After 15 years of negotiations, China and the World Trade Organization in September agreed on a plan for China’s entry into the global trade body. China is expected to participate in its first ministerial meeting next month.

And what’s good for China, is good for Hong Kong, said Frederic Lau, chief representative of the Hong Kong Monetary Authority’s New York office, at a meeting with members of the Wharton Asia Club in early October.

The World Bank estimates that in 1995 China accounted for 3.7% of all world exports. That was expected to grow to 4.8% in 2005 without WTO membership. But with WTO accession, China’s share of global trade will be 7.3%, Lau noted.

For Hong Kong, that is mixed news. About a third of Mainland China’s imports and exports now pass through Hong Kong. Lau said analysts estimate Hong Kong retains about 8% of the value of that trade by acting as a middle man, providing financing, warehousing, shipping and/or other services. When China joins the WTO, Hong Kong is expected to lose some of that business to other global competitors. But the increase in total trade will make up for that, Lau predicted. “The pie will be much bigger…and we think Hong Kong will benefit from [that].”

Lau also said that WTO accession will force many of China’s large state-owned industries to become more efficient because they will be facing heavier competition from abroad. That, in itself, will have painful repercussions because in China state-owned companies act as quasi-social service organizations, often providing housing and childcare to their employees. WTO membership, Lau noted, will force the Chinese to change their mind-set about the social role of companies, a change that must occur if the country is to achieve its potential in a truly competitive economy.

Lau also discussed the 1997 Asian financial crisis and stressed one factor he said has been underplayed: the role of Japanese investment.

With a $4.5 trillion economy, Japan is the heavyweight in Asian economics. Japanese investors, facing low interest rates at home, had invested heavily throughout Asia in the 1990s. But in 1997, they were hit by an economic contraction that caused them to withdraw financing abroad, exacerbating an economic calamity that had initially begun as a run on the Thai baht.

Hong Kong wasn’t spared. Economic growth had been 5% a year when the crisis began. A year later, Hong Kong’s economy contracted 5%. By 2000, the city had rebounded and its economy was growing at 10.4%.

The current global economic slowdown, however, has entered Hong Kong’s stunning harbor. This year, the economy is expected to shrink by .5%, according to economic forecasts. “The numbers are not pretty, for the time being, for Hong Kong and the rest of Asia,” said Lau. Meanwhile, “the [recession] in the U.S. will slow exports for China and that will affect Hong Kong,” Lau added. “China and Hong Kong are eager to see an early U.S. recovery.”

On the positive side, Hong Kong’s deep links to the Chinese economy will help it grow more than if it were simply dependent on its own mature economic base. Lau said official estimates of the value of the Chinese economy are $1 trillion, but it could actually be $1.4 or $1.5 trillion taking into account the underground economy.

In time, Lau said, China’s economy will be comparable to Japan’s. China is growing at a rate of 7-8% a year, compared to Japan which is shrinking 1-2% a year. In 10 years, Lau said China’s economy will double to $3 trillion, while Japan’s will have stabilized at between $5 trillion and $5.5 trillion.

Lau said Hong Kong will continue to benefit from the further development of China’s Pearl River Delta, to the city’s north, as a dynamic manufacturing base.

Lau was asked if the Chinese city of Shanghai, now promoting itself as a financial center, will grow to rival Hong Kong. He noted that while Shanghai will indeed become one of the world’s great business cities, Hong Kong is firmly established as Asia’s financial center. One specific obstacle to Shanghai becoming a major financial capital is that the Chinese currency, the Renminbi, is not fully convertible. Foreign investors also say the Chinese legal system and its enforcement capabilities are not as advanced as Hong Kong’s, making foreign corporations less comfortable in Shanghai than in Hong Kong, which is rooted in British law.

When asked if recent liberalization of travel restrictions between Taiwan and the mainland would hurt Hong Kong, Lau agreed that it is a cause for concern. “The immediate impact is there will be less travel, because people will not travel through Hong Kong first,” said Lau. But in the long-run, he added, Hong Kong will remain an attractive travel destination. He pointed to the new Disney project in Hong Kong, set to open in four years, as a potential new draw along with Hong Kong’s world-famous shopping.

Lau said Hong Kong has a long history as an open economy and it is taking additional measures to make it even more efficient: banking reform that will allow foreign banks to go from one to three branches; deregulation of the interest rate that had been set by the Hong Kong Association of Bankers, and the merger of its stock and futures exchanges.

The Hong Kong dollar is regulated by a currency board and is set at 7.8 dollars to $1 U.S. dollar. Lau said that while other Asian countries devalued their currency during the Asian crisis Hong Kong companies were forced to compete by making internal adjustments, cutting wages and costs, and doubling productivity between 1996 and 2000. “It’s impressive that people in Hong Kong have this very flexible attitude,” said Lau. “This is one of the strengths of the Hong Kong economy.”

Hong Kong did, however, have the backing of the Chinese government, which had taken formal control of Hong Kong from the British on July 1, 1997. During the Asian financial crisis, the government in Beijing had said it would back Hong Kong if necessary. That was enough to keep some hedge funds at bay.

Beyond that, Lau said China has made good on its promise to maintain Hong Kong’s financial community under its one-country, two-systems plan. “There really is no interference,” he noted. “The government of China understands it has to let Hong Kong remain the way it is.”