By Paul Wiseman, USA TODAY
HONG KONG — No one has a bigger stake in China's rocketing economy than Hong Kong's business elite. So a blast of bad news about unsafe made-in-China products — particularly Mattel's (MAT) recall this week of hazardous toys — has rattled this former British colony.
Mattel's recall announcement on Tuesday hit one of this city's best-known tycoons: billionaire Francis Choi, Hong Kong's "Toy King," who owns the factories that manufactured thousands of die-cast toy cars that were recalled after being found to contain excessive levels of toxic lead.

Mattel isn't blaming Choi's Early Light Industrial Co.. The toy giant says a Chinese subcontractor was responsible for violating Mattel rules and substituting cheaper, lead-contaminated paint for the approved paint Early Light had supplied.

Last weekend, entrepreneur Cheung Shu-hung, co-owner of another Hong Kong-registered company, killed himself after Mattel earlier recalled 967,000 lead-tainted preschool toys manufactured by his firm.

Early Light and other Hong Kong toy companies did not return calls for comment Thursday. But Lawrence Yau, spokesman for the Hong Kong Trade Development Council, said: "We are quite worried at the moment. We are surprised that Hong Kong manufacturers are involved. They have quite a good track record. They pay great attention to product quality and safety. They are now looking at their own supply chains."

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The Federation of Hong Kong Industries issued a statement Thursday, admitting that recent recalls have "caused significant damage to the image and reputation of the Hong Kong toy industry."

But it isn't just toys. In recent months, safety recalls have snagged Chinese-made pet-food ingredients, seafood and tires. "We are very, very nervous," says Federation Chairman Clement Chen, a textile manufacturer. "Today, we are talking about toys. We don't know what we will be talking about tomorrow."

Hong Kong, which is now an autonomous Chinese region, has lashed its economic future to mainland China's. Starting in the 1980s, Hong Kong manufacturers packed up and moved their factories across the border to the mainland, seeking to take advantage of boundless supplies of cheap labor.

But Hong Kong still provides the cash and know-how — in everything from quality control to marketing to logistics — that most Chinese firms lack. Hong Kong is by far the No. 1 source of investment in China: $20.2 billion last year alone; the British Virgin Islands, a tax haven, was No. 2, with $11.3 billion, according to Chinese government figures cited by the U.S.-China Business Council.

For Hong Kong firms that run factories in mainland China and especially for toy manufacturers, the furor about safety standards couldn't have come at a worse time. They're running full tilt to meet orders for Christmas. "We hope this can be settled as soon as possible," Yau says. "The shipment season will reach its peak in early September to mid-October. This period is critical."

The Federation of Hong Kong Industries is warning members to tighten their quality controls, hire laboratories to test products before shipping, and double-check everything subcontractors do, even if they've done good work in the past. Sure, Chen says, the precautions will drive up costs. But recalls are a lot more expensive.

"The market is changing every day," Chen says. "The consumer is getting more alert. The importers are tightening their requirements and standards. As business people, we have to be triple careful."

Chen is confident that most Hong Kong companies do a good job overseeing their Chinese operations. And he doesn't begrudge U.S. buyers for putting intense pressure on Chinese factories to raise quality and lower costs.

"We can't blame anybody," he says. "That's how the market works." He does suspect that outrage about Chinese products partly reflects tension over the United States' huge trade deficit with China, $233 billion last year. And he doesn't expect the controversy to go away.

"God knows tomorrow what other item will be recalled or rejected," Chen says. "Today, we are talking about the American market. What about the Japanese market, the European market? It is like a forest fire. It is getting more intense. The area affected is getting bigger and bigger. We need to do something to put it out."

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