Peking casting a lengthening shadow

Stephen Vines reports from Hong Kong on the problems facing Jardine Matheson, the trading giant that is bidding for Northern Electric, as it tussles with a hostile China

Hong Kong's so called "princely house", the Jardine Group, , looks as though it has every reason to celebrate. But much of the recent news is overshadowed by profound longer-term problems.

Jardine's main listed companies recently reported healthy earnings for 1994. Hongkong Land, the blue-chip owner of prime properties in Hong Kong's central district, reported a 19 per cent increase in earnings. It holds a controlling 25 per cent stake in Trafalgar House, which is bidding for Northern Electric.

Dairy Farm, the food distribution and retailing arm, also scored well with a 13 per cent increase. The parent, Jardine Matheson Holdings, turned in a better-than-expected 16.5 per cent profits rise after tax .

The good news from Hong Kong was echoed in Singapore, where Jardine's main companies have transferred their listing.

On Monday, Hongkong Land, Dairy Farm and the Mandarin Oriental hotel group made a respectable dbut on the Singapore exchange while the shares in Jardine Strategic and Jardine Matheson Holdings, which had already made the move, were achieving prices arguably higher than they might have achieved on the Hong Kong exchange.

However, the volume of trading in these two shares is down, indirectly confirming some of the fears of those who forecast liquidity difficulties for Jardine shares away from home base. Jardine went to Singapore after it lost an acrimonious battle with the Hong Kong regulatory authorities about preserving certain privileges for the group following the transfer of the primary listing to London.

Jardine is also involved in a far more profound battle with China, Hong Kong's impending sovereign power, which has singled out the group as a legacy of colonial rule and made it clear that it can expect no favours from the incoming administration.

Other companies in the colony have been quick to pick up the signals from Peking and are steering clear of Jardine as a business partner in large projects, greatly reducing the prospects for new business.

Peking sees Jardine, and the Keswick family that controls it, as supporters of Governor Chris Patten's democratic reform plans, which China bitterly opposes. It also holds the Princely House responsible for starting the exodus of companies moving their place of domicile to offshore locations.

Although Jardine stoutly denies having a lack of confidence in the new regime, it is clear that it does. More galling for Peking, it is clear that most listed companies in Hong Kong feel the same way but only found the courage to change their place of domicile in the wake of Jardine's example.

In an attempt to defuse the high level of tension between the group and the Chinese authorities, Alisdair Morrison, the managing director of Jardine Matheson Holdings, said in a speech at the beginning of the year that "plainly some of Jardine's actions have caused offence in China in recent years" - effectively an apology. The apology was not accepted. A foreign ministry spokesman came back within two days to say that Jardine would need to do more to demonstrate its sincerity.

Despite all the talk of Jardine quitting Hong Kong, the reality is that it generates over 60 per cent of its profits from Hong Kong and China.

Jardine has an US$8bn (£5bn) property portfolio in Hong Kong and is the largest private sector employer in the colony.

Like it or not, Jardine cannot simply up sticks. Companies that are equally worried about the colony's future under Chinese rule have managed to move a far higher proportion of their assets overseas with far less attention.

As the current battle for Northern Electric shows, it has never been easy for Jardine to operate outside the Far East. Jardine's control of Trafalgar House is just one example of disappointment from foreign investments.

Also in Britain, Jardine gained control over the Kwik- Save supermarket chain, through Dairy Farm, but it has proved less profitable than the Wellcome supermarket chain, one of two that dominate the grocery business in Hong Kong.

However, none of the overseas investments have proved to be as disastrous as the acquisition of a 20 per cent stake in the Bear Sterns brokerage of the US eight years ago. The bid was made as the market crashed and litigation followed in spades. Put simply, Jardine is not so sure-footed when it ventures out of Asia.

Even back home, Hongkong Land, its prime asset, is facing the problems of falling prices in the colony's property market, which have become acute in the central district, which is dominated by the company.

A Vickers/Knight-Ridder report issued this week estimates that values have fallen by a third in central since their peak in the second quarter last year. Unusually, by Hong Kong standards, the Keswick family control the Jardine group through a relatively modest holding.

This makes the companies, especially Hongkong Land, vulnerable to takeover. In 1988 a group of the colony's most powerful businessmen, including the ubiquitous Li Ka-shing, made a run at Hongkong Land and had to be bought out at considerable cost.

Part of the agreement with Mr Li and his colleagues involved the imposition of a hands-off period for buying shares.

This has expired and the possibility of another bid cannot be ruled out. Mr Morrison may well have been understating the situation when he said, at the time of the Jardine Matheson results announcement, that "our companies are well placed, but it is difficult to bump the market conditions".