.S. under the "Williamsons" name as well as under private labels of K-Mart and other chains. In another case, Harper's International, a Hong Kong automotive distributor, plans to build a big bus-and-truck assembly plant in Shenzhen (Shumchun), just across the border from Hong Kong. In Shenzhen, Chinese are already assembling handbags, shoes, key chains and plastic flowers for Hong Kong companies.

Such deals create jobs for China's workers, give its managers modern manufacturing experience and generate foreign-exchange earnings. The Hong Kong companies, for their part, benefit from cheaper Chinese labor and can thus keep export prices low. In the future, Hong Kong may specialize in merchandising and putting sophisticated finishing touches on products. But the colony also has a number of unskilled workers, and some of them could be hurt in the process.

Other problems becloud the generally bright landscape. The Hong Kong dollar has lately slipped 8% against the U.S. dollar because the colony suffered from a $1.8 billion trade deficit last year and is experiencing double-digit inflation, caused largely by an influx of foreign investment and a sharp rise in bank loans for Hong Kong's overheated real estate and property development market.

A minority of businessmen wonder if Hong Kong may be undercutting itself by shifting operations to China. Says Jack Tang, chairman of South Sea Textile Manufacturing: "In effect, you're setting up a plant with the latest machinery and you're teaching the mainland Chinese production and marketing. When your contract expires, you find that you have just created more competition for yourself."

Other Hong Kong leaders respond that the colony's enterprises are much more efficient, innovative and market-oriented than those of the Chinese. A leading Hong Kong businessman, having returned from a tour of mainland factories, estimates that a Chinese factory as a whole is only one-seventh as efficient as one in Hong Kong. The general bullishness is summed up by Sir Lawrence Kadoorie, 79, a Hong Kong-born multimillionaire, who is negotiating to buy large amounts of Chinese coal for a new Hong Kong generating station that will supply electricity to neighboring Guangdong (Kwangtung) province. As he gazes out at Hong Kong's beautiful harbor, he asks: "Is there any place on earth where the future looks brighter than here?"

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