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Hong Kong Struggles, Searches for New Economic Path

Hong Kong's economy roared just five years ago in the months before it reverted to Chinese sovereignty. But now, the city is losing business to China, is trying to climb out of its second recession since 1997, and unemployment is at record highs. VOA's Kate Pound Dawson looks at what has happened to Hong Kong and how the territory can find a new economic role in the shadow of China's economic boom.

Hong Kong appears to have lost its way, and, some economists and business leaders say, it needs to find a new path to prosperity.

For a century, the former British colony boomed as its ports shipped goods from China and the rest of Asia all over the world. Then, after the Communist Party closed off China in 1949, Hong Kong became a manufacturing center.

But China has opened back up. Its low-cost factories pump out exports worth billions of dollars each year and its ports grow ever faster in shipping those goods overseas. That leaves Hong Kong, where labor is more expensive than on the mainland, searching for a new role.

Vincent Kwan, the head of economic research at Hang Seng Bank, Hong Kong's largest local bank, said the city must make more of an effort to cut business costs. "I think Hong Kong needs to regain our strategic position, restore our competitiveness," he said. "The process has been undergoing, like wages, property prices, consumer prices, have been adjusting downward for the past five years." Hong Kong's economic problems are many. The territory returned to Chinese rule on July 1st, 1997 and in the five years since, the city has struggled with two recessions. The Hong Kong government says the unemployment rate, now a record 7.4 percent, will head higher this year.

Mandy Lee just a found a full-time job, working in the office of her church, after searching since she graduated from university last year. She is not optimistic about Hong Kong's job market. "I don't see any improvement, so I guess the graduates of this year might face the same problem as well," she said.

Those people who do find jobs are getting paid less, as struggling companies cut salaries. The government, grappling with a burgeoning deficit, plans to cut civil service pay this year.

Back in 1997, it was a different story. Unemployment stood near 2.4 percent. Property prices had nearly doubled in less than five years, the city's Hang Seng stock index was hitting new highs, and the government had a budget surplus of more than $10 billion.

The Asian financial crisis that began in mid-1997 quickly burst the balloon. Along with the rest of the region, the city sank into recession, and stock and property prices plunged.

Two years later, there was a dramatic rebound as Hong Kong business leaders jumped into high-technology industries. But in mid-2000, high-tech companies around the world faltered and the United States slid into recession, dragging Hong Kong along with it.

But the state of the global economy is only partly to blame. Hong Kong, an autonomous Chinese territory, is finding it shares in few of the mainland's growing economic achievements. In fact competition from China is a huge problem here and analysts believe Hong Kong must find a new economic role in the region and a new way to deal with China.

Jun Ma, the head economist for Deutsche Bank in Hong Kong, said "Hong Kong has to invest more aggressively in the mainland. By owning a bigger share in the China Inc., you will be able to increase your GNP growth."

Mr. Ma said profits returned from China could dramatically lift Hong Kong's gross national product. He said the government needs to speed up customs procedures between China and Hong Kong, keep taxes low and implement new regulations to make it easier to do business across the border.

Hang Seng Bank's Mr. Kwan said Hong Kong businesses should concentrate on supporting factories and other businesses in China with financial, legal and other professional services. "Hong Kong must reduce the barriers for the provision of these kinds of services. We must improve the flows between the two territories, mainland China and Hong Kong, no matter (if) it's people, it's information, it's goods."

For people like Mandy Lee, Hong Kong needs to find its way soon. She said people remain very worried about the economy. "The employers are paranoid, they're afraid of hiring laborers. I just really think people are really paranoid about everything so they don't want to spend money, they don't want to hire people."

Mr. Ma at Deutsche Bank said that as the world recovers from last year's global recession, Hong Kong will see growth return, slowly. He reckons the economy will expand an average of 3.5 percent a year over the next five years. But, he says, if Hong Kong's businesses aggressively integrate with China's economy, that growth could be above 4.5 percent, adding far more wealth to the city.

This is part of a series of reports on Hong Kong as it marks five years under Chinese control