JASON BOOTH

Staff Reporter

Even as relations between the United States and China get worse, the Magic Kingdom is intensifying its efforts to do more business in the Middle Kingdom.

Last week, the government of Hong Kong announced that it was engaged in talks with Walt Disney Co. concerning the building of a major theme park near the city. Disney analysts and China watchers say that in some ways, the Burbank-based entertainment giant's timing could not be better.

"Property prices in Hong Kong have fallen so much that (developing a park) would cost a whole lot less now than it would have two years ago," said Greg Fager, director of the Asian department at the Institute of International Finance in Washington.

Beijing, meanwhile, looks ready to give Disney a second chance after having shut the company's films out of the Chinese market for nearly two years. That unofficial ban followed a string of Disney movies that were deemed anti-Chinese, such as "Seven Years in Tibet" and "Kundun."

Beijing is now looking for Disney to be more politically sensitive, said Thomas Leong, who represents the China Co-Production Corp., a government-backed agency that overseas all co-productions between Chinese and foreign film production companies.

"I see a very bright future for Disney in China as long as they learn from their experience and they do things the way they are done in China, rather than trying to force the American way onto the Chinese," he said.

Beijing's acquiescence is driven by economic reality.

With Hong Kong in the midst of a serious recession, which has also caused economic difficulties on the mainland, Chinese officials are more than happy to welcome a major investment. Those economic concerns should easily override any political animosity between China and Washington, analysts say.

"China wants to show that the idea of 'One Country, Two Systems' works," said Alex Pan, who runs the China practice for PriceWaterhouseCoopers LLP in Los Angeles. "Following the Hong Kong economic crisis, Beijing wants to support anything that will help Hong Kong to help itself."

From Disney's perspective, Hong Kong is a near-ideal location for the company's first theme park in China, according to analysts. (Disney officials declined to comment for this story, citing ongoing negotiations with Chinese officials.)

A Hong Kong theme park would give Disney a chance to tap the Chinese market without the risks of attempting to build a park in China proper.

Under the "One Country, Two Systems" policy set up after Britain returned sovereignty of Hong Kong to China in 1997, the city has been allowed to maintain its own political, legal and business system. As a result, Disney would find building a park there far simpler than in a mainland city such as Shanghai or Beijing.

Building codes in Hong Kong meet U.S. standards. Much of the labor force is bilingual. Import tariffs are low, so the company would have little problem bringing in the needed materials.

And by building in Hong Kong, Disney would avoid local politics that have been troublesome for many foreign companies attempting to set up shop in China.

"It would be much harder for Disney to work through the levels of government and regulations you find on the mainland," said Alan Fenning, an attorney specializing in project financing in Asia with Milbank, Tweed, Hadley & McCloy in Los Angeles. "When you have local, provincial and state regulations to deal with, it's sometimes hard to figure out what level you are supposed to be dealing with at any given time."

Hong Kong is also favored because it is more cosmopolitan than China or most any other Asian nation. As a result, Disney would not have to tailor the new park to a particular set of political or cultural ideals. Even in France, Disneyland ran into trouble as local politicians and media argued that the park was not French enough.

The cosmopolitan nature of Hong Kong also means a steady flow of international tourists. "A theme park in Hong Kong would give Disney the best of both worlds," said Fager. "They can get good business from the Hong Kong people and regional tourists, while waiting for the huge Chinese market to open up."

Disney's past model for building theme parks overseas has been to work closely with a local partner, which finances the construction and then handles management after the park is completed. Similar to a franchise deal, Disney provides the hardware from Mickey Mouse hats to flying Dumbo rides as well as the training and technical support.

In Hong Kong, two firms, Cheung Kong Holdings Ltd. and Sun Hung Kai & Co. are reportedly vying to develop a partnership with Disney. Unlike many mainland Chinese companies, both Cheung Kong and Sun Hung Kai are considered financially strong and have years of experience in building and operating major office, retail and housing developments.

Eventually, Disney will likely push for a park in China proper. As income levels continue to rise in the world's most populous nation, the market for themed entertainment should continue to grow.

With that in mind, a park in Hong Kong is seen as a stepping stone that would allow Disney to learn about doing business in China, without having to deal with the economic, political and cultural difficulties it would face on the mainland.

"Disney sees China as a huge market that they have to be a part of," said Tom Wolzien, an analyst at Sanford C. Bernstein in New York. "The fact that 'Mulan' was a Chinese folk tale was no accident."

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