Quotes of the Day

Sir Gordon Wu says that to glimpse Hong Kong's future, you must look at another island's past. In his cluttered office overlooking Victoria Harbour, the 68-year-old chairman of property-and-infrastructure development company Hopewell Holdings unfurls a map of Manhattan island and environs on his conference table. He points out the Hudson River, the George Washington Bridge that spans it, John F. Kennedy Airport, the seaports in neighboring New Jersey. These are pieces, Wu explains, of an extensive transportation network that carried the output of the American industrial machine and made New York the world's premier city. Next to the U.S. map he lays down another, this one of Hong Kong and the Pearl River Delta. Most of it is dominated by China's Guangdong province, which has rapidly become the workshop of the world, its thousands of factories making everything from Barbie dolls to Nike sneakers. Hong Kong, outside the river's mouth, sits on "the 50-yard line," Wu says, and is perfectly placed to catch the burgeoning China trade, just as New York was ideally situated during America's Industrial Revolution.

Then Wu extends a pudgy finger, peers through his Coke-bottle glasses, and traces the route of a colossal bridge, starting on the west side of the Pearl River at Zhuhai, sweeping through Macau, and into Hong Kong. Construction companies are expected to start bidding later this year for the $3 billion project, which Wu dreamed up 20 years ago but until recently could not get Beijing's approval to build. Wu contends that the 29-km transportation link, which he predicts will be completed in 2007, will be as important to Hong Kong as the Lincoln Tunnel is to New York: bringing exports from mainland China to Hong Kong's bustling ports more quickly, and opening up the underdeveloped region west of the Pearl River to new investment.

Beyond these practical benefits, the bridge is a steel-and-cement embodiment of what amounts to a New Deal for Hong Kong. Around the time of the city's dramatic July 1 protests for democracy last year, Beijing, seeking to placate the territory's restive residents battered by SARS and a chronically sluggish economy, introduced a series of measures designed to jump-start Hong Kong by integrating it more thoroughly into the vibrant Pearl River Delta.

In addition to giving the green light for Wu's bridge, the central government began lifting travel restrictions so that millions of big-spending mainland tourists could visit the city; Beijing also approved the Closer Economic Partnership Arrangement (CEPA), which granted Hong Kong-based businesses preferential treatment over other foreign firms in investment and trade with the mainland. While pro-democracy advocates fret that Hong Kong's political freedoms will be undermined as the territory is brought closer to China, local tycoons like Wu have applauded the economic embrace. "We should be independent in a political sense," says Wu. "But economically, hell no. Let's integrate."

Few doubt that the city's long-term prosperity depends upon how completely it participates in the China boom. For much of the past decade, doomsayers have predicted that the former British colony would gradually become marginalized as an entrepôt and gateway to China. In the past, Hong Kong's unique status as a capitalist city governed by British law guaranteed its importance as a middleman for the mainland. But as China implemented capitalist reforms of its own and cities such as Shanghai grew more powerful, Hong Kong—which years before had transferred its manufacturing base to neighboring Guangdong—seemed destined for increasing economic irrelevance. In a 1995 article titled "The Death of Hong Kong," Fortune magazine famously opined that "the naked truth about Hong Kong's future can be summed up in two words: It's over."

Indeed, Hong Kongers have had little to cheer about since the Brits handed the territory back to China in 1997. Although Hong Kong's economy grew at an average annual rate of 5.1% from 1990 to 1997, it slumped into a recession in 2001, and the annual growth rate over the last three years has averaged just 1.9%. Residential property prices plunged by more than 60% between 1997 and 2003; meanwhile, unemployment last year rose to a record 7.9% (from 2.2% six years prior). And the more quickly mainland China developed, the more Hong Kong's future seemed to dim. Eleven years ago, 67% of China's exports passed through Hong Kong's ports and airport; today, only 28% do, as other Pearl River Delta cities have begun to develop their own ports and transport links. But Beijing couldn't afford to let Hong Kong become a latter-day Malacca or Samarkand, once dominant cities that lost their economic reason to exist. For one thing, a slowly rotting territory would be an international embarrassment, a demonstration that "one country, two systems" doesn't work. In addition, ongoing economic problems would likely spur increasingly strident calls by Hong Kong's democracy advocates for a directly elected Chief Executive. China needs a strong Hong Kong because it plays a crucial role as a financial center for the mainland economy, says Laurence Brahm, a Beijing-based political scientist and consultant both for foreign companies and the Chinese government. China's leaders "can't afford to have Hong Kong seen as being unstable," he says.

Now, it appears that Beijing's economic CPR, along with an improving global economy, is reviving Hong Kong. The city's gross domestic product surged 6.8% in the first quarter of 2004, the strongest growth in three-and-a-half years; private-consumer spending is up; and residential property prices have risen as much as 45% since August 2003. "Hong Kong may be dying," says S.K. Fung, a Macau-based textile manufacturer who advises the Guangzhou government. "But it has a great doctor, and his name is Beijing."

Tourism, increasingly a growth engine for Hong Kong's $150 billion service sector, has been the most obvious beneficiary of the central government's largesse. According to the Hong Kong Tourism Board, about 2.9 million mainlanders visited in the first three months of this year, a 37% increase over the same period last year and more than twice the 2002 figure. The improvement is a direct result of Beijing's decision to let Chinese tourists from cities such as Guangzhou and Shenzhen travel to Hong Kong as individuals rather than as part of organized tour groups. Joseph Tung, executive director of Hong Kong's Travel Industry Council, says mainlanders now make up more than half of all visitors to the territory, and their spending constitutes the principal source of the sector's revenue. The number of visits made by mainlanders is expected to rise further after Hong Kong Disneyland opens by early 2006.

Luxury stores are a favorite destination for richer Chinese tourists. Walk into a Gucci outlet in Hong Kong and you'll likely be greeted in Mandarin, not the city's traditional Cantonese dialect. "If Hong Kong grows today, it grows because of tourism from mainland Chinese," says Etienne de Gramont, Asia director of International Watch Co., a maker of Swiss watches. Upscale hotels are also increasingly catering to mainlanders. "China has become an important source of income for us," says Ainslie Cheung, marketing communications manager of the Hyatt Regency Hong Kong. "The gates have opened. It's an economic pillar for Hong Kong."

Despite this windfall, it's not yet clear whether Hong Kong's recent recovery will last. One problem: because of the territory's relatively high wages, it is difficult to generate new jobs in meaningful numbers. While the labor force has grown slowly from 3.2 million to 3.5 million from 1997 to 2003, the number of unemployed has almost quadrupled from 71,000 to 277,600. As Gordon Wu's maps suggest, the logical solution is for Hong Kong to redouble its efforts to be the Pearl River Delta's financial center, key transportation and logistics hub, and tourist haven. "I see ourselves continuing to be a service center, going through very much the same evolutionary changes as New York or London," says Henry Tang, Hong Kong's Financial Secretary. "New York is a thriving capital of finance and corporate services today. And I think this is what Hong Kong is."

Tang's assertion that the territory's manifest destiny is to lead southern China's manufacturing belt—by supplying business and marketing sophistication and helping to raise capital—is supported by history. Over the past quarter-century, Hong Kong played a pivotal role in the rapid development of the Pearl River Delta into a thriving manufacturing base. Guangdong's industrial output increased by more than a hundredfold to $256 billion between 1978 and 2003, largely because Hong Kong provided the province with capital and equipment. Hong Kong companies today are the biggest investors in the Pearl River Delta, accounting for more than $80 billion, about 70%, of Guangdong's total foreign investment. According to one study, Hong Kong firms last year owned or operated 53,300 factories in the province, employing some 10 million workers. Taken together, the economies of Hong Kong, Macau and the rest of the Pearl River Delta are bigger than those of Switzerland or Austria.

Still, there are many hurdles preventing Hong Kong from taking on a central role in the region. For a start, officials in Guangdong's fast-growing cities like Shenzhen, a center for high-tech manufacturing, and Guangzhou, the region's old trading capital with a population 32% larger than Hong Kong's, see the capitalist enclave as a competitor, not a beloved big brother. "It's not possible for Hong Kong to become the center of the Pearl River Delta," Lin Shusen, Guangzhou's former mayor and currently its Communist Party secretary, told TIME. "I think this area should have its own center city, and I think that center city will be Guangzhou."

Indeed, Pearl River Delta cities are developing numerous projects designed to reduce dependence on Hong Kong as a transport hub. A new international airport with a capacity of 25 million passengers is opening in Guangzhou this summer to siphon travelers away from the territory's Chek Lap Kok airport. Shenzhen is racing to develop its own ports to handle freight that usually passes through Hong Kong, the world's busiest port. With terminal-handling charges about $100 less per container box in Shenzhen, its ports enjoyed a 40% increase in traffic last year compared with Hong Kong's 4% rise. Farther up the Pearl River, in Guangzhou, city officials lobbied Beijing for a deepwater port at nearby Nansha. After Hong Kong Chief Executive Tung Chee-hwa spent much of his 2003 policy address extolling the virtues of pan-regional cooperation, Lin delivered a thinly veiled gibe: "There are some projects that we need to develop, and we hope Hong Kong won't expect us not to."

Following the July 1 protests, however, Beijing stepped in—and Hong Kong suddenly got virtually everything it wanted. Officials in several Guangdong cities had for years fiercely opposed Wu's cross-delta bridge, for example. But on Aug. 4, Beijing finally gave the project the thumbs-up, just five days after a study favoring it was released by China's State Development and Reform Commission. "The speed may have been linked to the political situation in Hong Kong," observes Michael Enright, a business professor at the University of Hong Kong. "The notion of pushing Pearl River Delta-Hong Kong interaction is at the top of the list."

Publicly, Guangdong officials now sing the territory's praises. "Guangdong and Hong Kong are as close as brothers," says Guangdong Governor Huang Huahua. "We depend on each other like lips and teeth." The partnership looks like it will go far beyond mere lip service. Beijing is backing a bold initiative by nine southern provinces, plus Hong Kong and Macau, to form a regional economic bloc that would have roughly the same population as the European Union. By coordinating economic policy, avoiding duplicate projects and reducing interprovincial trade barriers, this nascent organization hopes to compete with the rising economic powerhouse to the north: Shanghai and the Yangtze River Delta. Along with improving rail links between Guangdong and Hong Kong, government ministers outlined plans for 30,000 km of new highways in the region. "Hong Kong's economic hinterland will be expanded," Chief Executive Tung said in Guangzhou in early June. "The many opportunities in the region will provide a new impetus for Hong Kong's economy, relieve our economic slowdown and create more jobs."

There are other grandiose plans to tie Hong Kong to the mainland. Days after Beijing approved Wu's bridge, China's Vice Premier Zeng Peiyan was on hand to celebrate the start of construction of the $400 million, 5-km Western Corridor—a bridge-and-highway system connecting Hong Kong to Shenzhen. When it opens in early 2006, the bridge will enable truckers to complete more than one round-trip per day between factories in the delta and Hong Kong's ports, ferrying plastic Christmas trees and computer monitors to the world's Wal-Marts more efficiently and potentially halving shipping times to Hong Kong.

The ties binding Hong Kong to mainland China are not only physical but financial. In February, Hong Kong banks became the first foreign banks to be allowed to offer renminbi accounts, cracking open a door toward freer trade in the Chinese currency. Mainland companies are also pursuing stock-market listings in Hong Kong at a record rate. Last year, mainland firms raised $6 billion through initial public offerings (IPOs) of stocks in Hong Kong, up 260% from the previous year. And despite economic cooling measures from Beijing, they have raised more than $2.3 billion so far this year. The IPOs have not only boosted Hong Kong's stock market—but have helped the mainland by exposing more Chinese managers to the stringent demands of foreign investors.

Chinese Premier Wen Jiabao said in March: "Our principle is whatever is conducive to Hong Kong's prosperity and stability, to the common development of Hong Kong and the mainland, we will actively do it and give our full support to it." This is an immensely seductive deal, particularly to the territory's powerful business interests: Hong Kong gets rescued from the economic scrap heap, but it may be obliged to trade political autonomy for this promise of prosperity. Mainlanders have largely accepted such a trade-off, but will Hong Kongers be bought off in the same way? Pro-democracy advocates say no way. "Hong Kongers aren't going to say, 'The economy has improved so let's forget about democracy,'" insists Joseph Cheng, a political-science professor at the City University of Hong Kong who supports democratization.

But others say that whatever drives a wedge between Hong Kong and the mainland could imperil the territory's future. The economic reality, says John Meredith, group managing director at Hong Kong-based logistics operator Hutchison Port Holdings, is "that we are in a transition" and that "we're still too Hong Kong-centric." Like it or not, say the pragmatists, there isn't time to squabble about lofty political ideals when the mainland's support is so crucial to the territory's mutating economic role. "Unless Hong Kong continually reinvents itself, China isn't going to wait," warns Shan Weijian, a Hong Kong-based managing partner of U.S. investment fund Newbridge Capital. Indeed, if Hong Kong doesn't adapt itself quickly enough to a changing China, it could be left singing those little-town blues.

• Michael Schuman | Hong Kong and Neil Gough | Guangdong Province
• Hong Kong's economy is perking up, helped by Chinese tourists and closer links with the booming Pearl River Delta. Is Beijing buying the city's obedience?