(FORTUNE Magazine) – SMART-LOOKING SHOPS along Xizheng Street sell Japanese cameras, Reebok shoes, French cognac, Motorola mobile phones, and M&M candy. After hours, people pour into karaoke sing-along bars, coffeehouses with big-screen TVs, or semidarkened dance halls enlivened by sultry hostesses in skintight outfits. Hong Kong? No. This is the Chinese provincial city of Dongguan, 50 miles north, home to nearly 6,000 factories set up by investors from Hong Kong and Taiwan that turn out toys, plastics, and garments for export. Welcome to Greater China. Increasingly, the economic boundaries between Hong Kong, Taiwan, and freewheeling South China are fading -- and their cooperation fuels the most dynamic growth on this planet. Says William Purves, chairman of the Hongkong Bank Group: ''Investment and expertise channeled from Hong Kong have turned southern China into one of the industrial powerhouses of Asia.'' This vibrant swatch of China -- an area roughly twice as big as Connecticut -- is, says Purves, becoming another Little Dragon like Hong Kong, Taiwan, Singapore, and South Korea. Greater China is neither a political entity nor an organized trading bloc, but it is a reality driven by a common culture and a shared desire to make money. Paul Hsu, senior partner in the Taiwan law firm of Lee & Li, describes this cohesive area as ''the Chinese productivity triangle.'' It combines Taiwan's technology and financial power (it has $82 billion in reserves), Hong Kong's international marketing skills, and China's vast supplies of land, workers, and ambition. Says Robert Wu, director of industrial and business development at the Chinese University of Hong Kong: ''Greater China is a potential economic superpower, the only one that could stand up to Japan.'' Overseas Chinese entrepreneurs have transformed Guangdong province, which borders Hong Kong, into the most open, thriving economy in the People's Republic. With a population of 63 million, a mere 6% of the country, it accounts for 21% of China's exports. For a dozen years the province has sustained annual real growth averaging 12% -- probably the fastest economic takeoff in history. If this keeps up, and there are no signs of slowdown, per capita income in Guangdong will approach that of southern Europe by 2000. In Guangzhou, the provincial capital known in the West as Canton, more than 85% of homes have refrigerators, and 90% have TV sets. And these ardent viewers of Hong Kong TV commercials are very brand conscious.

Chinese industriousness can work wonders even in the People's Republic -- if bureaucrats get out of the way. Deng Xiaoping is trying to convince his aging Marxist comrades that South China is an economic model for the rest of the nation. He has even devised a term that -- for China -- is politically correct: ''socialism with Chinese characteristics.'' Rather than worrying about politics, manufacturers in Hong Kong and Taiwan are shifting production to South China for sound economic reasons. Semiskilled workers in Guangdong earn about $100 a month, more than three times the average wage in the rest of China but a great bargain compared with nearly $900 in Taiwan and Hong Kong. No wonder Hong Kong companies employ some three million workers in 25,000 factories across the border, more than triple the number of manufacturing workers in Hong Kong itself. An estimated 4,000 Taiwan enterprises have set up plants in China, mainly in the south, to make bicycles, handbags, sporting goods, and much else that can no longer be produced competitively in Taiwan. The British colony of Hong Kong will not revert to China until July 1, 1997, but the two are already inextricably linked. China and Hong Kong have become each other's largest trading partner and biggest outside investor. The People's Republic has poured more than $10 billion into Hong Kong in recent years, encouraging the colony's business leaders to believe that capitalism will continue -- just as Beijing promised in its agreement with Britain in 1984. Says Rod Eddington, managing director of Cathay Pacific Airways, in which Chinese companies have acquired a 22.5% stake: ''For me, 1997 has already arrived. Not only is it nothing to fear, but it provides opportunities.'' To cut costs, he is shifting labor-intensive accounting operations to South China. The Nationalist regime on Taiwan hopes that growing economic cooperation will lead to eventual reunification with a kinder, less-communist China. Taiwanese, once barred by local law from having any contact with the mainland, now make a million trips a year there. They often can make deals on better terms than Westerners or Japanese by relying on guan xi, personal contacts, with relatives and friends. Says Chang Ping-Chao, a Taiwan legislator and businessman: ''A Taiwanese who goes back to his hometown is received like a hero.'' Taiwan still prohibits direct air and shipping links, but trade through Hong Kong has taken off like a Long March rocket: up 44% last year to $5.8 billion and an expected $8 billion this year. And that's not counting another $2 billion or so that goes through other countries along with a bit of covert direct trade across the 100-mile-wide Taiwan Strait. At this rate, China could replace the U.S. as Taiwan's biggest trading partner within a decade. More immediately, the China boom has kept Taiwan from slipping into recession along with America, Europe, and Japan. Greater China sends inexpensive products into world markets through a division of labor no rival exporter can match. Toys, for instance, are designed in Hong Kong, assembled in South China (often with a Taiwan-made chip for talking dolls), and finally packaged and shipped from Hong Kong. Says William Fung, managing director of the trading firm Li & Fung, which supplies such U.S. retailers as Woolworth and the Limited: ''Jogging suits that we used to source from Taiwan now are sewn in China with velour from Taiwan.'' South China provides economical brainpower for VTech, a Hong Kong maker of personal computers, educational toys, and telecommunications equipment. The company, listed on the London stock exchange, does 70% of its manufacturing and much of its design in China. VTech is setting up an R&D center just across the border. Its 500 engineers will cost about the same as 30 engineers in Hong Kong. The China connection gives the company (with $561 million in sales last year) a profitable edge in supplying products to such outlets as Sears and Toys ''R'' Us. Says VTech Chairman Allan Wong, 41, an electrical and computer / engineer trained at the University of Wisconsin: ''By the year 2000, I can see clearly that Hong Kong will be like Tokyo, the business headquarters and financial center, while the factories will be on the outskirts in South China.'' That vision is practically a reality today, especially in the Pearl River delta that extends from Hong Kong up through the city of Guangzhou. A swing through the delta reveals an economy that could be described as Greater Hong Kong. Everywhere merchants, even soft-drink vendors on the street, prefer Hong Kong currency, some 20% of which circulates in China. As one Hong Kong banker puts it, ''We're the capital city of South China.'' Hotels and restaurants are filled with new Chinese entrepreneurs, many toting mobile phones and paging devices that display stock quotations. Even Chinese officials talk about profits rather than ideology. Capitalist in spirit if not in fact, South China gets most of its financial muscle from Hong Kong and Taiwan. Driving through this hothouse of private enterprise, you run into traffic (mostly trucks hauling goods to Hong Kong) so thick that there's plenty of time to see the dramatic transformation taking place. Both sides of the four-lane roads linking major cities look like huge construction sites. Chinese who have become relatively rich are building townhouses. Local collectives (village enterprises run like companies) are putting up office buildings and industrial parks. Overseas Chinese are financing skyscrapers, apartment buildings, and shopping centers. Shenzhen, just across the border from Hong Kong, resembles a mini-Hong Kong. The first and largest of China's Special Economic Zones for testing capitalism, Shenzhen since the late Seventies has blossomed from a fishing village into a manufacturing and financial center of two million people with an average annual per capita income of over $5,000. The city has a golf course, a race track, several amusement parks, and countless nightclubs. The biggest game in town is a fledgling stock market. Says Yu Guogang, 48, its deputy chief executive: ''To be very honest, in a socialist society like China it's a lot more difficult to launch a stock exchange than in a place like the U.S.'' How true. A riot broke out in August as hordes of would-be investors sought to buy new shares offered in a kind of lottery, but trading goes on. After all, China needs to mobilize an estimated $200 billion that sits in savings accounts and under mattresses, and the country has only two - stock exchanges, in Shanghai and Shenzhen. The drive for wealth in the delta is even more striking in Dongguan, a metropolitan area of two million that includes 29 surrounding townships. Over dinner at the Jiang Du hotel, which is owned by a township, a senior executive of a state-owned bank explains how this once somnolent rural town turned into an export manufacturing center in just a dozen years: ''Typically, a guy doing piecework in Hong Kong, such as making watchbands in his own little shop for a big factory, has a network of relatives here. He comes to visit, bringing along some samples, and gets his kinsmen to start making watchbands too. And on the back of their labor a little enterprise is built. Before long they buy a truck and carry their output to Hong Kong.'' To lure bigger enterprises, Dongguan townships have put up factory buildings to rent to manufacturers from Hong Kong and Taiwan. Western investors have come too. There are plants producing Nestle instant coffee and components of vehicle transmissions for Fenner Group of Britain. Boasts the banker: ''We're flexible and entrepreneurial like people in Hong Kong.'' Dongguan largely ignores ill political winds from Beijing, including the violent suppression in 1989 of pro-democracy demonstrators at Tiananmen Square. As the banker puts it, ''We're practical people and are not into political oratory or parades.'' When Beijing ordered a clampdown on spending in 1988 to control inflation, Dongguan put its own money into building roads and electric power plants. ''If we waited for Beijing,'' says a local official, ''nothing would get done here.'' In Dongguan, even officials have become entrepreneurs. Chen Lin, head of Wong Tsuen township, has organized Winnerway, which he describes as a ''comprehensive company'' that owns factory buildings, does trading, invests in real estate, runs a dance hall, and takes minority stakes in manufacturing ventures. Comrade Chen is now Chairman Chen. He started in 1988 by borrowing $12 million from a bank in Hong Kong to build an industrial park, and has already repaid most of the loan. Says Lu Wei, one of his assistants: ''Our goal is to earn money, but we also have a social responsibility to create jobs.'' Winnerway has already created some 10,000 jobs, many of them in the 24 companies operating at its first industrial park. Individuals, long squelched by communism in China, can flourish in Dongguan. Meet Kee Yong Tong, 35, who four years ago quit his job designing labels for a state corporation and started his own interior decorating firm, called M (for Modern) Design. Trained at the Guangzhou Fine Arts Institute, Kee says, ''This is what I wanted to do with my life. It's the shortest and quickest way to achieve something.'' Though he launched his business without much capital, Kee acknowledges that having Overseas Chinese relatives to fall back on ''has a liberating effect.'' He finds plenty of work, including the interior of a new 100-room hotel under construction in a nearby township and homes for the nouveaux riches of Dongguan. The Pearl River delta's corridor of wealth extends to the city of Guangzhou. A traditional manufacturing hub, it is now enjoying a real estate boom driven by the coming together of Chinese enterprises that have land and Hong Kong investors who have money to develop it. Tian An China Investments, a Hong Kong company, is razing a city block of waterfront on the Pearl River and, with a local partner, putting up a $60 million, 43-story building for offices and apartments. Across town, the Hong Kong company is developing Fortune Garden, a $40 million housing complex. The price of an apartment (under $100 a square foot) is about a fifth of the going rate in Hong Kong. Within a year a new superhighway will be completed between the two cities, cutting travel time from four hours to slightly more than one. Says Cheng Wei Yi, a Tian An manager: ''That superhighway will make Guangzhou a suburb of Hong Kong. If you believe that Hong Kong and the Pearl River delta are becoming integrated economically, Guangzhou is a perfect residential area.'' State industrial enterprises are inefficient nightmares in much of China, but the delta has some jewels. Gaily Electric Appliance Co., which started in Guangzhou as a neighborhood workshop turning out hot plates, has sales of $22 million a year and exports steam irons and toasters. The verve on its factory floors is reminiscent of Taiwan in the Sixties, but Gaily's computer-designed products are probably better than the ones Taiwan turned out back then. An international investment fund based in Hong Kong has a 25% stake in the company. Says Xie Xiu De, 39, Gaily's enthusiastic vice general manager: ''We treat the market like a parent that nurtures us. Instead of making copycat products, we try to do something different and original.'' The long arms of both Hong Kong and Taiwan reach into Panyu, a suburb of Guangzhou and the site of a high-tech industrial park. On a vast tract of land - leased from a village, the Grande Group of Hong Kong employs some 2,600 people -- mostly teenage girls -- making heads of computer disk drives for Digital Equipment, Seagate, Sumitomo Electric, and Samsung. Average pay per person, including engineers and managers, is just $110 a month. Rene Crestejo, executive director of Grande, says, ''This is called a joint venture, but the Chinese party, the senior official of a village, has no say over hiring and firing.'' Greater China has broad implications for U.S. policy. The shift of production from Taiwan and Hong Kong to the mainland has turned China into a potent export machine. Washington is already clashing with Beijing over China's trade surpluses. The U.S. wants China to dismantle its trade barriers. But the surpluses are bound to keep growing. With the full integration of Greater China in the years ahead, warns Harry Harding, a Sinologist at the Brookings Institution, ''the U.S. will face a powerful new international trading bloc.'' Still, it's not too late for American companies to get inside Greater China and exploit both its production prowess and its growing consumer market.