LONDON — China watching, long a staple among expansion-minded multinationals, broadened in 1997 to also include eyeballing Hong Kong. That, of course, was the year in which long-time free-trade bastion Hong Kong became a Chinese Special Administrative Region (SAR) in its reversion to mainland control.
        An odd couple, to be sure. But one with major potential, many observers thought. Hong Kong, the argument went, would be the ideal entry point into China, providing the optimal location for high-skill, value-added operations inside the People's Republic. Seven years later, though, things are turning out a bit differently – at least for the moment. The Economist Intelligence Unit (EIU at www.eiu.com), a prominent London-based think thank, has released a new forecast for 2002-06 that asserts that Hong Kong's business-location appeal has waned.

"Hong Kong (pictured) is trying to walk forward, but others are running," EIU Asia Regional Director Graham Richardson said in explaining the SAR's drop from its long-time No. 1 rank in Asia.

        Significantly, Hong Kong's dearth of high-skilled, English-speaking labor is one major reason for the SAR's diminished allure, the EIU reported.
        What's more, mainland cities, the think tank predicted, will likely attract a greater share of foreign investment - much of which would've once routinely gone to Hong Kong.
        "The growth of the mainland economy will no longer provide the unadulterated benefits that it seemed to during the last two decades," the study summary noted. "As the mainland economy liberalizes, Hong Kong's special role as an entrepot for visible trade with China is likely to diminish."
        The report, part of the EIU's latest quarterly Business Environment Rankings, dropped Hong Kong to No. 2 among the 16 Asian nations ranked in the report (see accompanying chart). The SAR had held the No. 1 slot in the EIU's Asian rankings from 1997 through 2001. Hong Kong also dropped from No. 5 to No. 11 among the 60 worldwide nations covered by the rankings, which look at 70 factors that "affect the opportunities for, and hindrances to, the conduct of business."
        Singapore, previously No. 2 in the EIU's Asian rankings, grabbed Hong Kong's long-time No. 1 perch. In the process, Singapore moved past the SAR in the overall rankings, moving up to No. 5 in the worldwide standings (see accompanying chart).
        Here's a more detailed look the shift the EIU projects in the location of Asia's best business climate.

Work-Force Quality 'Remains Major Worry'

While Hong Kong fell in the EIU's new rankings, it was nothing like a precipitous drop. The SAR's business environment was still ranked as "very good," the highest qualitative assessment in the EIU's system. Its score, however, slipped from the 1997-2001 tallies recorded during its regional reign at No. 1.
        "Hong Kong starts from such a competitive position that a slight slippage is hard to prevent," explained EIU Asia Regional Director Graham Richardson. Richardson added, however, "Hong Kong is trying to walk forward, but others are running,"

"Singapore (pictured) enjoys a much stronger underlying fiscal position, enabling it to consider cuts in both corporate and personal income tax," the EIU report noted in comparing the nation-state to Hong Kong.

        Losing investment to the lower-cost mainland is only one factor slowing Hong Kong's pace. There are also "causes for concern . . . on the domestic front," the report notes.
        For expanding businesses, work-force issues rank high on that list of worries. The report noted "concerns over [Hong Kong's] education system and poor standards of English. The quality of the work force - in particular, the ability to adapt to the new skills required in a knowledge-based economy - also remains a major worry." Hong Kong's scores for its overall labor market fell 8 percent in the EIU's new forecast.
        "Shortages of highly skilled labor will be an endemic problem as Hong Kong seeks to move up the value chain," said Richardson.

Biggest Drops: 'Political Effectiveness,
Policy Towards Private Enterprise'

Hong Kong's biggest drops, however, were in the EIU categories of "political effectiveness" (a 9.2 percent falloff from its previous score) and "policy towards private enterprise" (a 9.8 percent drop).
        "Worsening civil-service morale and the uncertain impact on policymaking of Chief Executive Tung Chee-hwa's new 'accountability' system of political appointees contributed to the drop in the political-effectiveness score for 2002-06," the report noted. "Continuing concern over the government's cozy relationship with certain sectors of the business community, combined with lack of progress in developing a competition law, were among the causes of the expected decline in the competitive environment for businesses." Perhaps the strongest criticism leveled at Hong Kong's government came two years ago, when Hong Kong's Pacific CenturyCyberWorks (PWW) bought Cable & Wireless Hong Kong Telecom (HKT) for US$38 billion. PWW beat out SingTel, the Singapore government's telecom company, to buy Hong Kong's No. 1 mobile phone service provider. The deal, critics charged was influenced by the Beijing connections of Hong Kong billionaire Li Kai Shing, the father of PWW Chairman Richard Li.
        The allegations, however, were never factually substantiated. The Hong Kong government also released a statement strongly denying undue influence.
        "The sale by Cable & Wireless Plc of its shareholding in Cable & Wireless HKT is entirely a commercial decision," the government assented. "It is a matter for the boards of directors of the respective companies to determine in the interest of their companies and their shareholders."

Best Asian Nations for Business, 2002-06 1. Singapore 2. Hong Kong 4. Australia 4. New Zealand 5. Taiwan 6. South Korea 7. Japan 8. Thailand 9. Malaysia 10. Philippines 11. India 12. China 13. Sri Lanka 14. Indonesia 15. Vietnam 16. Pakistan

Top 10 Best Overall Nations for Business, 2002-06 1. Netherlands 2. UK 3. USA 4. Canada 5. Singapore 6. Hong Kong 7. Switzerland 8. Ireland 9. Denmark 10. Germany Source (both charts): Economist Intelligence Unit "Business Environment Rankings." The EIU ranks 60 nations on the basis of 70 factors that "affect the opportunities for, and hindrances to, the conduct of business."

Slowing GDP and Growing
Budget Deficit: More Taxation?

Another concern for expanding firms is what the EIU report called "a structural change in the rate of GDP growth" in the SAR. The study predicts 3.3 percent GDP growth over the next five years. "By contrast, in the five years prior to the regional downturn of 1998, Hong Kong's economy grew by an average of 5 percent a year," the report noted.
        Coupled with that more sluggish GDP growth is Hong Kong's burgeoning budget deficit. Hong Kong Financial Secretary Antony Leung Kam-chung has predicted a deficit of some $8.4 billion for the 2001-02 fiscal year.
        Those economics strongly suggest tax hikes.
        "Hong Kong's lead in having a liberal and uncomplicated tax regime also may be eroded as the Hong Kong government considers broadening the tax base to reduce the structural budget deficit," the EIU report commented.
        On the other hand, China's entry into the World Trade Organization will give the SAR a boost in the report's "market opportunities" category.
        "Hong Kong's score [in market opportunities] advanced nearly 15 percent on the back of the increased opportunities, particularly in services, anticipated as a result of China's entry to the World Trade Organization," the EIU noted. "But scores," it added, "are improving faster for countries elsewhere."

Singapore: Stronger Labor, Finances
And Policy Toward Private Enterprise

In contrast, Singapore "enjoys a much stronger underlying fiscal position, enabling it to consider cuts in both corporate and personal income taxes," the EIU report noted.
        Singapore currently has a budget surplus of roughly $2.6 billion. The nation-state has already proposed reducing both its corporate tax rates and highest personal income tax rates to 20 percent in the next three years. Currently, Singapore's corporate tax rate is 24.5 percent, while the top personal income tax rate is 26 percent.
        In addition to Singapore's stronger public finances, the city-state overtook Hong Kong in labor-market quality and in its policy towards private enterprise and competition, the EIU reported. Both Singapore and Hong Kong, however, rank as major bright spots for Asia, a region that "as a whole struggles to keep pace with reforms being made by other countries worldwide," the EIU report noted. "Asia will continue to have a markedly worse business environment than Western Europe or North America during 2002-06."
        Western Europe's Netherlands was the No. 1 ranked business environment in the EIU global rankings. Other continental nations in the EIU's top 10 were No. 7 Switzerland, No. 8 Ireland, No. 9 Denmark and No. 10 Germany.
        North America, however, continued to rank as the best world region for business, the EIU report said. The United States finished in the No. 3 slot in the rankings, closely followed by Canada at No. 4.