One year from today, this bustling trade hub on the South China Sea will officially become a Chinese territory for the first time in nearly 150 years.

In the United States, attention has been focused largely on the political squabbling between Britain and China, and fears of Chinese heavy- handedness following the transfer.

But many U.S. banker doing business here see a future filled with dollar signs. While there are some reservations about the historic transfer of power, bankers by and large believe the handover will improve their business prospects by creating closer ties to China.

"On the political side, the road will be bumpy," says William Overholt, the managing director of Bankers Trust Co.'s Asian operations. "But on the banking side ... what you'll see is enormous expansion of opportunity, because the relationship with China will be much closer, and they have more at stake than anyone else."

In the past few years, many leading U.S. banks have set up shop here to get a piece of the booming Asian trade finance market.

In 1995, U.S.-Hong Kong trade - 54% of it re-exports of Chinese-made products to the U.S. - hit new highs, totaling $53 billion.

The colony's banking market has moved in tandem with trade, today ranking as the world's fifth largest, with more than $1 trillion in total assets and a daily foreign exchange turnover of $91 billion.

"You've got to think about this as a prudent businessman," says Stephen Long, head of commercial banking for Citicorp's North Asia division. "I think the Chinese realize that it's in their own best interest to live up to their agreements here."

Most large U.S. regional banks now have regional trade finance outposts here, while Citicorp and BankAmerica Corp. have built thriving domestic retail operations.

Others, including Bankers Trust and Chase Manhattan, use the colony as a base for sophisticated swap and option trading, derivatives operations, and project finance.

In all, there are 16 licensed U.S. banks in Hong Kong, controlling assets - both internal and external - of $43.8 billion, according to figures supplied by the American Chamber of Commerce in Hong Kong. Include joint ventures and other trade finance offices, and at least 35 U.S. banks have a presence here.

Domestically, U.S. banks in 1995 controlled 6% of the nearly $300 billion in local deposits, and 4% of the colony's $450 billion in loans, according to figures supplied by Bankers Trust.

In spite of these inroads, bankers have some concerns about life under the control of the Chinese will affect certain areas of the business.

Private banking operations, for example, are viewed as potentially vulnerable to peering government eyes.

Fearing that privacy information may be compromised, one U.S. bank has already shifted most of its Asian private banking operations from Hong Kong to Switzerland, while others are examining the issue closely.

"We've seen nothing from the Chinese to indicate we have a problem," says Terrence Cuddyre, Hong Kong country manager for Bank of America. "But we need to make sure that, with regard to confidentiality, that we can maintain our standards." Many question the fate of Hong Kong's vaunted British-style legal system, while others fret that corruption, endemic in China, will move south into Hong Kong.

"It's clear that (corruption) will increase," says Kevin Jones, vice president for Booz, Allen & Hamilton in Hong Kong. "The question is, will it increase to the point where this place is unviable as an economic entity? It may not in the next 10 years, but beyond that, no one knows."

Sparked by such fears, tens of thousands of Hong Kong residents now hold foreign passports as a means of escaping potential Chinese tyranny, while 86% of local businesses incorporated over the past six years are technically domiciled elsewhere.

"The Chinese authorities don't understand that the economic prosperity here is based on a whole set of political institutions - rule of law, public safety, security of property, an inherent lack of corruption," says David Newman, a U.S. attorney and senior lecturer at Lingnan College in Hong Kong. Mr. Newman is co-author of the new book, Red Flag Over Hong Kong which offers a decidedly pessimistic forecast of the colony's future.

In the aftermath of the government's 1989 crackdown on pro-democracy protesters in Tiananmen Square, most banks transferred key employees to the U.S. to help them acquire passports.

If the Chinese make hostile moves here, many of those employees could flee.

"We're vulnerable if things get difficult, and we have five or 10 key people walk out the door in a short period," says one U.S. bank manager who asked that his name not be used. "You can't prevent it. All you can really do is spend more time on succession planning and local recruiting."

Citibank, Bank of America, and Chase Manhattan are all big employers here. And it is those operations that are feeling the initial wave of the handover, as wealthy Chinese, flush with cash, speculate on the scarce land.

Over the past three years, rents have skyrocketed, pushing back-office workers to the fringes of the city. In central Hong Kong today, office space rents for an eye-popping $150 per-square-foot a year.

"Forget 1997," says Harry Wilkinson, managing director of Chemical Bank's office, which will officially merge with Chase Manhattan's later this month. "Costs are the main issue here today."

The coming linkage with China also has drawn a bevy of aggressive Chinese banks, sparking a heated competition in the city for all sorts of loans. Loan spreads have narrowed and underwriting standards have declined, bankers report, while trade finance - once managed cartel-style - is now done on a deal-by-deal basis, pushing prices down.

U.S. banks, with their big corporate customers, have been relatively immune to the trend, and many have aggressively extended their presences here. BofA, for instance, has a $2 billion mortgage business that didn't exist five years ago, while 1995 was Citicorp's most profitable year ever in the colony.

Whether that will continue is, of course, anybody's guess.

Beijing officials have made no secret of their desires to eventually see Shanghai, not Hong Kong, become the country's financial center, and in a centrally planned economy that has defined banking as one of several "pillar industries," such wants can quickly become self-fulfilling.

Although it will likely be a decade or more before Shanghai's infrastructure can compete with Hong Kong's, several foreign banks, including Citibank, have already responded to the call, making Shanghai their official China headquarters.

"Shanghai is a bigger commercial center, and it has the support of the government," says Booz, Allen's Jones. "So where would you go?"

Mr. Engen is a freelance writer based in Minneapolis.

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