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Adrian Cheng, heir to the behemoth New World conglomerate. Hong Kong politics is moving one way, and society another; for the territory's third-generation business elite, straddling the divide is becoming increasingly precarious. (Photo by Paul Yeung)
The Big Story

China shadows the rise of Hong Kong's next tycoons

Avoid politics, build trust: One dynasty heir speaks on a generation's dilemma

MICHELLE CHAN, Nikkei staff writer | Hong Kong

HONG KONG -- Adrian Cheng Chi-kong doesn't like to waste time. The heir to a family fortune of $20.7 billion, he also detests excessive formality and inefficiency. 

So when the 41-year-old, third-generation tycoon arrives at Cobo House -- an upscale fusion restaurant known for its panoramic sea view overlooking Victoria Harbor -- he shows up in casual Yeezy sports shoes. His first question: What's the circulation of your magazine? He allots a crisp 10 minutes for a planned photo shoot, which will take place in a nearby cultural center that showcases his own art collection.  

This has been a big year for Cheng. He has taken over the reins from his father, Henry Cheng Kar-shun, to become CEO of New World Development, as the Hong Kong property giant marks its 50th anniversary. The Cheng family also controls Chow Tai Fook Jewellery Group, the world's second-largest jewelry retailer by market value.

The Chengs are one of Hong Kong's premier old-money families. They have thrived in both the colonial and post-handover era, prospering under different environments and regimes by treading carefully between business and politics.

Today, the territory's tycoons face another once-in-a-generation dilemma as they pass on the leadership to their heirs: whether to further invest in Asia's financial hub in spite of the uncertainty generated by a newly assertive China, or to rethink their commitment to their home market.

Cheng has taken over the reins from his father, Henry Cheng, to become chief executive officer of New World Development this year as the Hong Kong property giant marks its 50th anniversary. (Photo by Paul Yeung)

Cheng has been doubling down on investments in the territory, committing nearly $50 billion Hong Kong dollars over the next year. In progress is a world-class sports park in the city's new urban development zone, and SkyCity, a colossal retail and entertainment complex connecting to the airport.

"New World, for the past 50 years, has been very rooted in Hong Kong," said Cheng. "Hong Kong is always going to be our base, our origin." He described the company's continuous investment in the city and mainland China, where New World plans to expand its K11 brand of shopping malls, with a total of 38 projects opened across greater China by 2024.

Cheng has also deepened his contacts with the Chinese government. He currently serves as vice-chairman of the All-China Youth Federation, and as a member of the Chinese People's Political Consultative Conference, on the Tianjin Municipal Committee.

But as Cheng and his peers maintain their relationships with China in the wake of sweeping security laws promulgated by Beijing last May, they are in danger of falling out of step with Hong Kong, where politics is moving one way, and society is moving another. The new generation of tycoons must find ways to appeal to Hong Kong's youth, who are increasingly alienated from big politics and sympathetic to the pro-democracy movement. Straddling this new divide has become, for this third-generation, an increasingly precarious balancing act.

"The world is not operating as it was ten years ago. ... The families here have to hedge their bets and diversify in some ways," said Kevin Au, director of the Centre for Family Business at the Chinese University of Hong Kong. Au noted that while Hong Kong tycoons have to make sure that they don't miss out on opportunities from China's economic growth, they have to maintain an image that they are not closely associated with China as the countries' geopolitical tensions with the U.S. and other Western countries escalate.

"It is going to be a dilemma for these old Hong Kong families," Au said. "They have to please both worlds, and they can't put all their eggs in one basket."

This need to balance both Beijing and appeal to Hong Kong's new generation is particularly apparent to Adrian, who has worked to transform the 50-year-old company into a millennial-focused brand. And there is only one way to accomplish this: Avoid talking about politics at all costs.

"My corporate philosophy is to create shared value. You know, connecting businesses with social programs," was the closest he came to this subject in a 40-minute long interview.

2020 was the year that faith in Hong Kong's future was sorely tested, as Beijing tightened its grip over the former British colony. In May, in response to pro-democracy demonstrations that started last year, Beijing announced a sweeping national security law which all but obliterated the "one country, two systems" formula for the country's governance agreed at the handover to China in 1997.

The all-encompassing law provides criminal penalties of up to life imprisonment for activities that authorities deem as national security threats. The day following the unanticipated announcement, Hong Kong stocks fell over 5% in their steepest single-day drop in five years.

The real estate sector, whose assets are heavily concentrated in the territory, led the fall. At one point this year, shares of New World Development dropped as much as 30% since January before recovering. The company's future is very much pegged to the fate of Hong Kong, where New World generated about two-thirds of its HK$59 billion ($7.6 billion) 2020 revenue.

For decades, Hong Kong has been the conduit for capital to flow between China and the rest of the world. But as the firewall between the two places gradually disappears, and as the U.S. revokes trade and investment privileges for the city in light of the new law, investors are beginning to cast doubt on Hong Kong's strategic position as a window to tap the China market.

Meanwhile, clouds of tear gas, riot police, and traffic disruptions have also prompted many businesses to make exit plans.

For the first time in 11 years, Hong Kong has seen a reduction in the number of foreign businesses, dropping slightly from 9,040 to 9,025, according to the latest Hong Kong government survey.

But optimism seems to be slowly returning, at least to the real estate sector. The Pavilia Farm, New World's latest large-scale real estate project, has logged the highest number of subscriptions since the city returned to Chinese rule in 1997, helping the company to exceed its sales target for the year.

Located in Hong Kong's suburbs, The Pavilia Farm is infused with Nordic and Japanese design elements. The modern, high-rise housing complex has a luminous, airy vibe, sleek wood furnishings and eco-friendly smart home devices tailored to millennials and young families -- provided they can afford the hefty price tag of HK$7.9 million to HK$25 million.

"It is going to be a dilemma for these old Hong Kong families. They have to please both worlds, and they can't put all their eggs in one basket"

Kevin Au, director of the Centre for Family Business at the Chinese University of Hong Kong
New World Development launches the sale of THE PAVILIA FARM I and attracts 22,700 registrations in the first round alone, making it HK’s most in-demand residential property, with the highest number of registrations since 1997. (Photo courtesy of New World Development)

It is also, as the name suggests, a farm. Part of the supposed appeal is the residents can grow crops in the communal space. "The first farm-life-infused sustainable residential project in Hong Kong," Cheng says in a promotional video on the Pavilia Farm website, suffused with images of wicker furniture, a wheat field stretching over the horizon, and some freshly dug potatoes.

Despite the worst recession on record, due to the COVID-19 pandemic and the aftermath of the security law, the project's record-breaking sales reflected citizens' general confidence over Hong Kong's future, said Cheng, noting that half of the Pavilia Farm's buyers are under 40 years old.

"Life goes on. ... Hong Kong is a very resilient market. There's a lot of demand for premium, high-end residential housing, especially from young people looking to upgrade their lifestyles," said Cheng, who attended Harvard University and has worked for both Goldman Sachs and UBS. "We have challenging times, but business will bounce back eventually. I have strong faith in that."

The big four

To the Chengs, one of Hong Kong's "big four" families -- the other three include the Lee brothers of Henderson Land Development, the Kwoks of Sun Hung Kai Properties, and Li Ka-shing's CK group -- it might be too late to plot a move away from Hong Kong.

In recent years, Chinese state media, often the mouthpiece of the Communist Party, has repeatedly lashed out at Li Ka-shing, who is regularly rated as Hong Kong's richest man. They accuse him of offloading assets worth billions on the mainland to invest in Europe, where Li's CK Hutchison holding company generated close to half of its annual revenue in 2019, versus just 18% from Hong Kong and mainland China -- leaving the Li dynasty the only major family in the city that does not rely on the local market.

Even though the CK group -- a conglomerate spanning infrastructure, port, retail, and telecom businesses -- began to diversify internationally 30 years ago, Li has ramped up overseas mergers and acquisitions since 2015 in the wake of the Umbrella Movement that called for universal suffrage in the city. That year, Li registered CK Hutchison and CK Asset Holdings, the two new companies created in a groupwide restructuring, in the Cayman Islands, instead of Hong Kong. The group has planned or completed asset sales totaling over $5 billion from China and Hong Kong since 2015, while only acquired less than $1 billion worth of assets in the region during the same period.

"Li Ka-shing has a long-term plan to divest from Hong Kong and China," said Joseph P.H. Fan, a professor specializing in family businesses at the Chinese University of Hong Kong.

As Li has reduced his local exposure and subsequently passed on the business empire to his elder son Victor Li Tzar-kuoi in 2018, his political stance is still under scrutiny from Beijing. Li was heavily criticized in the Chinese media during the early days of last year's citywide pro-democracy protests when he declined to openly criticize the protesters. It was only when Beijing proposed the national security law earlier this year that Li eventually broke his political silence and openly defended the legislation.

"It is within each and every nation's sovereign right to address its national security concerns. ... We probably need not overinterpret it," said the 92-year-old Li, following his son Victor's open support for the law.

For other Hong Kong tycoons who are almost completely dependent on the Hong Kong and China market, the room for dissent is even smaller, if not nonexistent. Billionaires based in the city, including the Chengs, have published one statement after another on local newspapers to voice their support of contentious government policies, including crackdowns on pro-democracy protesters and the new national security law.

Even so, China's Communist Party, which believes Hong Kong's unaffordable housing is fueling social inequality, deems the city's property tycoons as the culprit of protests. Chinese state media have repeatedly called on the Hong Kong government to seize idle land from property developers to build public housing.

In the early days of last year’s citywide pro-democracy protests, Li adopted an obscure stance towards the movement by not openly criticizing the protesters, making him once again the target of state media.   © Reuters

While Cheng denied that his business created social inequality, he said New World is committed to corporate social responsibility. Shortly after the criticism from China, New World pledged 3 million square feet, or almost 20% of its farmland, for affordable housing for low-income families. "Because Hong Kong needs it ... and I think that's important. It's a proper thing to do, so why not? Why can't we share our land with society?"

The Cheng family have made baby steps over the years to diversify out of Hong Kong, but have been unlucky with their choice of business partners. A first attempt failed spectacularly when the group sought a real estate partnership with none other than Donald Trump. The Manhattan development turned sour after the Hong Kong investors, including Henry Cheng, sold the project before reaching a price agreement with Trump in 2005. Trump later filed a lawsuit against Cheng and another investor for not driving a hard enough bargain.

Since this debacle, New World's acquisitions have spanned a Bahamas resort, an Irish plane leasing company, and an Australian energy group. It also ventured into the international hotel business in Vietnam and the Philippines, as well as property development in Singapore. Still, overseas businesses contributed less than 1% of the company's revenue for 2020.

Other "big four" families have stayed largely in Hong Kong as well. The Kwoks, which control Sun Hung Kai Properties, have co-invested in a shopping mall in Singapore -- the company's only overseas project. The Lee brothers, of Henderson Land Development, meanwhile, do not have any overseas investments at all.

"We need to look at it slowly because you don't want to diversify too much. ... Mainly we are very, very Asia-focused, and especially Greater China-focused," said Cheng. "Other people may want to go to another country, another place to put their resources. But for me, I want to localize my management team, I want to make my management more consolidated," he said. "I want everything to be leaner, more focused, more aligned. So that's my strategy. Other people, they have their own strategies."

Experts said local tycoons' business success in their home market has deterred them from venturing into foreign countries. "For decades, local developers have made big profits in the sure-win property market in Hong Kong and big Chinese cities. ... They didn't see a need for change," said said Fan at CUHK. He added that it will be difficult for local developers to suddenly expand into overseas markets, given their lack of connections and experience in those countries.

Even Li Ka-shing, a veteran in international expansion, has found it increasingly challenging to conduct overseas mergers and acquisitions as countries around the globe tighten regulations over foreign deals. In 2018, Li's CK group was blocked from acquiring Australian gas pipeline operator APA Group over national security concerns. In May, his group lost a bid in Israel to build a water desalination plant after the U.S. Secretary of State Mike Pompeo warned about CK's participation in the tender. "We do not want the Chinese Communist Party to have access to Israeli infrastructure," said Pompeo in a TV interview.

CK Hutchison declined to comment on the deal.

Hong Kong tycoons must walk a fine line to avoid being perceived by Western regulators as being closely connected to the Chinese government. But they are still in an advantageous position compared to their mainland counterparts. "After all, they are not Huawei Technologies," Fan said, referring to the Chinese telecoms infrastructure company which has been targeted for U.S. sanctions.

Local and global businesses fear Beijing's autocratic control will shatter the foundations of Hong Kong's success, underpinned by its long-established civil liberties and rule of law.

A survey by the American Chamber of Commerce found that nearly four in 10 members of the influential American business group are considering relocating from Hong Kong due to the new national security law. "We don't trust authorities here to honor the integrity of the banking and financial system," one member noted, adding that he has moved capital away from the city. In a separate survey conducted by the Japan External Trade Organization, more than one-third of Japanese companies are contemplating restructuring operations in Hong Kong or leaving the territory entirely because of the new law.

Ultrahigh-net-worth individuals in Hong Kong have already begun to park their assets elsewhere, with Singapore being a popular destination. Private asset management firm JJ Richman told Nikkei Asia that since November last year, it has seen three family offices it worked with diversifying their operations and moving to Singapore from Hong Kong.

Singapore-based wealth management outfit Envysion also told Nikkei that out of its pool of clients, two to three family offices based in mainland China that have assets in Hong Kong, are in the process of branching into Singapore. "Singapore, I think, serves as a very good ... more neutral location," said Veron Shim, Envysion's founder and chief executive.

Clients "have an intention of setting up family offices here, not just because they want to park their assets, but eventually, they are planning to move their family over to Singapore -- a lot of them are talking about immigration," Shim added.

However, New World insists it is not making any side bets. "Actually, we're much more insulated because we are focusing on China and Hong Kong. We're not doing exports with the U.S., we do not do anything with the world. So in terms of the risk of exposure, that will be less," Cheng said.

Over the past decade, it has aggressively invested in property development projects in both Hong Kong and mainland China. During the height of raging street protests last August, Cheng, undeterred, debuted his signature work: the K11 Musea shopping mall located at the Kowloon Peninsula waterfront, part of a HK$20 billion project to convert the promenade into an art and design district. Although the luxury mall has been forced to close on some days, it has been spared from the violence of the protests; some protesters have vandalized pro-China businesses while others call for boycotts.

"In the next 10 to 20 years, what we want to do is to continue to invest in Hong Kong, but at the same time ... expand to the Greater Bay Area and become a bigger Greater Bay Area company," Cheng added, referring to Beijing initiative to integrate 11 metropolises and cities in southern China to form an economic powerhouse. More than 50% of New World's China land bank is now located in the Greater Bay Area.

Living legacy

With his commitment to Hong Kong and friendly attitude toward China, meanwhile, Cheng is simply following in the footsteps of a family tradition that started under his grandfather -- Cheng Yu-tung. When the elder Cheng died in 2016, aged 91, his funeral was a mass event in Hong Kong. Pallbearers included leaders of Hong Kong and Macao, Beijing's permanent representative to Hong Kong, along with tycoons Li Ka-shing and Lee Shau-kee.

It marked the passing of an old era. But the new one, under Mr. Cheng, will hew closely to the course set by his grandfather. According to Patrick Mok Kin-wai and Wong Wai-ling, who recently published a biography of Cheng Yu-tung, the patriarch of the family always believed in connecting the fate of Hong Kong with mainland China

"He had a vision that if China can continue its development, it would give benefits and advantages to the whole Chinese people [and] be good for China," Wong told Nikkei Asia in an interview. "If China is good, [then] Hong Kong will be good."

Some of the elder Cheng's earliest investments bear out this logic. New World was the very first among the "big four" Hong Kong tycoons to make forays into mainland China. Its investment in China Hotel in Guangzhou in 1980 was the very first joint venture hotel in the country after Deng Xiaoping steered the direction to reform and opening up from isolation and self-sufficiency.

“In the next 10 to 20 years, what we want to do is to continue to invest in Hong Kong, but at the same time… expand to the Greater Bay Area and become a bigger Greater Bay Area company,” Cheng added. (Photo by Kei Higuchi)

After the Tiananmen Square massacre of June 4 1989, "when everybody fled from China, he took the opposite way and expanded his investment in China instead," said Wong. "Even though he could fly away from Hong Kong with his wealth, he didn't."

New World in 1989 signed a preliminary agreement for the first phase of a power plant construction in the neighboring mainland province of Guangzhou, while moving on to build the Northern Ring Road in the city agreed earlier that year. Cheng himself wrote in New World's annual report published in November 1997, the year of the handover, that the company has "sustained and actually increased our commitment, even when many investors were inclined to withdraw from China, as happened for example, after 4th June 1989, and more recently following the death of paramount leader Deng Xiaoping."

The lesson for the elder Cheng's descendants appears unmistakable: Hong Kong must count on mainland China for growth.

Indeed, New World Development is making bigger bets in the Greater Bay Area by snapping up 1.5 million sq. meters of floor area since 2016, with Guangzhou and Shenzhen being the key focus. Yet, it aspires to be more than a property developer in the area, consisting of economically prosperous cities where the 72 million population is dominated by young residents-- a driving force for tertiary services and consumption.

"There is a lack of services. ... So with a good brand with insurance services, wealth management services, financial services, different kinds of services, we will be able to complement the quality of life in the Greater Bay Area," said Cheng, citing the high gross domestic product per capita in the region.

Indeed, the 50-year-old property developer has ventured into tertiary services in recent years via a number of high-profile investments and acquisitions. In 2018, with a view to expanding its life and medical insurance business, New World bought FTLife Insurance for HK$22 billion through its infrastructure subsidiary NWS Holdings, which also invested in WeDoctor, a Tencent Holdings-backed online health care services platform. In the same year, it launched Humansa, a Hong Kong-based health care service for elderly living in the Greater Bay Area.

"A lot of nice projects coming up," Cheng said as he wrapped up the interview and hurried to another appointment. "We will continue to build awesome, monumental landmarks in Hong Kong."

As Cheng left, the late afternoon shadows were lengthening into dusk. Over the glassy harbor stretched Golden Bauhinia Square, the site of China's big annual flag-raising ceremony, bordered by the New World-developed exhibition and convention center that hosted the handover of sovereignty. The hulking building was commissioned in the 1980s, when Britain and China were negotiating the city's future.

It is a reminder of the importance of being on the right side of history. Otherwise, there is a Chinese saying: "Wealth does not last three generations."

Additional reporting by Kenji Kawase and Grace Li in Hong Kong and Dylan Loh in Singapore.

Correction: This article has been changed to reflect that one of the projects referred to, the sports park, is being financed by the government of Hong Kong.

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