BUSINESS

FEAR IN THE COLONY

NEWS OF BEIJING’S BLOODY SUNDAY AND ITS AFTER-MATH MADE THE HONG KONG STOCK MARKET PLUMMET

TOM FENNELL June 19 1989
BUSINESS

FEAR IN THE COLONY

NEWS OF BEIJING’S BLOODY SUNDAY AND ITS AFTER-MATH MADE THE HONG KONG STOCK MARKET PLUMMET

TOM FENNELL June 19 1989

FEAR IN THE COLONY

BUSINESS

The screams of the wounded and dying in Tiananmen Square last week echoed through the boardrooms and across the factory floors of Hong Kong, the Crown colony that Britain will return to China in 1997. It was not supposed to happen that way. When British Prime Minister Margaret Thatcher and China’s senior leader, Deng Xiaoping, signed an agreement in 1984 to return the bustling colony of 5.6 million people, the Chinese promised to leave Hong Kong largely untouched for 50 years, operating it under what Deng described as “one country, two systems.” And, lulled by nearly 10 years of economic reforms in China, most Britons and Hong Kong residents apparently believed that the Chinese would keep that pledge. But now, all assumptions are off. Last week, Hong Kong’s top businessmen cut back critical energy projects in China, while many among the colony’s middle class rioted and withdrew billions of dollars from Hong Kong branches of Chinese banks. And some analysts say that unless a moderate leadership emerges in Beijing, a tidal wave of Hong Kong capital will wash over Toronto and Vancouver.

The events in Tiananmen Square and other parts of China seemed to end all hope that China’s leaders were pragmatic enough to manage Deng’s “one country, two systems” policy. And despite assertions in some business circles in the colony that the slaughter in Beijing was simply a temporary setback, others said that Hong Kong’s 150-year history as a manufacturing and financial centre died under the advancing tanks in Beijing. Said Robert Broadfoot of the Hong Kong-based Political and Economic Risk Consultancy firm: “The people I have spoken to are very pessimistic. Hong Kong has had it.”

China’s leaders may also have dealt their own economic reforms a fatal blow. Many Hong Kong-based firms were building giant public works projects to underpin further economic expansion in China. But if one nation stands to benefit from the violence in China it is Canada, which has developed a number of programs to attract Hong Kong investment, in part by offering citizenship to affluent Hong Kong residents. In fact, in the six years before last week’s violence, Hong Kong residents had already invested $3 billion in Canadian manufacturing and $7 billion in real estate. Said Richard Pearson, spokesman for Access Canada International Investments in Hong Kong: “There has been a threefold increase in our business. Hong Kong residents have abso-

NEWS OF BEIJING’S BLOODY SUNDAY AND ITS AFTER-MATH MADE THE HONG KONG STOCK MARKET PLUMMET

lutely no confidence in the Chinese government.”

The reaction in Hong Kong to the brutal events in Beijing was almost immediate. Millions of Hong Kong residents protested the Chinese government’s heavy-handed tactics, and thousands more, deeply angered by the news of the mass slaughter, lined up outside Communist Chinese-owned banks in Hong Kong to withdraw their money. Said a 70-yearold fisherman: “My family used to trust the Chinese banks but since the events in Beijing, I do not want to have anything to do with China.” The run on the banks was so brisk during last week’s upheavals that security vans had to make extra deliveries of money to keep pace with withdrawals. As early as June 5, the Hong Kong civil administration was forced to inject $29 million into the local banking system to keep it stable in the face of depositors’ widespread panic.

The run on the banks headquartered in mainland China was only one of a series of

economic shocks that rocked Hong Kong last week. Also, on June 5, the stock market plunged 582 points, losing nearly 22 per cent of its value. Stock prices rallied later in the week, moving up about 75 points on Wednesday, and closed the week marginally higher. As well, real estate analysts predicted an immediate fall in property values—the main barometer of economic health in the colony—of 10 to 15 per cent. Said one real estate agent who requested anonymity: “Nobody wants to buy right now at any price.”

After an initial burst of pessimism following the signing of the 1984 Sino-British accord, the economic outlook brightened in the colony as China invested more and more money in Hong Kong. Its highest-profile project—and perhaps the most optimistic—of the economic reforms is the new 70storey Communist Bank of China tower in the heart of the colony’s financial district. When completed this g fall, the modernistic struc| ture will be one of the tallest in the world and I a symbol of China’s determination to become a major international financial force. As part of that expansion, the Bank of China planned to open offices in Canada, as well as other countries, and use the bank to underwrite the expansion of Communist Chinese firms abroad, including ones in Canada, where Communist firms have invested a total of $500 million since 1986.

The bank project was not the only one that suffered. Late last week, one of Hong Kong’s leading firms, Hopewell Holdings, immediately stopped work on two coal-fired power projects in energy-starved China. And a senior official of Hopewell, who asked not to be identified, said work on plans for a previously unpublicized power station at Ling Ding Island, between Hong Kong and the Portuguese colony of Macau, had also stopped. The $5.1-billion Ling Ding project also included a cargo terminal and a major highway link to Hong Kong. Said the Hopewell official: “I don’t know how long it will be postponed. But nobody would invest when China’s prospects are still unclear.”

As well, a 300-km, $1.5-billion superhighway linking Hong Kong, Macau and Guang-

zhou, formerly Canton, through China’s Guangdong province also appears to have been shelved. The project would have been completed in 1991 and would have dramatically improved the link to the booming Chinese province. And even more telling, massive projects in Hong Kong that would have been completed after 1997 have now been cut. Included is the colony’s international airport, a project that the British colony’s financial secretary, Piers Jacobs, once described as “a great sign of confidence.” The $3.2-billion plan involved some of Hong Kong’s biggest companies, including two

firms controlled by Li Ka-shing, a Hong Kong billionaire who recently purchased the Expo 86 property in downtown Vancouver for $320 million. Another was Hong Kong’s first domestic telecommunications satellite, which Li had hoped would be carried into space by a Communist Chinese rocket.

The uncertainty in Beijing also dampened a growing number of joint-venture projects between China and Canada and left Communist Chinese trade officials in Canada worried and confused. Xu Feng, commercial vice-consul with the Chinese consulate in Vancouver, said

that he hopes his country’s drive for economic reform keeps its bullish pace. But, sounding sad and upset, he added that a number of business deals between China and Canada are now on hold and that several Canadian business people have cancelled planned trips to China. Said Xu Feng: “Economically, China will have to continue to develop over the future, but it is hard to say how long it will take to get back to where we were a month ago.” He added, “It is very hard to forecast for the long term in China, but whatever happens now, China needs international trade—without it, the country will go back to where it was years ago.”

Still, many Canadian executives say that they remain optimistic about China’s long-term economic future. Stephen Bowen, senior vicepresident of public affairs for Toronto-based Northern Telecom Ltd., said that his company

has taken about 20 Canadian employees out of China to protect their safety. The firm is installing digital central office switches in several provinces in a three-year project that began in 1988, and it intends to continue. Said Bowen: “We’ve had no offical confirmation of the projects, but as far as we’re concerned, we are committed to the modernization of China and its economic development. Chinese people are committed to progress. It will occur whether or not there is a change in the current government.”

The full extent of the disturbances in the special economic zones in southwest China, and in Shenzhen province immediately north of Hong Kong, were not apparent. Michael List, vice-president of corporate development for Markham, Ont.-based International Semi-Tech Microelectronics Inc., said that the firm is concerned about its manufacturing operations in Hong Kong and in the Chinese city of Guangzhou. Semi-Tech, which owns the Singer brand name, began manufacturing sewing ma-

chines at a plant in Guangzhou last fall under a joint-venture agreement with the Chinese government. List said that the company had planned to produce 250,000 sewing machines there this year. It had also planned to open the first Singer store in China since 1948 in Guangzhou. List said that there has been some unrest at night in Guangzhou. But he added that, so far, the manufacturing operations at the Chinese plant had not been affected by the disturbances. And while the rioting in Hong Kong has not taken place near Semi-Tech’s facilities in North Kowloon, List said that SemiTech executives are concerned about the situation. Declared List: “An opportunity is on hold.”

For his part, Hongkong and Shanghai Banking Corp. deputy chairman William Purves said that he still hopes both massive investments

like Li’s and smaller operations like Semi-Tech will ultimately continue. He added that the joint declaration governing the return of Hong Kong to China in 1997 was now held in doubt by many people in the colony.

That doubt has shattered confidence in Hong Kong. Following news of the slaughter in Beijing, the Canadian, American and Australian consulates all reported sharp increases in requests for information about immigration. Said an immigration official who asked not to be identified: “We don’t have numbers, but clearly there is more interest.” Still, Canadian officials downplayed the increased demand for immigration applications.

Exactly how much Hong Kong flight money will leave the colony for Canada will depend on what faction ultimately takes control in Beijing. But, for now, many Hong Kong residents are hedging their bets and placing money that they removed from Chinese banks into Canadian banks in the colony. Said Alex Fung, investment manager at the Canadian Imperial Bank

of Commerce in Hong Kong: “We probably doubled our transaction amount last week. A lot of people are giving up better interest rates at Chinese banks to go into Canadian investments.” And, ultimately, those funds could find their way to Canada through investment for citizenship programs.

And Steven Funk, president of the Vancouver-based Canadian Maple Leaf Fund Ltd., said that when the crackdown began in China two weeks ago, the number of serious inquiries about the programs that offer citizenship in exchange for investment at his firm’s offices in Hong Kong jumped to 30 per day from only three or four. With nearly $50 million invested, the Maple Leaf Fund is the largest of the immigrant investor funds in which individuals can invest a minimum of $150,000 for three years in order to qualify for Canadian citizenship. Funk said that the flood of new inquiries has come from wealthy residents who are “fearful for their future and for their children’s future.”

Still, Andrea Eng, who has sold millions of dollars worth of commercial Vancouver real estate to wealthy Hong Kong investors as vice-president of the Vancouver real estate firm Colliers, Macaulay, Nicolls Inc., said that it was too early to tell if the trouble in Hong Kong will bring a new wave of Hong Kong investment to Canada.

Eng added that, as long as the Hong Kong stock market remains depressed, there will be no immediate upward pressure on Vancouver real estate from Hong Kong. Eng noted that the Hong Kong market is closely intertwined with Hong Kong property values, which are plummeting. Unless the market recovers, she added, investors will not be able to get their money out without taking a heavy loss. And leading Toronto condominium developer Martin Atkins said that he expects Hong Kong residents to keep their investments in Hong Kong for the foreseeable future. He said that the Chinese are gamblers and will keep the bulk of their holdings in Hong Kong, where returns are greater than in Canada, until just before 1997. Added Atkins: “They are just parking a small amount here so that they will have something to come to if they have to leave with just a suitcase.” But for now, Hong Kong residents hope that, somehow, forces friendly to modern economic reforms will win the upper hand in the struggle for control of China’s future.

TOM FENNELL with JOHN KEATING in Hong Kong and PATRICIA CHISHOLM in Toronto

TOM FENNELL

JOHN KEATING

PATRICIA CHISHOLM