Beijing throws lifeline to Hong Kong

WHEN Hong Kong reverted to Chinese rule in 1997, the former British colony was the jewel in China's crown. It was a major financial hub, stable and absurdly prosperous. Beijing's Communist rulers were intensely proud that the thriving centre was back in the fold as Governor Chris Patten sailed off on the Royal Yacht Britannia.

Since then, however, the jewel has lost a great deal of its lustre. Even as China's economic boom got fully under way in the past five years, Hong Kong failed to get much of a lift. Economists say the regional financial crisis of the late 1990s pricked its property-driven asset bubble. That set the stage for years of deflation, periodic recessions and rising jobless figures.

To add insult to injury, mainland upstarts such as Shanghai started to assert themselves more aggressively, stealing some of the growing business that used to be directed Hong Kong's way. Sars, the killer flu, also left its ugly mark. And a political crisis in July brought more than half a million Hong Kongers on to the streets to protest - successfully - against a proposed security law.

China's mandarins were rattled and have since decided to throw the city something of a lifeline. A series of concessions from Beijing has lent crucial political support to Hong Kong's embattled government and, economists say, helped to revive the territory's fortunes.

The most recent concession, announced this week, will see Hong Kong banks allowed to take yuan-denominated deposits and exchange the Chinese currency for Hong Kong dollars from next year. It is the latest in a series of moves by Beijing to loosen controls over its currency.

'The major factor is that Hong Kong people see there has been a change in the central government's attitude towards Hong Kong,' says Joe Lo, senior economist at Citigroup. ING chief economist Tim Condon puts it another way. 'There's been an extension, by China, of a helping hand.'

This hand should help Hong Kong grow by 5% next year, possibly more, potentially making it the best performance in years. Importantly, the city is also starting to fire on all cylinders because the US economy is picking up speed again. 'If the US is not having a good year, it's difficult - no matter what's going on in China - for Hong Kong to have a good year,' says Condon.

China's recipe for assistance has several ingredients. There is the Closer Economic Partnership Agreement which adds up to a free-trade pact between China and Hong Kong.

Beijing has also lifted many of the restrictions on mainland tourists visiting the city, delivering a much-needed boost for hotels, shops and restaurants. These were the sectors hardest hit by the Sars bug, which brought life in Hong Kong to a near-standstill.

Last but not least, Beijing has agreed to go beyond its World Trade Organisation commitments when it comes to allowing Hong Kong groups early access to China's vast service sector. In life insurance, for example, Hong Kong-based companies get countrywide access 12 months ahead of such concessions being offered to foreign competitors.

'Beijing is doing everything it can,' says Christine Loh, chief executive of think-tank Civic Exchange. 'It's playing the economic card.'

While there is dispute about the impact China's goodie bag will have, observers agree the first round of measures could be followed by others. Economists and laymen also note that the limited assistance has helped to raise Hong Kong's battered morale - a benefit not to be underestimated in such a fickle, sentiment-driven town.