China's WTO Deal May Leave Hong Kong Out in the Cold

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Little Hong Kong grew into prominence as a middleman, an intermediary between a befuddled West and a mysterious China. But the People's Republic's likely accession into the World Trade Organization may make Hong Kong's lucrative role obsolete. As Beijing is forced to open up its markets and adhere to international trading standards, foreign investors who once stopped off in the former British colony for advice and financing may find it easier just to head straight to the mainland.

Granted, China's entry to the WTO will probably be a boon for Hong Kong in the short term. Trade volume is likely to increase as many more Western companies pass through the territory on their maiden trips to China. The Hang Seng Index, which rose to a two-year high after the U.S.-China trade agreement was announced last Monday, could experience an explosion in new listings as state-owned mainland firms rush to raise money to help them withstand the new foreign competition.

But within a few years, as China is forced by the WTO agreement to liberalize its markets, Hong Kong could be out of a job. There may be a lot of expertise here, but Westerners are increasingly going to bypass Hong Kong, predicts Shamus Mok, chief economist at the Bank of East Asia. Compounding matters is Taiwan's proposed entry into the WTO--a move that's likely to follow a PRC accession. Domestic regulations have kept Taiwan from directly investing in the mainland, so many of the island's businesses have instead funneled money through Hong Kong. Two years ago, to cite one high-profile example, Taiwan's Core Pacific Group acquired the Hong Kong branch of bankrupt Yamaichi Securities in order to expand its mainland reach. But WTO membership would likely mean that Taiwan no longer has to play these elaborate money games, leaving Hong Kong out of the equation.

With its entrept role likely to diminish, Hong Kong is already fishing about for a new raison d'tre. It is casting a wide net, proposing mega-projects ranging from a new Disney theme park to a cyberport development aimed at attracting high-tech companies. The territory has also started deregulating its telecom and financial industries in order to make its firms more competitive. Hong Kong's lifeline in the next century will be to offer high-value services to China, says Fred Hu, chief China economist for Goldman Sachs in Hong Kong. It has started that process, but it needs to pick up the pace. To maintain its edge, the city needs to sustain the free flow of information, strengthen the rule of law, upgrade its technological base, improve its sometimes surly service sector and boost the level of both English and Mandarin--all difficult tasks.

Ultimately, say critics, Hong Kong needs to admit to itself that such radical change is necessary. There is a false pride in Hong Kong that makes us think we can make money without working hard, says Peter N.S. Lee, a politics professor at the Chinese University of Hong Kong. We think all we have to do is invest in the stock market or get a business degree. Already, the territory faces a shortage of engineering and computer-science students, and the specialists it does produce face stiff competition from their mainland counterparts. WTO will force Hong Kong to prove it's on a world-class level, says Mok. It cannot survive as just another Chinese city. Unless Hong Kong can reinvent itself quickly, the enclave may succumb to a flaw worse than hubris: irrelevancy.