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Hurdles for Hong Kong

It’s inside the wood-paneled confines of the exclusive Hong Kong Club that one gets the best sense of the self-doubt …

It’s inside the wood-paneled confines of the exclusive Hong Kong Club that one gets the best sense of the self-doubt that has gripped the city. From the chieftains of industry who take refuge there you will hear nothing but complaints-about Hong Kong’s pollution, its economy, its government, and most of all, the fact that the city’s status as Asia’s premier business location is fading fast.

“The Singapore International School is getting fuller,” William Overholt, executive director of Nomura International, told a recent lunch gathering at the club. He concluded his speech, provocatively titled, “Hong Kong: Between Third World and First,” by noting that still more companies will move to Singapore and other regional competitors unless the city starts to look more like the international financial center it claims to be. It’s hard to disagree.

Hong Kong’s decline has had little to do with the fact that Britain handed control over the city to communist China in 1997. Ironically, the bigger problem is that Hong Kong has complacently remained the same since the handover, while China’s other cities-once back-wards places and worrying portents of things to come in a Chinese-ruled Hong Kong-have been busy modernizing. They have developed better language and technological skills than Hong Kong, while also loosening restrictions and generally becoming more cosmopolitan and pleasant places to live.

As a result, companies that used to consider Hong Kong an essential gateway to China are now bypassing the city. For example, both IBM and Compaq Computer, which has invested more than $30 million in China, recently chose Beijing over Hong Kong for their regional headquarters. Even local Hong Kong firms are heading to the mainland: Timeless Software, one of the city’s biggest software firms, recently moved its R&D operations to a technology park in Zhuhai, just across the border. “It might not be an exaggeration to say that the quality of tech staff on the mainland is higher than in Hong Kong,” K.K. Cheng, managing director of Timeless, explained at the time of the move.

Meanwhile, corporations that sell outside of China have begun to take a second look at Singapore. The rivalry between the two cities is decades old, but Hong Kong always had the edge because it was believed to be an easier place to do business and a better home for expatriate managers than stodgy Singapore.

 That has changed. In a full-on effort to attract investment-especially from high-tech firms-Singapore’s government has been loosening its tight grip on the economy and offering tax breaks and other incentives to companies that set up operations there. Hundreds of large firms have taken the bait. Among them are Hewlett-Packard and Dell Computer, both of which moved their headquarters to Singapore from Hong Kong last year. And while the city was once dominated by large, state-owned dinosaurs, it is now home to thousands of high-tech entrepreneurs-making it an appealing headquarters for big Internet firms like Yahoo.

Singapore is also lightening up-so much so that it can almost be said to be a hip place to live. To be sure, those notorious rules against chewing gum are still on the books. But local artists and media outlets that used to be regularly harassed are now mostly left alone. As a result, a lively arts scene has emerged and dozens of media firms-including MTV, CNBC Asia, the BBC, and Reuters-have moved their headquarters to Singapore from Hong Kong. By contrast, expatriate managers say that sky-high costs (residential and office rents are the highest in Asia and the city’s port is the most expensive in the world) and pollution Hong Kong’s is the worst in Asia have made the city intolerable.

To its credit, Tung Chee-hwa’s administration seems to recognize Hong Kong’s problems. It has changed immigration rules to make it easier for mainland residents with high-tech skills to live in the territory. The city is building a “cyberport”-a modern, wired office complex—-and has opened a NASDAQ-style second stock exchange in hopes of attracting high-tech investors. And it has begun to introduce policies that should make the air more breathable.

But for the members of the Hong Kong Club, this might not be enough. “Remember Rangoon,” they like to say as they wonder whether Hong Kong might be heading down the same path as the capital of Burma, the now-shabby city that once held the title of Asia’s premier business location

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