By Donald Greenlees
International Herald Tribune
HONG KONG — In the early 1980s, with negotiations on Hong Kong's reversion to Chinese sovereignty in 1997 under way, Swire Group, one of the oldest and biggest British conglomerates here, made a crucial choice. It decided its future lay with China.
That judgment, by one of the businesses most closely associated with British rule, was a vote of confidence in the Chinese commitment to the free market and the prosperity of Hong Kong, Swire executives say.
"It was always the view from the very top of the company that Hong Kong was going to be fine. It was going to continue to be a great place to do business," Christopher Pratt, chairman of Hong Kong-listed Swire Pacific, said.
Swire Group, which opened its first office here in 1870, might have had little choice but to hope for the best. Many of its assets, like the international airline of Hong Kong, Cathay Pacific, and swaths of prime real estate, could not be easily sold or moved. Still, at a time when many were predicting Hong Kong's demise, Swire's assessment of how Beijing would behave proved astute.
Meanwhile, its storied British rival, Jardine Matheson Group, took another route, confident it had found a way to hedge the risk of the Hong Kong handover.
After the 1984 agreement on ending British rule was signed, the company, which had been a part of Hong Kong since its founding nearly a century and half before, stunned the local business community and Beijing by announcing it was transferring its corporate registration to Bermuda. Although the company kept its headquarters and much of its business focus in Hong Kong, it later delisted its stock from the Hong Kong exchange and established a secondary listing in Singapore.
"Both Swire and Jardine looked at the same set of circumstances and reached different conclusions," said Rod Eddington, a former chief executive of Cathay Pacific, who is now chairman of JPMorgan in Australia. "That was not to say at the time one was right and one was wrong. If Hong Kong had gone pear-shaped, everyone would say Jardine was right and Swire was wrong. As it turns out they have both done well."
In the 10 years since the British flag came down, the Hong Kong economy has certainly had a bumpy ride, hit by the aftershocks of the Asian economic crisis, a sharp fall in property prices and, in 2003, the SARS epidemic.
But the city has bounced back and, as it marks a decade of Chinese rule Sunday, the climate for foreign business is as vibrant as ever. Far from proving to be the agent of Hong Kong's decline, China has, at least economically, been its biggest benefactor.
The story is reflected in the balance sheets of Swire and Jardine Matheson, the two biggest Hong Kong conglomerates still in British hands. The two firms might have differed about the prospects of Hong Kong after 1997, but the effect on the bottom line has been the same. They were battered by downturns in property prices, airline travel and consumer consumption in the first few years after the handover and are now reaping the benefit of a turnaround.
When Swire reported its 2006 results in April, its property division, heavily reliant on Hong Kong valuations, contributed 17 billion Hong Kong dollars, or $2.2 billion, of a 22.6 billion dollar profit in 2006, an increase of 20.2 percent over the previous year.
A 21 percent increase in the value of the property holdings of the Jardine Matheson subsidiary Hongkong Land contributed $599 million of a $1.35 billion profit result in 2006.
John Saunders, an analyst with CLSA Asia Pacific Markets in Hong Kong, said Swire and Jardine Matheson would have to reach far back into their histories in Hong Kong to find a more favorable time for business.
"I think both of them are benefiting within China and within Hong Kong from China's record growth and it is as good as it has ever been for them," he said.
There is no doubt that the phenomenal growth of mainland China underpins the resurgent prosperity of Hong Kong. And like all of Hong Kong's conglomerates, Swire and Jardine Matheson are now betting heavily on the mainland market.
Emblematic of the push into the mainland was a deal done last year in which Swire-controlled Cathay Pacific paid more than $1 billion to buy the Hong Kong carrier Dragonair, which has an extensive network of destinations in China. The deal also saw Chinese state-owned investors, including Air China, deepen their holdings in Cathay, leaving Swire in management control but with a reduced stake.
Pratt, who is chairman of both Swire Pacific and Cathay Pacific, said the deal was part of a long-term strategy of deepening links to China, where Swire already has a big aircraft maintenance operation and a Coca-Cola bottling franchise.
Pratt estimated that 95 percent of the company's new investment would be on the mainland, including $15 billion to be spent on three commercial construction projects.
" China is the focus of our investment," Pratt said. "If you look at what we have done in the last two or three years, the Dragonair deal is essentially a China play, we have three big property deals in Guangzhou, Shanghai and Beijing, and we are looking at the expansion of our facilities in Xiamen for aircraft maintenance. China is happening very fast for us and we are very happy with it."
Jardine Matheson, by contrast, has pursued a much more geographically diverse investment strategy. In its annual results, it reported that 40 percent of underlying profit came from Southeast Asia. The company strained relations with Beijing with its decision to take its corporate registration out of Hong Kong, but it, too, is betting heavily on China.
"I think the Chinese have not forgotten that," said Simon Murray, a former Jardine Matheson executive. "But the Chinese are very pragmatic and Jardine can show up and do their business."
Jardine Matheson is developing residential projects in Beijing and Chongqing, its Mandarin Oriental Hotel brand has announced a number of mainland projects, most recently in Beijing, and it operates more than 400 7-Eleven convenience stores in southern China.
Neil McNamara, the group corporate secretary, said Jardine Matheson's businesses were "continuing to build their presence" on the mainland and had benefited from "the increasing sophistication of China's markets." But both Swire and Jardine Matheson say they are committed to Hong Kong as a market and a base for their regional operations.
With good reason. Hong Kong has been good to them for a very long time.
For the 156 years of colonial rule, the great British trading houses and conglomerates, known as hongs, had unrivaled opportunity and influence here. Their own histories were inseparable from that of Hong Kong.
Jardine Matheson, which this year marks 175 years since its founding in Canton, now Guangzhou, started out in shipping and was intimately involved in the notorious opium smuggling trade in southern China.
Many of the original hongs have been bought up by Chinese tycoons. But Swire and Jardine Matheson remain in British hands, and their heirs, the Swire and Keswick families, are among the richest people in Britain.
Since Hong Kong was established, the real commercial prize for the hongs has been mainland China. But while the opportunities and risks in China have fluctuated with the political climate, Hong Kong has endured as a haven for foreign business in the region. Despite some jitters caused by the city's return to Chinese sovereignty a decade ago, that remains the case.
Last year, in preparation for the 10th anniversary of the handover, Swire asked the Oxford economist James Forder to write a report on how business conditions had changed since the end of British rule. One of Forder's conclusions was that Hong Kong was still a good place to be British and in business.
British business, financial and cultural interests in Hong Kong "remain extensive," Forder wrote. "For the most part, that makes for good will towards Britain and businesses of British origin."
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