Hong Kong likes to say it will be business as usual after the handover and that, from an economic perspective, June 30 and July 1 are just pages on the calendar.
But this glib response draws a veil over a major bout of corporate restructuring which has been underway in earnest for the past 18 months. Moreover, it ignores foreign perceptions, which may be misinformed but nonetheless hold sway over much of the capital flowing into the territory.
Then there is the reality of growing competition in the region, and the fact that much of Hong Kong's head-start came from a mix of accidental advantages. These include a favourable location as port and gateway to China and the mainland's closure under communism and its subsequent opening in 1978, when it was bereft of the infrastructure and skills needed to manage that opening.
A different city
Jardine House, headquarters to the venerable British trading house, no longer dominates the skyline or the corporate landscape. The princely hong, which brought the first steamships to the China coast, has since distanced itself from the colony it helped win ? shifting its domicile to Bermuda in 1984 and de-listing from .the Hong Kong stock exchange a decade later.
The company's relations with China have warmed recently after a long spell out in the cold. Jardine Matheson chairman Henry Keswick was last month received by vice-premier Zhu Rongji. Blamed for the initial humiliation on which Hong Kong was seized ? the opium wars ? and spurned for its sup-port of governor Chris Patten's reforms to accelerate the pace of democracy in Hong Kong, Jardines has felt the wrath of the Chinese government.
Beijing refused to sanction a port development franchise awarded by the Hong Kong government to a Jardine-led consortium. The issue was only resolved finally last year, and resulted in Jardines taking a smaller share in the consortium and swapping the container terminal development it had bid for with another terminal already up and running.
This raised questions over level playing fields and Beijing's willingness to over-turn Hong Kong government decisions even before taking over. "You have to question who is going to be calling the shots, and even if existing franchises ? such as tunnels or bus routes ? will continue to be honoured," says one foreign businessman. The question is at the heart of corporate fears under the new order. The spreading influence of Citic Pacific also raises questions. The Hong Kong-listed arm of Beijing's main investment agency, it has grown from a sleepy motor-trading outfit to a red-blooded, blue-chip conglomerate.
Following a slew of Beijing-brokered deals, Citic Pacific now holds 25 per cent of Cathay Pacific, the territory's de facto flag carrier, and 20 per cent of China Light and Power, the biggest of the two electricity suppliers. It last month switched its eight per cent holding in HongKong Telecom, the dominant carrier, to China Everbright ? another state firm. It is expected that this will pave the way for a bigger restructuring of the erstwhile telecoms monopoly which is now 58 per cent owned by Cable & Wireless of the UK.
Through Citic Pacific and its ilk, Beijing has gained a slice of three strategic industries in Hong Kong: aviation, power and telecoms. These are already lucrative franchises, and they could become more so as the distinction between state and corporate begins to blur.
In aviation, the Cathay Pacific deal was part of a wider restructuring of the industry which evolved after China's national airline China National Aviation Corporation (CNAC) signalled plans to set up shop in the territory. CNAC's direct parent is the industry regulator, the Civil Aviation Administration of China. Cathay Pacific, then 52.6 per cent owned by Swire Pacific, a British controlled trading house with a pedigree almost as long as Jardine's, was thus doubly outraged. Not only was it facing competition which ? so Swire claimed ? was in blatant breach of the Sino-British joint Declaration, but it was competition "with the referee in the driving seat".
It did not come down to that: CNAC bowed out, but in doing so reduced Swire's bargaining power and was able to avail itself of a slice of the sector at knockdown price. CNAC now owns 35.86 per cent of Dragonair, the regional carrier previously controlled by Cathay Pacific.
In recent times Cathay Pacific's share price has under-performed the market; investors are concerned that lucrative China routes will henceforth be allotted to Dragonair.
Shunned by bankers
A more immediately striking example of the growing symbiosis of politics and commerce was afforded by Mr Jimmy Lai, a rags-to-media tycoon who has already had his share of brushes with Beijing. Three years ago, after penning a virulent attack on Premier Li Peng in his weekly Next Magazine, the Beijing outlet of the Giordano clothes chain Lai founded was closed down.
As Giordano faced continued problems in the mainland, Lai sought to distance himself from the company by standing down as chairman and finally selling his entire stake. Despite this, Giordano is not yet out of the wilderness. Its China expansion continues to be hampered and a proposed sale of shares to five mainland bodies was suddenly pulled in April.
Meantime, Lai has failed in his endeavours to float Next Media, his publishing concern. All of the 12 banks approached to support its listing refused, some citing political reasons. One said it would have to take advice from Xinhua, China's de facto embassy in the territory.
The question of who will now call the shots in Hong Kong was also raised by the issue of six new mobile telephone licences last year. Long delays ensued after the Hong Kong government submitted its list of winners to the Sino-British Joint Liaison Group for approval. In the vacuum both those on the list and losers, including Hongkong Telecom, made a series of lobbying pilgrimages up to Beijing.
While the losers were ultimately unsuccessful, a commercial advantage was gained by Hutchison Telecom, part of tycoon Li Ka-shing's empire. Hutchison already had a mobile net-work and took advantage of the delay to launch an aggressive price war which boosted its subscriber base and made the economics of launching new networks far less attractive.
All these suggest a threat to what has arguably been Britain's greatest gift to its former colonies ? the rule of law. If this is eroded, diplomats and businessmen say, the foundations of Hong Kong's success will come toppling down and send international investors running for cover.
Nor is shifting goal posts the only fear. A survey conducted by the Baptist University Transition group showed that corruption is the biggest post-handover concern in the minds of Hong Kong people, particularly among the older generation familiar with the modus operandi in dynastic or communist China.
The Independent Commission Against Corruption, the anti-graft body established by the government, is due to remain in place, and businessmen will be paying close attention for evidence of any neutering of its powers.
Last month, the British Chamber of Commerce surveyed its members on the handover and found that 85 per cent believed corruption would worsen after-wards. More than half also feared erosion of the rule of law, while marginally less saw the quality of life deteriorating. "Hong Kong is a relatively corruption-free environment. We hope it can be maintained, but it is not a certainty and Hong Kong cannot afford to be complacent," said chairman Patrick Paul.
A more Chinese city
Hong Kong has few publicly-owned entities, and those that exist are largely in areas such as hospitals and schools. But that is changing as China state-owned entities move in. Examples include mobile telecoms (under the Ministry of Foreign Trade and Economic Co-operation) and buses (under the Commission for Overseas Chinese Affairs). In finance, the Bank of China controls about one-quarter of the territory's loans and bank deposits.
But the growing integration can be seen beyond the corporate level, and for optimists it is this factor which will fuel Hong Kong's economy and ensure its at-traction for foreign business.
China is the biggest investor in HongKong, boasting a cumulative direct in-vestment of US$17bn at the end of 1994 (the latest date for which figures are available). There are more than 1,750 China-related enterprises operating in Hong Kong and some 11 per cent of the stock market capitalisation is made up of mainland companies.
China is Hong Kong's largest trading partner, accounting for 36 per cent of Hong Kong's total trade. Last year nearly 90 per cent of Hong Kong's re-exports ? the bulk of the territory's exports ? involved China either as source or destination.
Skills gap narrows
But even as China is moving into Hong Kong, others are moving out. Some, like the two-thirds of Hong Kong-listed companies that are domiciled in Bermuda, are simply taking out an insurance policy while remaining in the territory.
Others, mainly traders and multinationals, have been chased out by higher costs and a desire to be at the forefront of the action. For companies using Hong Kong as a platform to access China, that means moving regional or greater China headquarters directly to the mainland.
Companies making the journey north include: Fluor Daniels, the international engineering construction contractor; Henkel, a German manufacturer of chemicals and consumer brands; EG&G, the high technology instrumentation and electronic components company; and Swiss-Swedish construction giant ABB. Among those preparing to follow suit are PepsiCo, which is heading for Shanghai, and Anglo-Dutch oil company Royal Dutch/Shell.
One relocated company chief says running a China operation from Hong Kong is tantamount to being in a different country. "Certainly Hong Kong has
a role to play in the future but it's a different role from being the 'clearing house' for doing business in China," he says.
Today, Hong Kong is one of the most expensive centres to operate in. Meantime the infrastructure and skills differential with other parts of the region is narrowing. "Hong Kong thinks its people are smarter and infrastructure and banking systems superior, which they probably are ? today," says a fund manager. "But it's a snapshot, and unlikely to be the case in five or 10 years' time,".
If, as the bleaker scenarios presume, Hong Kong is absorbed into China within a five-year time-frame with the same currency and tax structure, there will be no compelling reason to remain. Telecoms and transport services are improving in big cities such as Shanghai or Dalian, while in Hong Kong property prices are around eight times higher and English language skills are deteriorating.
Not everyone is writing off Hong Kong's competitive edge. According to the authors of a recently published book, The Hong Kong Advantage, the territory's system will stand it in good stead under Chinese rule. This system, they write, is characterised by the balance between government and business, between local and overseas firms, between strategies of 'hustle' (ability to respond swiftly to new trends) and longer term strategic commitment, and between management and entrepreneurship.
Detractors would quibble that the balance between government and business is one of cosy accommodation of cartels, whereby banks club together to set interest rates and a handful of developers control around 70 per cent of the property market.
Moreover, teachers and businessmen alike lament a decline of the entrepreneurial spirit that ? yoked to the rule of law ? helped propel Hong Kong to the top of the wealthy country league tables.
In the immediate aftermath of the handover celebrations, it is likely to be business as usual for commercial Hong Kong. But even three years can be a long time for a spit of barren rock that was soon metamorphosed into a bustling trading post. It will be then that companies will seriously assess whether or not Hong Kong remains a viable business centre.