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Hong Kong Sees Challenges in China's WTO Membership - 2001-11-14

Economists in Hong Kong see both opportunities and pitfalls for the Chinese territory now that China has been admitted into the World Trade Organization. Hong Kong's long-term survival now depends on how well it can adapt and compete with other fast-rising Chinese cities.

China's entry into the WTO had long been anticipated. But the timing of its entry is troubling some experts in Hong Kong, who say the territory is ill-prepared to compete with the mainland economically right now.

"The Hong Kong economy at the moment is going through a period of very painful restructuring with unemployed people spread into the middle class and even into the high-income bracket, said Chris Leung, a Hong Kong-based economist with the Development Bank of Singapore. "In Hong Kong, we do not have any new industries that can absorb this kind of skilled labor. Employment opportunities will be in China, not in Hong Kong."

Monday, the Hong Kong government gave its gloomiest assessment of the economy since the Asian financial crisis of 1997. It predicts Hong Kong's economy will contract for the next several quarters, with unemployment expected to rise to 5.5 percent.

Mr. Leung says the acceleration of the global economic downturn following the September 11 terrorist attacks on the United States has deepened the crisis of confidence here. The only long-term solution he sees for Hong Kong's problems is for the territory and China to loosen border controls and better integrate into each other's economies. "Unless labor mobility is completely free so that we Hong Kong people can go up there and work and mainland Chinese can come here, then, it is only at this point that I can see mutual benefits starting to surface," said Mr. Leung.

Senior economist Joe Lo at Citibank in Hong Kong agrees some economic integration may be necessary to keep the territory attractive to investors and remain competitive. But a move toward integration could also bring additional challenges for the territory.

Because of China's relatively low cost base compared with Hong Kong, Mr. Lo says many Western businesses may bypass Hong Kong and deal directly with other, less expensive Chinese cities. That could largely eliminate the territory's lucrative role as a trade middleman and cause further economic hardships here. "So, Hong Kong companies will have to change to provide higher value-added service in the new environment. Also, they have to reduce costs and provide better quality service to maintain its present role," Mr. Lo said.

The good news is that many experts believe Hong Kong has what it takes to distinguish itself as being more than just another Chinese city.

Mr. Lo notes that Hong Kong has many freedoms not found in the mainland mandated by an agreement to preserve the former British colony's capitalist way of life after it reverted to Chinese rule in 1997.

It also has a fully convertible currency, a well-developed infrastructure and legal system, and a clean, transparent business environment. But Mr. Lo believes Hong Kong's most important asset is the adaptability of its nearly seven million citizens. "So, there is no reason to think that Hong Kong cannot adapt to this new environment," he explained.

With Hong Kong looking beyond trade and financial services to maintain its vital international role, the immediate challenge now is to decide what exactly that future role should be.