- The Washington Times - Monday, June 24, 2002

HONG KONG Queenie Lee was on her way to work as a secretary in the head office of a small retail chain one recent morning when she spotted a colleague walking in the opposite direction.
"No need to hurry," the woman told Miss Lee, a single, 32-year-old high school graduate. "We've all lost our jobs. Our company has gone out of business."
Miss Lee, who lives with her parents, suddenly found herself among the more than 245,000 unemployed people in this former British colony where labor shortages once were the norm. They are no more.
Unemployment hit a record high of 7.1 percent in April, and personal bankruptcies have tripled so far this year. Hong Kong residents, many the children of parents who fled the mainland after the communist takeover in 1949, now are lining up for job fairs promising work across the border in China.
To make matters worse, property prices have fallen 60 percent in the past five years, erasing the equity of many homeowners. Even the government is running once unheard-of budget deficits.
"Over the past five years, we've been hit by a double blow," said K.Y. Tang, the chief government economist, in an interview. "First, it was the 1997 Asian economic crisis. And just as it appeared that we were emerging from that, we were hit by last year's global economic downturn."
No one suggests that Hong Kong will go the way of Argentina, where the economy has all but collapsed, prompting bank runs, riots and a political crisis.
Many of the fundamentals of Hong Kong's economy are sound. It has $112 billion in foreign reserves, no external debt, a currency pegged to the U.S. dollar, low taxes and business-friendly leaders.
And while many activists here are disappointed by the slow move toward a popularly elected government, by and large, the territory, now officially known as a Special Administrative Region of China, continues to enjoy the rule of law, an independent judiciary and a stable political environment that make it an inviting base for multinational businesses.
Still, it's clear that Hong Kong may never again enjoy the exclusive role as a distributor for nearly everyone who wants to do business with China, the world's fastest-growing economy.
"Hong Kong is struggling to find its new identity," said Ken Sheffer, who heads the local office of the Washington-based Heritage Foundation, which ranks the territory as the world's freest economy.
"There's a race on to see which city Hong Kong, Kuala Lumpur, Taipei, Seoul can be the major Asian hub 10 or 20 years from now," he said. "Obviously, Hong Kong has cultural and geographic advantages when it comes to dealing with China."
The International Monetary Fund, in its most recent review of the trade-dependent Hong Kong economy, suggested that the territory's long-term future will depend on its ability to adapt to integration with the mainland.
"Hong Kong will need to push ahead with the transformation into a center for high-value-added financial and business services as the importance of the entrepot trade for the mainland diminishes," said the report, issued last month.
Hong Kong still handles about 40 percent of the mainland's trade, which is projected to grow some 80 percent during the next five years in the wake of China's entry into the World Trade Organization. That rise will bring a need for increased financing, much of which will be generated in Hong Kong.
But as trade restrictions begin to fall on the mainland and infrastructure, particularly ports, improves, many foreign companies will go directly into China.
Shanghai, the booming metropolis at the mouth of the Yangtze River that has the entrepreneurial zeal reminiscent of Hong Kong two decades ago, is the city most people here fear. Even the border city of Shenzhen in neighboring Guangdong province is emerging as an attractive spot for corporations.
The economic turmoil of the past five years has prompted Hong Kong leaders to embark on a path that once would have seemed out of character in a city that prides itself on its commitment to a free market.
In August 1998, the government intervened in the stock market, buying up more than $15 billion in publicly traded stocks to fend off speculators. The government used $1.74 billion of its own money to lure the Walt Disney Co. to Hong Kong, where it will open a theme park in 2005.
In all, Tung Chee-hwa, handpicked by Beijing to lead Hong Kong, has proposed some $77 billion in government-supported infrastructure and other major projects over 15 years, intended to get the economy moving.
Such grand schemes have pushed public spending up to 24 percent of gross domestic product, producing a budget deficit. In 1997, when the British returned Hong Kong to Chinese sovereignty, public expenditures accounted for just 17 percent of GDP.
And there is serious talk of new taxes, including one on those crossing the border with China and a tax on goods and services. Those suggestions are unpopular in a tax-shy city with a maximum 15 percent tax rate on personal income and a 16 percent tax on businesses.
But for most Hong Kong people, such as Karen Tang, who recently lost her job with a publishing company, the immediate goal is simply getting back to work.
"I thought I'd have that job for as long as I wanted to work," she said. "There were 10 people on staff when I started eight years ago. Now, there are only five."
Miss Tang, 40, is making do with free-lance work while she combs the classified ads, job Web sites and employment agencies.
"I'll probably have to take a significant pay cut to go back to work," she said. "But that's the new reality in Hong Kong."


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