Why Try to Disturb the Golden Goose?

Why does Hong Kong have more billionaires than Singapore, Taiwan, Brazil or Canada--and countless other countries?

Because Hong Kong is the world’s most entrepreneurial economy, a place where individual and family-owned businesses can grow into empires in a single generation, spanning manufacturing and finance and crossing borders into China and throughout Asia.

But there is anxiety about Hong Kong’s entrepreneurial economy as the British colony nears the July 1 transition to rule by China.

The fear is that China’s Communist Party rulers will stifle economic liberties and turn dynamic Hong Kong into a grim case study on the effect of authoritarian government on entrepreneurial drive and innovation.

The danger is real, no doubt, but why should America and the rest of the world care what happens to Hong Kong?

Because the island colony of 6.3 million people is crucial to the continued economic transformation of China and, therefore, important to the health of the U.S. and world economies.

It’s as simple as that. About 70% of the foreign investment flowing into China goes through Hong Kong. It is the financial center of Asia with offices of 500 of the world’s major banks and financial institutions, and Asia’s second-largest stock exchange, after Japan’s.

Foreign investments help to finance joint ventures in China with Hong Kong entrepreneurs like Peter Woo, whose family recently sold the Omni Hotel chain in the United States to focus on opportunities in China, or Li Ka-shing, whose family builds power plants, bridges, ports and highways in China.

Woo, Li and the heads of at least 15 other multibillion-dollar family fortunes, as listed by Forbes magazine, are investing heavily in China today.

And those foreign investments, which last year totaled more than $40 billion, fuel the productive half of China’s economy that manufactures and sells to world markets.

But those investments will dry up if China imposes its authoritarianism on Hong Kong. And if the investment flows were to diminish, China’s economic growth would slow to a crawl, explains Li Lu, one of the organizers of the 1989 pro-democracy protests in Beijing’s Tiananmen Square.

Lu, 31, who later came to the U.S. and is now a lawyer and investment banker in Los Angeles, says a slowdown would raise tensions inside China, where 2 million laborers from villages now crowd the cities.

The effects would spread. Commerce would be hurt throughout the Asia-Pacific region, which now absorbs 30% of U.S. exports. California, especially the Los Angeles region, would feel a severe impact, as China is the Southland’s second-largest trading partner--with Hong Kong the fourth.

Dire consequences, in short, are predicted.

Yet the Hong Kong economy betrays no sign of such consequences today. On the contrary, its stock and real estate markets are booming as state companies from mainland China rush to attract capital through Hong Kong’s stock exchange. China itself buys pieces of Hong Kong’s high-priced property.

So if China is investing, and seemingly recognizing that its own prosperity depends on Hong Kong, what are all the fears and dire predictions about?

They’re about the rule of law.

“Hong Kong is a place with free currency markets where overseas Chinese and investors from all over the world can conduct business without government regulation, but with the backing of the rule of law,” notes Frankie F.L. Leung, a lawyer in Los Angeles and Hong Kong who has taught Chinese law at Stanford and Hong Kong universities.

In Hong Kong’s legal system, commercial transactions are based on British common law, as ultimately are U.S. laws. “It’s the law backing sanctity of contracts that allows business to flourish in Hong Kong,” says J. Kimball Dietrich, an associate professor of finance at USC.

Indeed, the combination of entrepreneurial verve backed by common law gives Hong Kong aspects of the best of East and West.

A question, however: If Hong Kong is such a golden goose, why should China even try to disturb it? The answer: The Beijing government might do so inadvertently. The ruling passion in China today is nationalism, not communism. China, now fervidly preparing for the return of Hong Kong, may seek to stamp out “foreign” influences, to make Hong Kong toe a line dictated by Beijing.

If that becomes the case, “Hong Kong’s sensitive money markets will be the first to notice and shut down business,” Leung says.

But the outlook may in fact be far different. Hong Kong is not a delicate flower but a place of tough, resilient business people. And whether Chinese or British, it has always rewarded shrewd characters. William Jardine, who in the 19th century co-founded the trading firm Jardine Matheson, proudly wore the nickname “iron-headed old rat.”

Hong Kong’s redoubtable business community has survived more than a century of tumult, as an exit point for emigrants, a destination for refugees from communism, a maker of clothing and electronics, and now as employer of millions inside China.

“It has become an example to the world for information-based manufacturing and decentralized business operations,” says Suzanne Berger, a professor at Massachusetts Institute of Technology and coauthor of “Made by Hong Kong,” one of two new studies of the colony’s economy.

Will all that now fade to insignificance under rule by Beijing? Many think not. “China’s true objective may be to unite Taiwan,” says a U.S. banker, referring to the province of 21 million that has become a prosperous democracy over the last five decades. China may want Hong Kong to show Taiwan’s many entrepreneurs that a free economy can flourish under what Beijing is calling a “one country, two systems” approach.

The proper perspective is to look at Hong Kong’s development in the last 18 years, since China reopened its economy, says Michael Enright, coauthor of “The Hong Kong Advantage” and a professor at Hong Kong University. “Hong Kong has been transformed from an enclave economy to a metropolitan economy,” Enright says. It has become “the real driver of China’s economy.”