Worldwide attention will be zeroing in on Hong Kong as its colonial flag is lowered for the last time June 30 and China resumes ownership. Does that transition bode good or bad news for Hong Kong's economy and stock market? Last month, Pensions & Investments asked this of Rafael S Y Hui, the Hong Kong government's secretary for financial services. His comments show considerable optimism for post-1997 Hong Kong. As he put it, "politically, there are difficulties. Nonetheless . . . the overall economy . . . will go on pretty much as before. There will be business as usual."
An edited version of that interview follows.
Q: What should investors think of Hong Kong's future?
A: Overseas investors have to balance risk and rewards. But whereas a few years ago there were more uncertainties about life after 1997, now there are fewer uncertainties as the handover draws near.
After 1997, Hong Kong will become even more necessary to China . . . If China continues to open up internationally in the next five years . . . it will need a lot of additional investments. And Hong Kong is the only place where China can raise the kind of money it needs to sustain its economic program.
Q: What, if any, opportunities does Hong Kong's transition bring for international investors?
A: Increasingly, China has to privatize more of its state-owned enterprises. It has been doing so for years. So far, 23 Chinese companies have listed on the Hong Kong Stock Exchange. The listing rules for them are the same as for our own local public companies, that is, they do follow international guidelines. I believe there are another 20 Chinese companies lining up to list in Hong Kong. After 1997, there will be more Chinese companies - not necessarily state-owned or government-related enterprises, but private companies seeking not only to list their stock but also to issue debt. Hong Kong has all the systems and infrastructure to meet that need.
So, you have these two areas where Hong Kong will continue to play a big role between the international investors and China.
Q: Do you think China intends for Shanghai to become the PRC's chief financial center?
A: The Basic Law of Hong Kong (Hong Kong's post-1997 constitution) stipulates Hong Kong must - not just will, but must - remain an international financial center.
Of course, Shanghai has a lot of potential. But because of domestic considerations, I don't think it's China's intention that Shanghai should move in an outward, international direction. Chinese leaders have repeatedly stated that Shanghai will be a financial center domestically; Hong Kong will be the international financial center for China.
At the moment, China's currency - unlike Hong Kong's - is not fully convertible. If one's currency is not fully convertible, there is no question of any international financial center being developed for that area.
Q: After Hong Kong becomes part of China, will its economy become more susceptible to the vagaries of the PRC's economy?
A: Since the war, Hong Kong has always been, by necessity, outward looking and totally open. In other words, we are used to dealing with external influences.
Look at our dollar-linked system. One could say that our monetary policies are being run by the (U.S. Federal Reserve Board). Thus, besides China, we are equally susceptible to overseas markets. To deal with this, we always have maintained a very small public sector and a large private sector because we always have had confidence in the market being the most flexible and most adjustable mechanism to deal with these temporary external shocks. Whether it likes it or not, China has to subject itself to market forces, and by definition, these are cyclical, with ups and downs.
As long as we remain flexible, we don't have a lot of structural problems hindering our ability to adjust to economic cycles. Our taxation is low, we have reasonable labor legislation and our labor mobility is very high. We must be vigilant about making sure that this flexibility remains.
Q: It appears China wants to have a say in how some strategic Hong Kong businesses, ranging from utilities to airlines, are run. Will we see this trend increasing after July 1?
A: The behavior of Chinese companies in Hong Kong in the last 10 years should be sufficiently reassuring to investors; they do play by Hong Kong's rules."
Q: What explains last year's case in which Chinese-related entities took larger stakes (and the Swire Group had to lower its holdings) in Cathay Pacific Airways Ltd. and Dragonair?
A: Cathay Pacific had long had a relationship with CITIC Pacific (the Hong Kong arm of China International Trust & Investment Corp., which increased its holdings in Cathay Pacific last year). It was largely a commercial matter for the airline to decide to allow China to have a bigger stake in it. Across the board, airline companies face a variety of issues and choices concerning destinations, air rights and sovereignty. All countries look at air rights decisions from their own point of view . . . Far be it for me to pass judgment on commercial decisions.
Q: And what is your view on the recent CITIC Pacific case? (In that instance, to some investors' chagrin, 65 members of CITIC Pacific Ltd.'s management were able to buy company shares from the parent at a 24% discount to the prevailing share price.)
A: Surprises can happen, whether they involve red chips, blue chips or whatever. These things do happen and you can't totally avoid them. But according to international rules, there was nothing wrong with the CITIC Pacific deal. Some institutional investors believed it illustrated less of a commitment to CITIC Pacific from the Chinese parent company. But equally there is the view that, now that (executives including CITIC Pacific Chairman) Larry Yung have a bigger stake in CITIC Pacific they will make sure the company stays sound.
Q: Some investors worry that Article 18 of the Basic Law of Hong Kong could allow Beijing to interfere with Hong Kong's systems after July 1. What is your view?
(In part, article 18 states that in general PRC laws will not be applied in Hong Kong, but if "the Standing Committee of the National People's Congress . . decides the Region is in a state of emergency, the Central People's Government may issue an order applying the relevant national laws" to Hong Kong.)
Is there any chance that Beijing could use this or other excuses for raiding Hong Kong's treasury?
A: If people mention Article 18, then equally they can invoke other articles of the Basic Law that say that Hong Kong's money is ours (and Beijing doesn't have the right to take it).
There are also provisions that say we must have an independent monetary system and a separate reserve. Beyond that, it is inconceivable things will develop along this scenario. Bear in mind China's fiscal reserve is fast approaching US$80 billion to $90 billion. Why do they need our money?
Q: Will the peg of the Hong Kong dollar to the U.S. dollar last?
A: "It has lasted 13 years and brought us more good than bad - largely because it provides very important ingredients of stability and predictability. And in terms of our businessmen, the currency risk as far as Hong Kong is concerned is virtually zero. There is no reason something like that ought to be altered.
Q: The establishment of a Provisional Legislature for Hong Kong even before its return to China - and existing in tandem with the democratically elected Legislature - has created controversy. What is your view of the Provisional Legislature?
A: I am a Hong Kong government official. Therefore, my position is that the Provisional Legislature is unnecessary. It is not a good idea because it is unnecessary and because this leads to unnecessary disputes. Because legislation in fact can be dealt with by the current Legislature taking effect after 1997.
If China decides - as it has done - there are things the current Legislature cannot do or is not prepared to do, therefore encouraging China to set up a Provisional Legislature to pass legislation that takes effect July 1, then that is up to them.
Equally, we can say on July 1, the new Legislature can sit for one whole day and then pass everything they want.
