A CHANGING HONG KONG AND U.S. POLICY By Michael F. Martin January 2011 PDF version

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A CHANGING HONG KONG AND U.S. POLICY

By Michael F. Martin
January 2011
PDF version

Current American policy towards the Hong Kong Special Administrative Region (Hong Kong) is based on the United States-Hong Kong Policy Act of 1992 (the Hong Kong Policy Act; P.L. 102-383; 22 USC 66). When the original legislation was introduced, many members of Congress were apprehensive about the future of Hong Kong, particularly whether the Chinese government would live up to its obligations under the 1984 Sino-British Joint Declaration 1 and the Basic Law of the Hong Kong Special Administrative Region of the People's Republic of China (Basic Law) that serves as its de facto constitution. 2

Eighteen years later, it would seem that China has, by and large, lived up to its obligations and many believe there is little reason to change U.S. policy towards Hong Kong. However, there are warning signs on the horizon – particularly in Hong Kong's political, legal, and economic systems – that could portend a desire by some for the U.S. to reexamine this relationship. In the interim, how Hong Kong has managed its relationship with China, given that its authorities have generally found ways to foster cooperation with their Chinese counterparts without seriously compromising Hong Kong's relative autonomy, may be instructive.

At its core, the Hong Kong Policy Act commits the United States to continue to treat Hong Kong as it did when it was a British colony so long as China complies with its obligations under the Joint Declaration. 3 In short, so long as Hong Kong continues to "enjoy a high degree of autonomy on all matters other than defense and foreign affairs," the United States will continue to treat Hong Kong as a separate entity from China with respect to commerce, trade, transportation, cultural and educational exchanges, and in international agreements and entities in which Hong Kong participates as a separate entity from China. In addition, the Hong Kong Policy Act states that the United States, as a fundamental principle of its foreign policy, supports the democratization of Hong Kong and the safeguarding of the human rights of the people of Hong Kong.

Anxiety in Hong Kong

Many people in Hong Kong, including some of its more prominent political and economic leaders, shared the congressional concerns about the city's future. After the signing of the Joint Declaration, thousands of its residents sought and obtained citizenship in Australia, Canada, the United Kingdom and the United States as a precaution. Many businesses previously incorporated in Hong Kong shifted their corporate homes to the British Virgin Islands and other offshore locations. While most of these people and businesses continued to operate in Hong Kong, they had clearly hedged their bets, just in case the future took a turn for the worse.

However, as the date for the handover approached, the attitude in Hong Kong turned from a focus on what would happen on July 1, 1997 to what Hong Kong should do afterward. On the political front, people began discussing the transition to the selection of Hong Kong's chief executive and Legislative Council (Legco) by "universal suffrage," as promised in the Basic Law. 4 On the economic front, a debate arose as to whether Hong Kong should foster closer ties with the rapidly growing economy of the Chinese mainland or seek to become a diversified "world city" that serves as a hub for the emerging pan-Asian economy. 5

Changing Hong Kong

Thirteen years have passed since China's resumption of sovereignty over Hong Kong and the city largely remains a thriving, prosperous and comparatively autonomous Asian business center. Many of the more dire predictions made prior to the Handover – most notably Fortune magazine's premature declaration of the "death of Hong Kong" 6 – have not come to pass. Hong Kong's political system is operating according to the provisions of the Basic Law: it is headed by a chief executive, who is monitored by Legco, and adjudicated by a relatively autonomous judicial system that continues to operate based on British common law.

The Hong Kong economy also has remained vibrant. Although its gross domestic product declined 2.9% in 2009 – largely due to the effects of the global financial crisis – it grew by 9.5% in the third quarter of 2010. Similarly, Hong Kong's exports and imports declined in 2009 but have rebounded in 2010. In 2009, Hong Kong's per capita GDP was nearly $30,000, compared to $46,000 in the United States.

However, this is not to imply that nothing has changed in Hong Kong and that there is no reason to be concerned about its "high degree of autonomy." While there have been only marginal changes in the formal political system, several incidents involving the interpretation of Hong Kong law and legal procedures have raised questions about maintaining Hong Kong's legal autonomy. In addition, its economy has become increasingly integrated with the Chinese mainland, resulting in trends that may erode and undermine the economic separation necessary to preserve Hong Kong's economic autonomy.

Since the handover, the people of Hong Kong have voted in four general Legco elections 7 and the special Election Committee has selected Hong Kong's chief executive on three occasions. Annex II of the Basic Law mandated a transition in the Legco election process for the first three post-handover elections, and established procedures for the possible transition to election by universal suffrage after 2007. Annex I contains similar provisions for amending the method of selecting the chief executive after 2007. Despite the possibility for change – and arguably strong popular support for election reforms – there has been a virtual stalemate since the handover between Hong Kong's pro-democracy forces on the one side and the Chinese government, Hong Kong's chief executives and their political supporters on the other side. In 2010, a modest compromise was reached with respect to the Legco and chief executive elections to be held in 2012, but election by universal suffrage remains a unfulfilled goal. 8

Four Interventions of Concern

While there has been marginal progress on changing Hong Kong's political system, there have been several incidents pertaining to the legal system that have raised concerns about the preservation of its autonomy. On four separate occasions since 1999, the Standing Committee of China's National People's Congress has intervened in the governance of Hong Kong. In 1999, the Standing Committee overturned a decision of Hong Kong's Court of Final Appeal interpreting Article 24 of the Basic Law, which specifies who has a right of abode in Hong Kong. While this intervention was very popular in Hong Kong, legal experts questioned the legitimacy of the committee's involvement, given that the Basic Law places final judicial authority with the Court of Final Appeal. However, supporters of the Standing Committee's involvement point to Article 158, which grants the committee the power to interpret provisions of the Basic Law.

In 2004, it interceded again, this time on the issue of possible election reforms in 2008, and released a decision on the proper procedures for amending the selection process for the chief executive and Legco. In 2005, the Standing Committee ruled on the correct interpretation of the term of the chief executive following the resignation of Hong Kong's first chief executive, Tung Chee-wah. In 2007, it interceded in a lively political debate over possible election reforms, by issuing a declaration that restricted the scope of reforms for the 2012 elections, but allowed for the possibility – but not a guarantee – for the direct election of the chief executive in 2017 and all the Legco members in 2020.

These four interventions in the interpretation of the Basic Law, as well as its involvement in negotiating the 2010 compromise of the 2012 election reforms, have raised questions about the autonomy of Hong Kong's governance and the integrity of its British common law system. Critics also point to several judicial decisions that allegedly reveal bias in favor of the pro-Beijing parties in the case. Others maintain that the Standing Committee has acted in accordance with the provisions of the Basic Law, and that the Chinese government has abided by the concept of "one country, two systems."

If the intentional actions of the Chinese government have led some to question the long-term autonomy of Hong Kong's political and legal systems, the unintentional consequences of a number of recent economic trends have led some to wonder if Hong Kong will be able to preserve its long-term economic autonomy. Over the last 18 years, a growing portion of Hong Kong's international trade has been with China. In 1992, 29.6% of Hong Kong's total exports went to China and 37.1% of its imports came from China. By 2009, 51.2% of Hong Kong's exports were going to China, and 46.4% of its imports were coming from China.

China is also playing an increasingly important role in Hong Kong's financial markets. Hong Kong's stock exchange currently lists over 100 companies incorporated in the Chinese Mainland and over 90 internationally incorporated companies whose operations are mostly on the Chinese Mainland. Over 400 mainland companies have utilized the Hong Kong stock exchange to raise over $170 billion in cross-border initial public offerings (IPOs). In addition, according to some experts, hundred of billions of dollars in capital owned by mainland companies is flowing through Hong Kong – so-called "hot money" – to avoid or evade regulation by the Chinese government. To some, Hong Kong's financial market is becoming increasingly dependent on China.

The Dollar is Challenged

Even Hong Kong's separate currency, the Hong Kong dollar, is being challenged by China's renminbi. Since the handover, changes in Chinese and Hong Kong laws have gradually expanded the use of renminbi in Hong Kong. Banks in Hong Kong now offer renminbi-denominated accounts, can make renminbi-denominated loans and issue renminbi-denominated bonds. In many Hong Kong shops and stores, customers can pay for purchases in either renminbi or Hong Kong dollars. Hong Kong's current chief executive, Donald Tsang Yam-kuen, has suggested that at some point in the distant future, the Hong Kong dollar's link to the U.S. dollar will be transferred to a link to the Chinese currency.

Hong Kong's job market is also showing signs of growing influence from the Chinese mainland. According to Hong Kong's Census and Statistics Department, more than 380,000 people from the mainland immigrated into Hong Kong between 1997 and 2004, and the numbers continue to increase. Under the "Admission Scheme for Mainland Talents and Professionals," over 33,000 mainland workers have been granted Hong Kong work visas. For Hong Kong's workforce, the influx of mainland workers has increased competition, while the market for professional and middle-income jobs has diminished. Since 1997, many of Hong Kong's trade-related professional and skilled jobs have been transferred across the border into China, leading to a rising gap between the city's rich and its working class, and a noticeable decline in Hong Kong's middle class. This trend has been particularly hard on Hong Kong's youth and less-educated workers, according to a 2010 report by the Hong Kong Transition Project. 9 The report's main author, Michael E. DeGolyer, has suggested that unless the increasing wealth disparity and prospects among the people of Hong Kong is adequately addressed by its government, there is a serious risk of rising social discord and possible civil unrest.

Despite these warning signs looming on Hong Kong's horizon, the city remains politically stable and economically prosperous. But today it is not the Hong Kong of 1997. Then it generally was viewed as the main window into China; now it is increasingly being transformed into China's main conduit to the rest of the world. This shift has sown the seeds of potential problems in Hong Kong that could lead to the gradual or rapid erosion of its much-valued "high degree of autonomy."

Implications for US policy

For now, most believe there is little one can point to in Hong Kong that would indicate such a serious decline in Hong Kong's relative autonomy from China to warrant a change in American policy towards Hong Kong. The U.S. consulate in Hong Kong will remain vigilant for signs of untoward Chinese government involvement or interference in Hong Kong's political, legal, and economic system. Similarly, key committees in the U.S. Congress will continue to monitor the situation in Hong Kong.

One can anticipate some of the major warning signs that the Obama Administration and the Congress may be watching for in Hong Kong's future. On the political side, the failure to implement reforms allowing for the direct election of Hong Kong's chief executive by a universal popular vote in 2017 is one such sign. Given that Hong Kong is an executive-led government, the direct election of the chief executive is in some ways more crucial than the direct election of all Legco members. In addition, under the Standing Committee's 2008 declaration, the direct election of the chief executive must precede the direct election of Legco. Failure to implement the reforms in time for the 2017 election would likely also portend failure to implement reforms for the 2020 Legco elections.

On the legal side, the Obama Administration and many in the U.S. Congress might believe that the less the Chinese government interprets or comments on the meaning of the Basic Law and the decisions of Hong Kong's court system, the better for the future of Hong Kong's autonomy. One of Hong Kong's socio-economic pillars is the international high regard for its legal and judicial system. The courts are seen as fair and impartial. The international business community knows a contract will be enforced to its letter in Hong Kong – in contrast to the situation it often finds in China. Greater Chinese government involvement in Hong Kong's legal system will likely be viewed by many as eroding the perception of the independence and fairness of Hong Kong's courts.

On the economic side, the warning signs are more subtle. The rising role of mainland businesses in the Hong Kong economy has already raised concerns about the separation between the two economies. Loss of economic separation could lead to the elimination of Hong Kong's special treatment by the United States, as well as harm its role as a major international business hub in Asia. The growing presence and influence of mainland workers in Hong Kong, particularly as they rise to positions of power, may also signal a decline in the city's relative autonomy. One obvious signal that Hong Kong is losing its autonomy would be the transfer of the linked exchange rate from the U.S. dollar to the renminbi. Even more serious would be the elimination of the Hong Kong dollar and the monetization of the renminbi in Hong Kong.

However, none of these warning signs are currently seen as a pressing problem. In fact, the U.S. government can be well-informed by Hong Kong's nearly 18 years of experience in working closely with Chinese authorities on a number of issues of interest to the United States. Hong Kong imports the vast majority of its meat, vegetables and fresh fruit from China, and has found ways to insure the safety of its food imports. Similarly, Hong Kong's Customs and Excise Department has developed a good working relationship with its mainland counterparts, while protecting Hong Kong's special status with respect to U.S. export controls and reducing the problem of intellectual property rights (IPR) violations in Hong Kong. In these areas, as well as others, the U.S. government may benefit from further and continued study of how the Hong Kong government manages relations with the Chinese government.

Michael F. Martin was Assistant Chief Economist at the Hong Kong Trade Development Council from 1994 to 1998. He is currently Specialist in Asian Affairs at the Congressional Research Service (CRS). The views expressed in this article are his own and do not reflect the views of CRS or the U.S. Congress.

http://www.hkjournal.org/archive/2011_spring/1.htm

It appears that the US is apprehensive that C.ommunist China would tweak Hong Kong's political, legal, and economic systems to assimilate it into the Chinese CCP's system in its holity and seriously compromise the limited autonomy Hong Kong has till now.

After all, Hong Kong was China's 'window' to the world. Now that China is a world player on its own terms, it surely is on a firmer footing and would like to assimilate Hong Kong to the CCP ways.

It is fair of the US to demand that so long as Hong Kong continues to "enjoy a high degree of autonomy on all matters other than defense and foreign affairs," the United States will continue to treat Hong Kong as a separate entity from China with respect to commerce, trade, transportation, cultural and educational exchanges, and in international agreements and entities in which Hong Kong participates as a separate entity from China. In addition, the Hong Kong Policy Act states that the United States, as a fundamental principle of its foreign policy, supports the democratization of Hong Kong and the safeguarding of the human rights of the people of Hong Kong.

Hong Kong is a part of China and therefore is it wrong of China to assimilate it in the way she so desires?

Notwithstanding, it is an interesting sitrep of what is Hong Kong and what is its future.

Will the US be able to influence the policies and if so what would be the implications.

If China assimilates HK, what are the implications?