Hong Kong's New Groove:

Hong Kong's New Groove:
Ferraris, Hot Chefs, IPOs
Ten years after the handover, the city is thriving -- even as mainland China looms
By PETER STEIN
June 29, 2007; Page P1

HONG KONG -- At the recent launch of a hip new Japanese restaurant here called Zuma, a cross-section of high society sampled pink cocktails and teriyaki beef hors d'oeuvres. American investment bankers mingled with the fashionable daughters of old Hong Kong money as well as new faces, including the granddaughter of the chairman of China's National People's Congress.


See a timeline of major events in Hong Kong since the takeover. Plus, take a look at Hong Kong, 10 years on.
The scene captured much of what makes Hong Kong thrive these days, nearly 10 years after Hong Kong's July 1, 1997, handover from British to Chinese sovereignty: a legacy of wealth and sophistication, an international character with links to the world of global trade and finance, and an infusion of new money, opportunity and human capital from the new China.

That combination of factors has never guaranteed Hong Kong's prospects under Chinese rule. Beijing agreed to preserve Hong Kong's autonomy and way of life when it signed a handover deal with London in 1984. However, China's desire for political control has sometimes crimped freedoms here, and Hong Kong's push for more democracy remains a point of friction. The growing development of Shanghai and Beijing still threatens to detract from Hong Kong's pull as a center for business and finance.

But Hong Kong's ability to defy skeptics, maintain a leading role in China's economic growth and prosper as one of the world's great cities says much about the former colony's resilience.

Much of the past decade has been a story of adversity here. Almost immediately after the 1997 handover, a financial crisis spread throughout Asia, sinking Hong Kong and its nearly seven million residents into a six-year deflationary spiral. Many businesses collapsed, and home prices fell by as much as 75%. Four years ago, an outbreak of the SARS virus killed nearly 300 people in the city, bringing life here to a near standstill.


Today, demand from wealthy mainland Chinese buyers is driving prices in Hong Kong's luxury-housing market to records. Last December, a piece of land on picturesque Victoria Peak sold at auction for the equivalent of about US$5,400 a square foot, making it some of the most expensive real estate in the world, property agents say.

Hong Kong's ability to bounce back also says something about the "stickiness" of its competitive advantages: a reliable legal system, sound business regulation and a sophistication in financial, retail and travel services that is so far unmatched elsewhere in China.

"Your water glass is never empty in a restaurant," says Jennifer Woo, who runs Lane Crawford, a Hong Kong-based luxury and fashion retailer.

These days, the economy is purring. Last year, gross domestic product grew 6.9%, and growth is expected to remain strong this year. Unemployment is at a nine-year low of 4.3%. Consumer spending is up -- and conspicuous consumption is, too. Last year, Hong Kongers bought 96 Ferraris, compared with 28 in 2003. Zuma is only the latest chichi restaurant to set up a base here: Celebrity chefs Nobu Matsuhisa, Joel Robuchon and Alain Ducasse have all opened Hong Kong restaurants in the past few years.

For much of the colony's long history since the British took possession of it in 1842, Hong Kong was a haven of stability and safety that contrasted with upheaval elsewhere in China. Many of its business leaders today are the children of refugees who fled here in search of a better life. Under British rule, those people turned Hong Kong first into a manufacturing and trading center, then a services and logistics hub with a growing role in global finance.


That role has made Hong Kong, not Shanghai, China's premier financial center today. Last year, thanks to share sales by two of China's biggest banks, Hong Kong's stock exchange raised $42.7 billion in initial public offerings -- more money than the stock exchanges in New York, London or Tokyo. Hong Kong is China's only exchange where foreigners can freely trade shares in the country's biggest listed companies.

The financial action and Hong Kong's quality of life are attracting an infusion of new talent from China, including people like Neil Shen. A 39-year-old entrepreneur from Shanghai, Mr. Shen co-founded one of China's biggest online travel companies and a Chinese hotel chain. He now runs a venture-capital firm and keeps his primary home here in Hong Kong, in the exclusive neighborhood atop Victoria Peak.

When he first worked in Hong Kong as an investment banker 10 years ago, mainland Chinese professionals like him were a rarity, and people from the North were sometimes looked down upon by Hong Kong Chinese. Speaking Mandarin, not the local Cantonese dialect, immediately set him apart. People knew: "You're not a Hongkie," he says.

Today, though, "I feel I'm part of Hong Kong -- Hong Kong is my home," he says. Mr. Shen's two daughters attend Hong Kong schools, and he is a local member of the Young Presidents Organization, a networking group for businesspeople. "This is a place for people who are open-minded, willing to learn, willing to mingle," he says. "It's easy. And it's sophisticated, compared to Shanghai and Beijing."

For Allan Bu, an investment banker with Canadian Imperial Bank of Commerce in Hong Kong and native of northern China's Shandong province, Hong Kong is a happy middle ground between China and the West. Working for a Chinese investment bank, he spent several weeks in New York once, but knew that life there wasn't for him. Here, he says, "you have an overseas flavor, but you're part of China." One catch: He laments that the high cost of housing makes it difficult to live in a decent-size apartment, "unless you're super-rich."



In the decade since the Chinese handover, Hong Kong has seen massive protests against a planned antitreason law, top, and the 2003 SARS crisis, above, which killed nearly 300 people there.
China's super-rich appear to like Hong Kong, too. A number have bought homes in some of the city's most elite neighborhoods. Li Ning, a former Olympic gymnast who now runs China's biggest domestic sportswear brand, last year bought a 540-square-meter villa on the south side of Hong Kong Island for about US$19 million. One of his neighbors, the head of a mainland Chinese tobacco and liquor empire, paid about US$21.5 million for his home.

Hong Kong hit what many feel was its rock-bottom moment in 2003, during the outbreak of severe acute respiratory syndrome.

"SARS was the turning point," says Allan Zeman, a Canadian-born entrepreneur and longtime Hong Kong resident whose early investments in bars and restaurants helped establish one of the city's main nightlife districts, Lan Kwai Fong. "Hong Kong was really on its knees. Somebody needed to light the match to get the confidence burning."

It was also a time of huge political unease in Hong Kong. That summer, half a million people marched in the streets to protest then chief-executive Tung Chee Hwa's government and its policies, including plans to enact an unpopular antitreason law. (The law wasn't enacted.)

So China intervened to help Hong Kong's economy. It signed a trade pact with Hong Kong that gave the city's businesses certain investment privileges in China. And it loosened restrictions on individual travelers to Hong Kong from the rest of the country, goosing both the travel and retail industries.

Suddenly, those businesses began catering to the flood of mainlanders. Mr. Zeman recalls how restaurants in Lan Kwai Fong, a magnet for many expatriates, for the first time began printing their menus in the simplified Chinese characters used by China, rather than Hong Kong's traditional script.

Today, Mr. Zeman runs a successful aquatic theme park that pulls in more than five million visitors a year, just under half from mainland China. On July 1, he will be on hand to celebrate the park's newest attractions, Le Le and Ying Ying -- two baby pandas donated by China's central government to help celebrate the handover anniversary.

"It just shows how important Hong Kong is to China, and how important China is to Hong Kong," says Mr. Zeman of the pandas.

Visitors from China like Charlotte Zhao are now the key clientele for many of Hong Kong's swankiest boutiques. "Of course Hong Kong is the best place to go shopping," says Ms. Zhao, a 23-year old from Beijing whose fingernails are each painted with a different color of polish. She has just bought a watch at the Christian Dior boutique in a Hong Kong shopping mall. "I come to Hong Kong all the time whenever I'm bored at shopping in Beijing," she says.

Not everyone here feels the wealth effect. Many Hong Kong people still live in cramped homes stacked in densely packed housing estates. Some workers struggle to get by, and haven't adapted to the service economy that now dominates after low-cost Chinese labor north of border siphoned off most manufacturing work here.

Nor is Hong Kong out of the danger zone. Its stock market faces new challenges amid efforts by Chinese regulators to build up the Shanghai exchange after a long moratorium on domestic IPOs ended last year. The city's closer ties to the rest of China also mean any economic problems there will reverberate here as well.

And despite those closer ties, politics remains a sticking point. Ten years ago, China took over Hong Kong only after undoing Britain's last-minute attempts to expand the vote and dividing many people here on the subject of democracy. Seven years later, the unpopular Mr. Tung stepped down after more street protests at which democracy was a rallying cry.

Today, his more popular successor, Donald Tsang, a former civil servant under British rule, runs the city amid a calmer political climate. But the political system remains undemocratic -- he was chosen by a group of about 800 electors, not the wider Hong Kong electorate, and Beijing's support made his selection a mostly foregone conclusion. Mr. Tsang's toughest challenge may be mapping out a road toward a more open system, as he has promised to do.

Still, differing political views and the willingness to vent them are a good sign, says Eden Woon, a senior executive with Starbucks Corp. in China who used to run Hong Kong's chamber of commerce.

"The diversity is still there," he says. "There's still people complaining."

--Juying Qin contributed to this article.

Write to Peter Stein at peter.stein@wsj.com