Hong Kong Jitters, China Boom Jude Wanniski November 24, 1992

It seemed too good to be true. As we arrived in Hong Kong on Ted Forstmann's Gulfstream jet, a luxurious G-4, the Hang Seng index hit 6422.03, a record high, and it felt as if there would be no end in sight. The air is electric with the energy of uninhibited entrepreneurial capitalism, bright-eyed young men and women hustling up and down the skyscraper canyons, chattering about the limitless possibilities of an endless boom fed by developments on the mainland. The business community is positively giddy about the prospects for bigger and better deals flowing out of the new China, now the fastest growing economy on earth. The traffic between Hong Kong, Beijing and Shanghai is so great that the top executives at Swires Group, which owns a big piece of Cathay Pacific, complain they can't get reservations on their own airline.

The cloud over Hong Kong that has kept a lid on the enthusiasm for the region's future had become just a wisp with completion of the 14th Communist Party Congress in Beijing last month. The reformers solidified their grip on the mechanisms of power with a 5-to-2 majority in the Politburo's standing committee -- cementing in place Deng Xiaoping's long march to a capitalist China. If there is anyplace on earth that is studiously implementing supply-side economics, it is here, with the Chinese business and financial community of Hong Kong directing not only Beijing on a path to no-holds-barred entrepreneurial capitalism, but also, even more importantly, the provincial politicians. We had dinner in Guangzhou -- the old commercial city of Canton -- with the "Communist" mayor, Li Zi Liu who boasted proudly of the vast theme park being planned near the city, how it was inspired by his trip to DisneyWorld in Florida, with emphatic assurances that it would be developed with private capital!

We met with Gordon Wu, the 56-year-old billionaire who runs Hopewell Holdings Ltd., which is building a toll-road turnpike from Guangzhou to Hong Kong with private capital and enormous grants of land from the Beijing Government. Wu, who studied engineering at Princeton and is now one of its major benefactors, says he got the idea from riding the New Jersey Turnpike and by one history course he took that covered the Robber Barons of the nineteenth century, the railroad builders who, coincidentally, also used Chinese labor. Wu, I think, is driven by the vision of a Twenty-First Century in which China replicates America's past, as a Land of Opportunity, the building of which will earn him a place in history. Foreign investors in Hopewell are nervously watching him start one dizzy project after another -- power plants across Quandong Province, a superhighway in Bangkok -- and wonder if he'll ever consolidate in order to produce a dividend stream. Wu is scornful of this view, as he is of the "big boys" in Hong Kong who nervously watched the developments in China from the sidelines in the early days of the reform movement, 1978-81, while "the brave people, the small contractors, took big chances and made lots of money."

This is still no place for the Business Roundtable, the Country Club Corporatists who currently own the two political parties in the United States, Japan and all of Europe, for that matter. China is in its wildcatter phase, a Klondike Era, a New Frontier in which the fires of untrammeled democratic capitalism rage from the bottom up. To my mind, it's profoundly stupid to berate the "Communists" in Beijing for their resistance to building democratic institutions without this kind of evolutionary process, while at the same time applauding Boris Yeltsin in Moscow for copying the top-down, catastrophic economic and political blueprints provided by the West. China, we must realize, is an embarrassment to the Council on Foreign Relations, the International Monetary Fund, the power brokers in the Atlantic councils, precisely because it works. Even more horrifying, its model of economic freedoms might somehow be transplanted throughout the Third World, which might mean the rich people of the next century will be of different colors.

Into this hothouse has now parachuted a politician of the Old World, one Christopher Patten, appointed by Her Majesty the Queen to be the last Governor of Hong Kong. Patten, a backroom politician who lost his seat in Parliament last April, a Tory opponent of Maggie Thatcher within the Conservative Party, was selected for this post by Prime Minister John Major and Foreign Minister Douglas Hurd to rescue him from political oblivion. It was Patten who made our stay in Hong Kong more interesting than it would otherwise have been. We had thought that the future of Hong Kong had been secured in the 1984 Joint Declaration between London and Beijing, which had taken six years to negotiate. Beijing had agreed to political and economic guarantees that would not only last for 50 years, but would also be liberalized in stages after the 1997 departure of the British Imperialists. Patten, though, decided the agreement was not good enough for him, as it is not "democratic" enough, and just as we arrived in Hong Kong his blusterings led to an acrimonious debate with Beijing that sent the Hang Seng Index tumbling several hundred points. With the British press corps sounding clarion calls of support for Patten, and John Major and Douglas Hurd dutifully embracing their man in Hong Kong and his courageous expositions on behalf of the little people, it seemed even Washington might be drawn into this controversy. President-elect Bill Clinton, after all, had been making ominous sounds about the "Communists" in Beijing throughout this year's presidential campaign. Had he not? If enough noise were made on behalf of the "little people of Hong Kong," perhaps the Clinton Administration would join an effort to isolate China. If the U.S. Congress would end "Most Favored Nation" trade treatment of China because of these "human rights" violations, that would be something, wouldn't it? Suddenly, Hong Kong didn't seem like smooth sailing.

What's really going on here? One clue is that the Chinese business community in Hong Kong would like to hang Patten by his toes, while the British business community for the most part think he's just peachy. My guess is that the Brits are not really worried one bit about the future of Hong Kong, but about their future in Hong Kong. As the China boom unfolds, Americans have been crowding into Hong Kong and now seem to outnumber the Brits. The Chinese have long memories of British Imperialism and imperiousness. It may be there are grounds for suspicion that come 1997 it might not be as easy for British interests to compete. All it would take is a little red tape on this application or that license or this tax dispute and the Union Jack would be tied to a ball and chain. Eventually old scores would be settled, but meanwhile it may be that British assets will sell at a discount. During the Hang Seng  selloff, for example, I noted that Gordon Wu's Hopewell held up better than most.

In any case, over the weekend Governor Clinton spent some prime time with President Bush, and when he emerged from the White House he announced that he absolutely did not intend to "isolate China." This made the "Communists" in Beijing very happy and they issued a statement accordingly, on how they looked forward to meeting with Mr. Clinton. A report on Reuters yesterday had it that Maggie Thatcher is not happy with Christopher Patten, and that several former Hong Kong governors are not peachy keen about him either. Beijing yesterday announced there would be no counter proposal to Mr. Patten as the 1984 accord is as good as it gets. So there. The Hang Seng Index is up 125 points on the news, still more than 400 points below the high that greeted us, as Hong Kong jitters remain alongside the boom in China.

We note that Brilliance China Auto, the first pure China listing on the New York Stock Exchange, climbed steadily throughout Patten's teapot tempest. Brilliance, which has no Hong Kong connection, is going to produce the vans that will travel on Gordon Wu's turnpike. With a toll of 10 cents a kilometer, it will be six times the toll on the Massachusetts Turnpike, says Mr. Wu, but only half that of the Japanese tollroads. Wu scoffs at reports that he's having trouble building the road on time and insists it will make a fortune, throwing off cash that will enable the building of more and more roads to crisscross undeveloped China. Environmentalists are already horrified at how much gasoline will be consumed. The world will run out of oil with 1.2 billion Chinese behind the wheel! Not to worry. China's mainland has never been explored for petroleum. Once the highways open up, the drill rigs will be traveling them, finding the oil to fuel the autos.

I came away thinking that if I were 25 years old I'd head for China, with a few years in Hong Kong for starters. Christopher Patten isn't going to get in the way, for long. Nor is President Clinton, the IMF, or the Business Roundtable. The way things are going, I came away wondering if, when they start their next big round of rail and highway construction, the Chinese might have to import some contract labor from California. After four years of George Bush and three years of Pete Wilson, there is plenty of surplus labor on our Coast. To feed them, we might imagine, there would be taco stands springing up all over China.