Hong Kong Sitting On Needles Opinion Split On Colony’s Future Role In Global Economy

With only hours remaining before Hong Kong’s historic handoff to China, a debate has intensified in Asia’s financial center over whether it will prosper or wither under Chinese authority.

The optimists are led by Stock Exchange Chairman Edgar Chang, who asserts Hong Kong’s global importance will grow. The pessimists are represented by market analysts like Marc Faber, who says China will take steps to ensure that Shanghai eclipses Hong Kong in economic prominence.

When Britain lowers its flag over Hong Kong on Monday after 156 years, many unanswered questions will remain about the territory’s future as part of the Chinese communist colossus.

But perhaps the biggest is what will happen to the economy rated the world’s freest by the Heritage Foundation, a conservative U.S. research group.

The British are leaving this enclave of 6 million people on China’s southeastern coast with impressive economic credentials: It is the world’s fourth-largest source of foreign investment, fifth-largest foreign exchange market, and seventh-largest global trading entity.

Hong Kong’s growth has been intertwined with the dramatic economic strides in mainland China since the late 1970s when Beijing began introducing elements of a free market. Hong Kong and China have become each others’ most important economic partners.

Optimists like the Stock Exchange’s Chang express confidence that China will honor its promise to maintain the free market, low taxation and free flow of information that made Hong Kong the leading international financial center in Asia.

“I think the next few years are going to be boom time,” he told a two-day conference sponsored by the Far Eastern Economic Review that ended Tuesday.

The effect of reunification, Chang said, will be to add “a large new dimension to our market without taking away any of its existing international and regional role.”

Miron Mushkat, chief economist for the Asia-Pacific at Lehman Brothers Asia Ltd., was equally bullish, predicting Hong Kong’s role as an intermediary between the mainland and the rest of the world will increase as China develops into a global economic powerhouse.

Shanghai, Asia’s financial center before the communists seized power in China nearly 50 years ago, is unlikely to regain that pre-eminence, Hong Kong enthusiasts say. They argue it simply lacks the skills and infrastructure required.

“It won’t become a financial center by government design or some fortuitous accident,” Mushkat told the conference.

But Hong Kong pessimists like Faber, whose nickname is “Dr.

Doom,” are equally certain Shanghai will supplant Hong Kong because that’s what the Chinese government wants.

Hong Kong will become “just another Chinese city,” said Faber, managing director of Marc Faber Ltd., an investment firm.

The attributes that distinguish Hong Kong - its English language skill, its unique position adjacent to China but not part of it, and its decades of experience in the global marketplace - will either be lost or shared by Shanghai, he said.

Peter Churchouse, a managing director of Morgan Stanley Asia Ltd., expects Hong Kong’s Hang Seng Index, which topped 15,000 for the first time a week ago, to be trading in the range of 26,000 to 28,000 within 18-24 months. But he predicted a crash soon after.

Churchouse agreed that Shanghai will overshadow Hong Kong in eight to 10 years, citing its heavy stock trading last year and the Beijing government’s desire to develop the city as China’s financial capital.

“It’s just a matter of time,” he said.