HONG KONG — No place in the world is caught more between Eastern and Western culture than Hong Kong and it continues to hold a special place in the global economy.

For most of the past two centuries, this tiny territory served as a British trading colony and a window into its northern neighbor. Now that China, which controls Hong Kong and has historically been closed to Westerners and their ideas, is increasingly integrating itself into the world economy, the question on the mind of many observers is whether Hong Kong will lose its place as a business hub.

In particular, observers have speculated that the booming city of Shanghai will eventually challenge Hong Kong’s place as a commercial mecca within the Communist country.

Executives at the many multinational trading companies and buying offices based on the island of Hong Kong and the Kowloon peninsula said they don’t believe the territory will lose its position anytime in the next few years, though they conceded that in a decade or more things could change.

“Everybody says, ‘Is China going to replace Hong Kong?’ I don’t think so,” said Joanna M.Y. Ying, deputy managing director of the Esquel Group of Cos., a garment manufacturer with factories in five countries, including China. “We have a lot of experience in the rest of the world and we have our eyes on other markets. It’s difficult to replace Hong Kong.”

Experts said there are cultural and systemic reasons why Hong Kong is likely to retain its key position as a trading center, even as rising costs make it less viable as a manufacturing platform for many apparel firms.

One legacy of Hong Kong’s British heritage is that it has two official languages, English and the Cantonese dialect of Chinese. For U.S. buyers and sourcing executives — many of whom speak only English — that is a key concern. Some U.S. executives live for years in Hong Kong, speaking only English, and are still able to drive, go to restaurants, shop and perform the other basics of day-to-day life.

More importantly, executives noted that China still has fairly strict controls on the exposure of certain aspects of foreign culture on its citizens and where they can travel, though some travel restrictions are starting to ease. In the global apparel-sourcing industry, that suggests that many Chinese nationals would be behind the international learning curve.“Ten years ago, if you lived in mainland China, you couldn’t go out. So how much of a global perspective can you have?” asked Hong Kong-based Jeff Macho, vice president and managing director for the Asian and Caribbean operations of Sears Roebuck & Co.

Under the one-country, two-systems approach that China has taken to the Hong Kong Special Administrative Region since reassuming sovereignty in 1997, the territory has its own legal system, as well as a better developed banking and financial services industry. Executives said those factors are also advantages for which it will take years to catch up for cities in the rest of China.

“Geographically, financially and legally, Hong Kong will continue to have the advantage,” said George C.V. Ling, board chairman of Newtimes Group Holdings Ltd., a $1 billion sourcing company based here, with operations in more than 10 countries around the world.

Sources explained that it’s much easier to handle the legal disputes that are an almost inevitable part of big business in Hong Kong, while they contended that the courts in China act more as a tool of the ruling Communist Party and are seen as more likely to shake down companies than to give them a fair shake.

The lack of travel restrictions in Hong Kong is another advantage, sources noted.

One Hong Kong-based sourcing executive for a U.S. retailer said: “The good thing about Hong Kong is the freedom to travel. You can buy a ticket and go anywhere. China still has many local restrictions on travel and you have to travel in this business.”

Industry executives noted that while the growth of Chinese production has attracted a lot of attention lately, Southeast Asian countries such as Indonesia, Vietnam, Thailand and Malaysia are likely to remain important sourcing hubs after quotas on apparel and textiles are lifted in 2005 among the nations of the World Trade Organization. Sourcing executives who need to travel to other nations in the region, as well as to the Indian subcontinent and Western Hemisphere, face fewer restrictions if they’re Hong Kong-based.

Executives also noted that dealing with Chinese bureaucracy can be burdensome.

Harry N.S. Lee, managing director of the shirt and blouse producer TAL Apparel Ltd., which employees 21,000 workers around the world and produces 50 million garments a month, noted that in Hong Kong he sits on several advisory boards that the government consults before major regulatory changes are instituted.“China does not have that kind of setup,” he said. “I’m sure they have very good intentions, but it makes things difficult.”

He recounted one incident in which, after his company completed building a factory in China, the local government informed him that all the personal-use water used by employees living at the company dormitory for things like showering and preparing food would have to be treated before being released. The company had already built a treatment facility for its industrial water used in washing garments, but hadn’t made room for another water-treatment facility, since there had been no requirements for one when it started construction. They wound up constructing the facility on top of another building.

That sort of last-minute rule change, he said, “drives us crazy.”

Hong Kong’s low tax rate — a flat 15 percent tax is paid by all individuals, while the corporate tax is 14 percent — is another draw, executives said.

Li & Fung Ltd. employs more than 1,700 people at its Hong Kong headquarters. Executive director Thomas Haugen commented, “We could move our offices to Guangdong and the cost would go up,” because of the much higher tax rates in China. Sources said average corporate taxes in China are around 40 percent.

“Payroll is money, but tax is the real deal,” Haugen said.

Nonetheless, most of the major Hong Kong sourcing companies have started to move some functions into China, in addition to the quality control offices they already had in place. Haugen noted that Li & Fung has opened offices in Shenzhen and Guangdong, and was continuing to move employees in selected functions into China.

Ling of Newtimes said, “We are shifting a lot of our people into China because of 2005,” including shipping, quality control and accounting functions. He said Newtimes now has 400 employees in China, compared with 450 in Hong Kong, 250 in Taiwan and another 250 in field offices around the world.

Sources noted that much of the industrial growth in China is being driven by investors from Hong Kong, Taiwan, Macau and elsewhere abroad. According to China’s National Bureau of Statistics, 26 percent of China’s industrial production in the first quarter came from factories with non-Chinese ownership and those factories grew at a faster rate than those owned by the state or by local investors.“A lot of the investment in China is from Hong Kong,” said William Fung, group managing director of Li & Fung, the $4.28 billion sourcing enterprise.

He said the decision to open an office in Hong Kong or Shanghai comes down to one thing: “China has two doors. One looks outward, one looks inward.”

Shanghai is the inward-looking door, he said, making it suitable for companies that are trying to sell goods to China’s nascent consumer markets. For companies looking to benefit from Chinese production, he said, “Hong Kong is the place where you set up.”

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