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February 17, 1997 12:00 AM

BULLISH VIEW IN HONG KONG

Margaret Price
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    HONG KONG - Hong Kong's financial community remains bullish on the territory's post-1997 prospects - despite the major political changes expected after its July 1 return to China.

    News that Beijing plans to trim democracy and civil rights protections in the territory has rocked the world and fueled concerns about Hong Kong's future.

    But the financial community sees a brighter side: weighed against the specter of political/civil rights curbs in Hong Kong is the economic gain from tighter links to the People's Republic of China. Indeed, many believe that China, for its own self-interest, wants capitalism to thrive in Hong Kong.

    In turn, Hong Kong's businesspeople see ever increasing opportunity in China. Already that factor, along with other positive trends within Hong Kong, are helping to recharge the Asian Tiger. The evidence:

    A rising stock market, which gained almost 34% last year.

    Property price gains. Following a mid-1990s slump, Hong Kong's residential property prices last year rose more than 20%.

    Overall economic improvement this year. According to the economic research department of the Hongkong and Shanghai Banking Corp. Ltd., Hong Kong's real gross domestic product is expected to grow 5.2% this year, vs. 4.6% in 1996.

    An easing of China's inflation-fighting economic austerity program. This development fuels hopes for improved business opportunities in the PRC.

    For these and other reasons, an estimated 80% of Hong Kong's money managers are overweighted to the Hong Kong stock market. And at least some projections favor remaining that way. Late last year, a bullish Peter Churchouse, a managing director of Morgan Stanley & Co. in Hong Kong, predicted Hong Kong's Hang Seng market index could hit 28,000 by mid-1999; and by this year's end, it could reach 16,500. (On Feb. 5, the Hang Seng index closed at 13660.50).

    In its regional portfolios, Barclays Global Investors Hong Kong Ltd. has an average 30% overweighting to the Hong Kong market. Among other attractions: an expected average of 17% to 18% growth in earnings per share this year. That's up from less than 15% growth in 1996, said Stephen Leung, BGI's deputy managing director and chief investment officer.

    Last September, Terence F. Mahony, managing director at TCW Asia Ltd., Hong Kong, "became bullish on Hong Kong" amid brightening economic prospects for Hong Kong and China. Moving from an underweighted position, the firm now has a 39% to 40% exposure to Hong Kong. "However, as we get closer to the handover, we might go to a (neutral) or underweighted position for valuation reasons," said Mr. Mahony.

    At NMFM (Asia) in Hong Kong, portfolios hold an average of 38% to 40% in Hong Kong for Asia-excluding-Japan accounts. But for "very aggressive" portfolios, the weighting goes as high as 50%, said Chief Investment Officer Ophelia Tong. The Hong Kong allocation steadily increased last year, particularly in the past six months, Ms. Tong said in January.

    In global and Asia-excluding-Japan portfolios, LGT Asset Management Ltd., Hong Kong, became overweighted to the Hong Kong market starting in 1995. Since then, the firm gradually has been raising that bet. Attractions include the firm's "positive view of the prospects for economic growth in China" as well as its sanguine view of Hong Kong's post-1997 future, said Marcel Souza, the firm's senior economist for Asia-Pacific.

    George S.K. Leung, economic adviser in Hong Kong for the Hongkong and Shanghai Banking Corp., cited Hong Kong's strengths as a financial/service sector. These abilities - including its capability of helping fund infrastructure developments, providing sophisticated transportation systems and meeting growing banking needs - will prove indispensable to China, he believes.

    Providing these services will help sustain Hong Kong's GDP growth, which should average levels "above 5% per annum" for the medium-to-long term, estimated Mr. Leung.

    At the same time, Hong Kong will be allowed to maintain its economic systems, the financial community believes. As part of the "one country, two systems" promise for the territory after July, Hong Kong is due to keep its own monetary policy and its own dollar-pegged currency. Plans to maintain Hong Kong's Independent Commission Against Corruption is seen as protection against illegalities.

    Overall, the mantra heard from Hong Kong's financial community is that Beijing wants to sustain a thriving Hong Kong. To many observers, China wants to prove it can run Hong Kong better than the British have; in fact, many believe China wants a well-managed Hong Kong to help it lure Taiwan back to China's political fold.

    Such optimism contrasts with the harder-to-find concerned voices. Among the skeptics is Marc Faber, managing director of Marc Faber Ltd. who has a "very negative view of the long term outlook for Hong Kong as a trading city or commercial center." He believes the "relative importance of Hong Kong's economy will diminish" - and indeed has already been doing so - because "Shanghai is emerging as China's most important city."

    "In the future, Hong Kong may just be a city that's just important to southern China; but it's also possible that it may not be important at all." For example, it's possible Hong Kong could become "like Florence or Venice - tourist places with no economic importance," he said. "I suspect that in 20 years, the majority of companies here will have head offices somewhere else in China, and their regional offices in Asia will be somewhere else other than in Hong Kong."

    Mr. Faber also scoffs at views that China will honor the Basic Law of Hong Kong, a sort of constitution for post-1997 Hong Kong. In his view, "the Basic Law is a worthless piece of paper that's already been violated, at least in spirit, by the Chinese." Among the other expected moves and changes, he expects China "definitely will tap into Hong Kong's treasury" and, among other moves, eventually will find some way to "get rid of" the Hong Kong dollar.

    Mr. Faber also seems to put little hope in Tung Chee-hwa, Hong Kong's chief executive-designate. The blunt-speaking Mr. Faber labels him a "prime example of things to come - a total puppet" of Beijing.

    A number of events in Hong Kong events have raised the international community's eyebrows. Politically, these have included China's promises to abolish Hong Kong's democratically elected legislature and replace it with a body chosen late last year - the so-called Provisional Legislature - which already has begun to meet.

    Moreover, this year, China's Preparatory Committee for Hong Kong's handover voted to amend or repeal 25 Hong Kong laws relating to politics and civil rights. These moves - which are expected to be ratified by China's National People's Congress - appear aimed at making Hong Kong politically more akin to the PRC.

    A number of business dealings also have caught international attention. For example, some time after reports surfaced that China might start a new airline in Hong Kong, the U.K.-based Swire Group (John Swire & Sons and its units) reduced its majority stake in Cathay Pacific Airways, Hong Kong's flagship carrier. Swire Pacific Ltd., a unit of Swire Group, last year trimmed to 43.9% from 52.6% its stake in Cathay Pacific, and the Swire Group lowered its position in Hong Kong Dragon Airlines (Dragonair) to 25.5% from the previous 43.16%. China, thorough its entities, increased its overall holdings in both airlines

    Late last month, it was announced CITIC Pacific Ltd., the Hong Kong arm of China International Trust & Investment Corp., was set to take a 20% stake in China Light & Power. According to the South China Morning Post newspaper, "the move . . . gives Beijing a direct say in the running of the territory's largest electricity company."

    But as China appears to reach further into Hong Kong's economy, those who seek dealings in the PRC have found they need to watch their steps.

    Hong Kong's Giordano International Ltd. presents a case in point. That retailer, whose former chairman had made insulting comments in 1994 about China's Premier Li Peng, evidently is still struggling to expand in China. Recently, reports circulated that its joint venture plans in China appeared to have stalled. In the recent past, Chinese government officials have shut down a number of the company's franchised stores in China, including 11 in Shanghai last year.

    Will this happen to other businesses seeking opportunities in China? Probably not, many think, if companies remain apolitical. But in time, lines between politics and economics may become more blurred in Hong Kong.

    For now, the general view is that Hong Kong's links to China are economically positive for the soon-to-be Special Administrative Region. "Politically, there is a term called bifurcation. It means a division between politics and economics," said political risk consultant T.L. Tsim of T.L. Tsim & Associates Ltd., Hong Kong. On the economic side, Hong Kong has been benefiting for some time from rising activities in mainland China. This "integration has been creating the wealth that has taken Hong Kong's GDP per capita to a level that is above that in the U.K.," said Mr. Tsim.

    But although "the economic (situation) is very bullish, the political side isn't," he maintained. At this juncture, he holds four main questions remain: the maintenance of the rule of law; human rights protections; freedoms, including that of the press; and prospects concerning corruption.

    The spin observers put on this overall picture might depend on who they are, Mr. Tsim said. For example, "if you're a businessman you wouldn't want to do anything to upset the apple cart. But if you're not a businessman - say you're a journalist - you may not like" the coming situation.

    But international investors could have the best of both worlds: participating in Hong Kong's economic gains without being subjected to a new political regime. "In the end one (may choose to) distinguish between where to invest and where to live," said Mr. Tsim.

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