Spiritual Opium

For Hong Kong, Chinese-style capitalism may be a bigger threat than communism.

Hong Kong. Did you know that Hong Kong leads the world in per capita consumption of oranges? That it has the world’s biggest neon sign, is home to 25 of the world’s 50 busiest McDonald’s, and boasts the world’s highest number of Rolls-Royces relative to population?

If you didn’t, you will. Well in advance of the mobs of reporters, editors, film crews, radio disc jockeys, news anchors, and photographers now descending on the territory to cover the July 1 transfer of power–8,400 at last count–the press handlers in the Hong Kong government wisely assembled mounds of prepackaged material. The result: a journalistic Gresham’s law, whereby hard news is driven out by the sheer volume of fluff and clichés. Time, for example, not only availed itself of much of the government bumph in its special 1997 issue, but also added fun facts of its own (e.g., “most breathtaking bathroom view”). Newsweek trotted out not one but two illustrations of old opium smokers. And TV-network crews have been parked beside the territory’s flagpoles, waiting to stock up on footage of the British standard being lowered against a dusk-lit sky.

Still, the arrival of foreign newspeople has not been without its headaches for Hong Kong’s business and political establishments. They are now complaining about negative coverage that focuses on disputes over the electoral arrangements for Hong Kong’s legislature and the fate of civil rights. That is only to be expected, inasmuch as most of the aforementioned 8,400 reporters are interviewing the same three or four people–democrats Martin Lee, Emily Lau, and Christine Loh. But Hong Kong’s wheelers and dealers should consider themselves fortunate. Because if the press ever did decide to move seriously past politics, it would discover that the real threat to Hong Kong’s future may have as much to do with Chinese-style capitalism as with Chinese-style communism.

That threat arises from the blurring of lines between the kind of pro-business regimes (with all the attendant corruption) that characterize the rest of Asia and the pro-market regime that has distinguished Hong Kong until now. When Gov. Chris Patten, who himself comes from the “wet” side of the Tory fence, sharply increased social spending in his budgets, the business community thundered (rightly, I happen to think) that the proposals had been introduced with scant regard for long-term implications. Mainland officials were livid, seeing the initiatives as a last-minute British effort to rob the territory of its riches by saddling it with a European welfare system. “Spiritual opium,” Beijing called it.

Y et Hong Kong’s champions of laissez faire and low government spending have been curiously silent in response to the new signals coming from the top. Just the other day, Chief Executive-designate Tung Chee-hwa–who will take over from Patten come July 1–sent a very loud official signal by declaring that “a noninterference policy would not meet the needs and strengthen the competitiveness” of today’s Hong Kong. The remarks echo a similar speech Tung made in December to the Chinese General Chamber of Commerce in favor of a “new industrial direction” that would look more kindly upon state subsidies for preferred businesses.

In this Tung has been supported by a large number of Hong Kong businessmen, many of whom oddly–and despite their success–see Singapore as a better model for Hong Kong than Hong Kong. Were the legions of reporters to look as closely at Tung’s business as they do his politics, moreover, they might discover that he is closer to a Korean chaebol chieftain than to a Hong Kong entrepreneur. Not only does Tung’s container-shipping line operate within a cartel market where routes and quotas are routinely carved out, but it was bailed out, as he acknowledged last year, by the Chinese government in 1985 when on the brink of bankruptcy.

Tung’s fellow businessmen have not been shy about taking him up on his new offer. Just recently, the International Herald Tribune carried an alarming piece in which Henry Tang, a prominent local industrialist and member of Tung’s Cabinet, suggested tapping Hong Kong’s considerable foreign exchange (some $69 billion in reserves, plus another $22 billion in a special fund from land sales) to develop southern China. Given that there is no genuine infrastructure need for which China could not easily find private sourcing–of which Hong Kong accounts for the lion’s share–the suggestion by a Cabinet member to raid the reserves is a virtual invitation for scam and graft. “It’s why I always told the democrats to oppose the Provident Fund [a government pension scheme],” says a director of one of the territory’s oldest hongs (as firms are still called here). “You put a pile of money out there and there’s every chance it will end up in some Chinese dam.”

And raiding of the reserves is only one worry. Although hailed by no less than the Heritage Foundation as the world’s most open economy, colonial Hong Kong has retained many notable exceptions to the rule, exceptions that may prove more costly after July 1. The banking industry, for example, is run by a cartel that until recently fixed interest rates every Friday. The same insulation from market forces prevails elsewhere in the non-traded sector. Even today, everything from legal and medical services to airlines and utilities is almost immune from market competition thought good for everyone else. About a year ago the chairman of Cathay Pacific, Peter Sutch, defended such arrangements, saying that “unfettered competition” would destroy the “stability” of the market.

Over the past two years or so, Chinese interests have been buying into these companies, usually at a substantial discount to the market. This is not simply a matter of substituting Chinese for British vested interests. For one thing, the British vested interests didn’t also regulate their own industries, as the Chinese state firms frequently do. For another, mainland-connected players generally are able to buy in at much better terms than anyone else–certainly at terms better than their balance sheets suggest they deserve. And so the Hong Kong we have on the eve of the handover is one where Jimmy Lai’s Next Group–the most popular Chinese media group in Hong Kong–cannot find an underwriter to take it public. Yet when Beijing Enterprises, a company with nothing to show but its connection as the investment arm of the Beijing mayor’s office, made an initial public offering in Hong Kong last week, there were almost 1,300 applications for each available share.

None of this means that Hong Kong is about to go bust. So long as China continues to develop, Hong Kong will get a substantial chunk of that growth. But the market has clearly signaled a future in which guanxi, or connections, will count as much as traditional pluck and enterprise. Such an outcome invites an irony that would be appreciated as much by Lenin as by Adam Smith: that the same businesses whose investments have done so much to undermine communism in China may be responsible for bringing down capitalism in Hong Kong.