Leading Article: Another hazard of the handover

CONCERN for the future of Hong Kong after its handover to China in 1997 has understandably centred on Peking's hostile reactions to plans by the Governor, Chris Patten, for a modest broadening of the franchise for elections due next year and in 1995. Mr Patten's talks yesterday with the Prime Minister and Douglas Hurd were a chance to take stock of the so far largely formalistic negotiations with the Chinese on this vexed topic. Yet, as our report on page 12 and other recent news from the mainland suggests, Hong Kong stands to lose not just from Peking's dislike of anything resembling democracy, but also from the corruption, runaway inflation and social unrest being unleashed on the mainland by the fervent embrace of free enterprise.

These difficulties are hardly surprising; in sharp contrast to China's intolerance of political dissent, they deserve some sympathy. As experience in Russia and Eastern Europe shows, the transition from a centrally controlled economy to a relatively free market is extremely difficult. The progress achieved in China, in which Hong Kong has played a substantial role, far exceeds Russia's. But it is still, as in the former Soviet Union, in the first and ugliest phase, which seems to parody the vices of capitalism: black markets and corruption flourish, gangsters abound, a huge gap yawns between the haves and have- nots, and local authorities abuse their powers by imposing medieval-style taxes on the local peasantry.

All this reflects the paradox that there is more money to be made in restricted markets in which little information is available than in open economies in which opportunities are open to all. The saving grace of the Chinese approach, in which even the army and civil ministries sink their collective snouts deep into the capitalist trough, is that it involves bribes pure and simple rather than permits that have to be bought.

In Hong Kong, capitalism has had several decades in which to mature. Such an economic entity is bound to suffer when it is absorbed into China's seething proto-capitalism. The process is already well under way: China has become the colony's biggest single investor, while more than 3 million southern Chinese work for Hong Kong companies. Corruption, kept in check since 1974 by the Independent Commission against Corruption, remains within tolerable bounds, though few substantial deals on the mainland are secured without backhanders.

Omens for the new era are not good. Peking officials have not hesitated to tip off mainland entrepreneurs in Hong Kong about a forthcoming attack on Governor Patten that was bound to send the ever-sensitive Hang Seng index plunging. A combination of insider dealing and more straightforward corruption could seriously distort an economy whose strength has been its unusual sensitivity to market signals. These dangers only reinforce the arguments for the Patten proposals. A more broadly based legislature would be less susceptible to influence than the present version, and more likely to act as a check on the executive. That is why the outcome of the talks with China remains a matter of prime importance.