PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | SPEECHES & EDITORIALS | 2000 | HONG KONG STATUS REPORT

Hong Kong Status Report The World to Come: Value and Price of Globalisation Economic Strategy Institute Global Forum Washington, D.C. May 15-17, 2000 Dr. Helmut Sohmen Chairman Emeritus, Pacific Basin Economic Council & Chairman, World-Wide Shipping Group, Ltd. The Hong Kong Special Administrative Region of China (HKSAR) is no longer quite so often in the international news, as the Crown Colony of Hong Kong was before the 1 July 1997. And when there are headlines, they are usually of the negative kind. This may be one of Hong Kong's major problems. The transition to Chinese sovereignty over the territory of Hong Kong, an entity of some 1,000 sq.kms and a population of close to 7 million people, went extremely smoothly. The years since 1982 in preparing for the event and for the new experiment in having two different legal systems and social norms co-existing in one country, were obviously well spent. The drafting of the Basic Law as the new constitution for the SAR was a serious effort involving both Chinese and Hong Kong contributions. Only time will tell how good the drafters were as visionaries: the potential conflict points of two very different legal systems, community traditions, and macro-economic principles are quite naturally manifold. Within weeks of the resumption of sovereignty by China, the Hong Kong courts were confronted with a constitutional challenge to the SAR's legal system and the transitional arrangements for its legislature. Since then, a number of other issues have made their way to the courts, seen by some as the only genuine autonomous body in the SAR. Common law, as embodied in the Basic Law, provides for the judicial review of legislation, and this has produced the spate of constitutional litigation in Hong Kong since July 1997. Such issues would not be adjudicated in mainland Chinese courts, where constitutional questions are normally dealt with in the political arena. The dominant position of the SAR's Executive, and the comparative weakness of its Legislature, has placed additional responsibility on the Hong Kong courts to strike a balance between Hong Kong and mainland interests. The ultimate powers of interpretation of the provisions of the Basic Law rest with the Standing Committee of the National People's Congress in Beijing under Art. 158 of the Basic Law. These powers were invoked by the Chief Executive of Hong Kong to change a decision by the Court of Final Appeal in January 1999 regarding the right of abode for the offspring of Hong Kong permanent residents under Arts.22(4) and 24(2)(3) of the Basic Law. It was considered that to allow hundreds of thousands of such persons the immediate right to come and live in Hong Kong was a pragmatic impossibility. The Standing Committee gave the expected interpretation in June 1999 on the basis of the original 'legislative intent', and in December of that year the Court of Final Appeal repudiated the tenor of its earlier decision. The intepretation was controversial and regarded by some observers in Hong Kong and overseas as undermining the rule of law and the autonomy of the Hong Kong courts. The large majority of the Hong Kong population however supported the final outcome. Those publicly arguing for permitting a large influx of mainland people lost considerable political credibility, as they had with earlier predictions of catastrophe following the handover. The mentioned developments were often misunderstood abroad: the case did not involve an unprovoked interference by the Central Government in Hong Kong affairs, but was a decision of the Standing Committee that had been specifically requested by the SAR Government. The fact is that the Chinese Government has been most scrupulous to-date in trying to adhere to the terms of the Sino-British Joint Declaration of 1984. The garrison of the People's Liberation Army stationed in Hong Kong is barely visible. Both the PRC official representatives in Hong Kong (for the Ministry of Foreign Affairs; and for the Central Authorities - previously named New China News Agency) have been meticulous in their work to avoid any impression of interfering with the responsibilities of the Hong Kong Administration, or with public opinion. A recent statement by an official of the latter office, to the effect that the media in Hong Kong should not support Taiwan independence statements, caused some anxiety about press freedom, as have calls this month to prevent the public auction of looted Chinese cultural relics in the SAR. These calls were incidentally echoed by a number of Hong Kong residents, both local and expatriate. In both cases, the Hong Kong Government pronounced in favour of respecting existing rights and freedoms. There is no restriction on the practices of the Falun Gong sect in Hong Kong, an organisation that is outlawed on the mainland. Censorship of the media, if any is perceived, tends to be of the self-made kind. Recent Government ideas for a press council were quickly rejected. There was a unrestricted public debate on the Court of Final Appeal decisions. The Hong Kong press continues to print articles that are critical of events and personalities also on the mainland, and controversial voices are being aired regularly. In the same vein, the exercise of the administrative powers of the Government are consistently and publicly scrutinised and commented on. The Independent Commission Against Corruption continues to do its good work in Hong Kong supported by the population at large, same as before the handover. There is no fear about having an opinion and expressing it. Sometimes we could actually do more in Hong Kong supporting all-Chinese national interests: but it is early days and experience in doing so constructively has to be gained. Conducting foreign policy is of course a matter for the Chinese Central Government. Exceptions to this premise are stipulated in Art.151 of the Basic Law, which gives the SAR the right to deal with foreign countries and international organisations on foreign economic matters in the fields of trade, finance and monetary affairs, shipping, communications, tourism, culture and sports. The SAR has concluded over 90 bilateral treaties with 50 countries and is a member in its own right in some 10 international bodies. Hong Kong is a signatory to 219 multi-lateral treaties, quite of few of which only apply to the SAR and not to the rest of China. So far the provisions relating to Hong Kong's role in the international arena have produced no problems or controversies. By contrast, there has been criticism that the occasional refusal by mainland authorities to allow travel by Hong Kong residents to other places in China was restrictive and arbitrary. It may well be. On the other hand, like with visiting warships, every government in the world exercises the right to choose whom or what it wants to admit. In most cases the refusals were decided for reasons that rested in the political background or agenda of the applicants. In some other cases they were silly or short-sighted and thus quite prone to create public-relations problems for all concerned. What one can say positively about the practice is that it highlights the fact of a controlled border between the SAR and the mainland: something Hong Kong normally regards as very beneficial for the preservation of the SAR's autonomy and its traditional way of life. Beijing has not interfered with the way in which Hong Kong's currency is operated, nor with the tax system in its design and administration. As you will know, the SAR is not required to remit revenue income to the Central Government. The decision to intervene in the stock market during the height of the Asian crisis was the Hong Kong Government's decision alone. In retrospect it was a shrewd move with rather prosperous consequences for the public coffers, although it then had its critics, myself included. The Chinese Government did not make any pronouncements for or against at the time, nor since. The Hong Kong Government has also carefully played the role of financial investor and not attempted to interfere with the management of the companies whose shares it acquired even when they were large stakes. Looking at the fate of some major hedge funds of late, the Hong Kong action probably acted as an international wake-up call for the need to counteract some of the more concentrated efforts at de-stabilisation, by the exploitation of institutional weaknesses or regulatory loopholes in targetted jurisdictions. With clear indications that an end is in sight for the Asian economic crisis in the affected economies, the stock markets have since bounced back in most of East Asia. Hong Kong itself has effected a number of changes to its legislative base and administrative rules governing financial markets and the behaviour of market participants. Hong Kong has also strengthened its institutions through consolidation and has made additions to its existing panoply of markets, for example by the creation of a Growth Enterprise Market (GEM) in November last year for smaller or younger companies. So far 61 companies have listed and over HK$90 billion in funds were raised. Hong Kong does encourage the listing of mainland Chinese companies provided they meet all the stipulated requirements, as it does of course encourage other companies from all around the world. It is assumed that the mainland is now the largest external investor in Hong Kong in percentage terms, although accurate figures are hard to come by since total inward investment (of some US$220b) also includes investments that originated from Hong Kong but were channelled through offshore companies. Close to 2,000 mainland enterprises now operate physically in the SAR, largely in property, insurance, finance, transport, local construction, and food processing and distribution. Inversely, Hong Kong continues to be the most important direct foreign investor in the mainland, with Chinese figures suggesting a total cumulative value of US$156 billion at end-1999. Most of these investments are concentrated in Guangdong Province, where some 5 million people now work directly or indirectly for Hong Kong enterprises. There is increasing close coordination between Hong Kong and mainland authorities on a number of administrative issues and infrastructure projects (such as border crossings, briges, railway links). A joint committee was established in October 1997 to act as an information exchange and supervisory body. Cross-border traffic is increasing by leaps and bounds: 400 trains run between the border and central Hong Kong and 211,000 travellers cross the border each day, as do 28,300 trucks. Nine ferry services provide routes to 24 destinations on the mainland. Infrastructure building in Hong Kong proper continues apace also, with a new container terminal being constructed, and new rail and road links being planned. Hong Kong was again the world's biggest container port in 1999 with a throughput of some 16.2m TEUs. Over 423,000 vessels entered and left the Hong Kong port in 1999. I see no medium-term risks to the important role of the port, since the catchment area is determined by topography and is growing fast. However, we need to watch costs. What we definitely need to do better is to deal with pollution in Hong Kong, in the water but especially in the air. Hong Kong has since the early 1980s found favour with overseas companies as a base for regional headquarters, with currently some 850 officially listed (the largest number from the United States - 205). Overall, there are some 2,500 regional representations in Hong Kong set up by foreign entities. Most of the enterprises are engaged in wholesale and retail trade, and in export and import activities, and over 100 are active in financial services. Hong Kong is still a major banking centre. As of end-February 2000, there were 210 licenced or restriced licence banks, 69 deposit-taking companies, and 129 bank representative offices operating. 247 of these institutions were owned by foreign interests coming from 30 different countries. The banking system is very professionally supervised by the Hong Kong Monetary Authority. Unlike the experience in other economies in Asia, Hong Kong banks were able to get through the Asian crisis without any serious problems, and the financial sector was certainly not the cause of the economic difficulties experienced in Hong Kong during the past 2-1/2 years. The return of confidence in the future of Hong Kong as a part of China is also evidenced by the emigration figures of recent years. From a high of 66,200 in 1992, the number of emigrants has now dropped back to 12,900 in 1999, compared to an average of some 20,000 per annum during the 1980s. Skilled workers can obtain work permits in Hong Kong without too many difficulties, and the expatriate population continues to increase. The largest foreign group are Filipino nationals counting some 150,000. There is a small but steady stream of one-way permit holders (150 persons) arriving in Hong Kong from the mainland every day, the majority young children and elderly people. Towards the end of 1999, Hong Kong has bounced back convincingly from the misery caused by the Asian crisis. Fourth-quarter 1999 GDP growth was 8.7% year-on-year, and 2.9% for the full year (compared to a contraction of 5.1% in 1998). The recovery has been reliant on exports, rather than on domestic demand and private and domestic investment, with the latter picking up more gingerly. The growth forecasts for 2000 by economists and analysts are now for well over 6% (against an official estimate of 5%), despite concerns about the risk of further US dollar interest rate increases which would immediately translate into Hong Kong rate levels through the existing currency board arrangements. However, over the last two years Hong Kong was forced to de-leverage, to repair balance sheets and increase household savings, so may by now be more resilient to higher interest rates and other external shocks. We cannot of course predict with any confidence investor sentiment in Asia since investors increasingly take their cue from Wall Street and Nasdaq. The inflation rate was minus 4% in 1999, and minus 5.2% in January and February 2000. Unemployment is coming down also, from 6.3% last year to 5.7% early this year. Tourist are also coming back to Hong Kong in larger numbers, after a fairly miserable three years for the trade, even though they tend to spend on average a bit less than before. The property market, traditionally Hong Kong's economic dynamo, has climbed back from the depths of 1998 but has not yet regained its former boom characteristics. The price adjustments are in fact a good reality check. The Hong Kong Government is otherwise committed to continue with the provision of affordable housing for the lower income groups. Before the last budget in March, a substantial deficit of HK$36.5 billion was anticipated but the figure finally announced was only $1.6 billion. Greater than expected returns from the Exchange Fund (government reserves) were part of the reason for the difference. No new taxes and no tax increases were introduced and stamp duty on stock transactions was actually reduced to enhance Hong Kong's competitiveness as a financial centre. At the same time, the Government committed itself to restrict recurrent spending in real terms to 2.5% in the current financial year (versus the forecast of 4%). A budget surplus in 2000/2001 is a strong possibility but official estimates still mention a deficit of HK$6.2 billion for the period. In the second quarter of 2000, Hong Kong seems to be in fair shape, or in fact in better shape than most people had expected following the handover and the Asian economic conflagration. Hong Kong is one of the most affluent communities in the world. Domestically Hong Kong has sound institutions, a commitment to legality, an excellent infrastructure especially in communications and transportation, some very good tertiary institutions of learning, talented entrepreneurs, a versatile workforce, a market economy, low taxation, and limited red tape. It has a government regarded as one of the least intervenionist in Asia although a tendency to appear "caring" and ready to meet the demands of special interest groups has been more discernible since 1997. Security is not a major concern in Hong Kong, both internally and externally. Fortunately Hong Kong does not need to spend money on defense, a decided advantage in an era that sees increased military spending across the whole region. Hong Kong is making considerable strides in its cultural development. Speaking as somebody who used to be very much on the spot in this process, I personally think even more could be done. Hong Kong also has the advantage of location being close to mainland China, a market that will grow even more spectacularly when the country joins the World Trade Organisation, as I am sure it will soon. Externally Hong Kong has the support of China, as the experience in the last three years has proven. The Chief Executive evidently enjoys the trust of the Central Government. So why should Hong Kong not be able to reach its stated goal of becoming one of the world's great cities of this century? In my personal opinion -- and I am of course somebody who moved to Hong Kong from somewhere else -- Hong Kong already is. Hong Kong is not as old as Rome or Paris or Vienna, so in certain aspects of urban excellence we have some catching up to do. But in others Hong Kong can hold its own, certainly with regard to the emerging competition from some of the other principal cities in China and in the rest of East Asia. Hong Kong has long been regarded as China's door to the Western world. Since the opening of the country in the late 1970s, and especially during the past few years, China has of course established and is developing more direct links to the outside world. Although some of Hong Kong's attributes are therefore no longer exclusive, Hong Kong can continue to be both the premier meeting place in which both sides can feel very much at ease, as well as a showcase for China. Hong Kong can help to promote a more modern image of the whole of China, not only in terms of business sophistication but also in the arts and sciences. A friend of mine has drawn an analogy to the historic role of St. Petersburg during the Russian Empire. Creating and embedding a meeting place between East and West for artists and intellectuals probably does only need a modest investment. The returns over the longer term could be extraordinary. Such an effort would also re-inforce Hong Kong's own ambitions: to be a community that attracts the best and brightest of the knowledge workers and true wealth creators which so many other places in today's globalising world are now so keen to get. And these attempts will likely also stimulate local imagination and creativity that will come in handy when solving the problems that Hong Kong might be facing in the coming years. It is self-evident that the quality of human capital will be critical for any society's success or failure in the next decades. You will have recognised the generally upbeat tenor of my remarks so far. I am not a propagandist for the Hong Kong Government but do passionately believe that Hong Kong not only has a future, but a great future. To ensure that you receive a balanced view of the state of affairs in Hong Kong, let me also mention some of the challenges we currently face in the SAR. To emphasize again for good measure: contrary to earlier worries and as I have tried to explain, China and its Government are not really prominently among them! Taiwan could be a problem, in two respects. Recent tension across the Taiwan Strait in the wake of the Presidential election on the island, and the longer-term escalation potential for actual conflict do not bode well for all of us in the region. The situation creates political dilemmas for Hong Kong that may at times be difficult to resolve. The majority of the Hong Kong people no doubt support the goal of ultimate reunification, as a vote last week in the Legislative Council vote has again shown. There is an equivalent belief in Hong Kong, however, that reunification may not be achievable on the exact models of the Hong Kong and Macao solutions. Ironically, if the tensions abate and the mainland and Taiwan return to the negotiating table, and/or proclaim an ultimate reunification goal (with or without setting a specific time-table), the resultant re-establishment of direct trade and transportation links will obviate the current need for Hong Kong to act as a transshipment centre. Hong Kong stands to lose a fair volume of business. Opinions differ as to the actual economic impact this development would have. In any event, it is by far the more desirable of the two scenarios. Friendly relations will inevitably create new business opportunities and stimulate new growth from which Hong Kong can proportionally benefit. A similar argument can incidentally be applied to other cities in China that are intensifying their economic development and external relationships. In my view, when China becomes part of the multilateral world trading system and moves ahead at full steam, the country will need three Hong Kongs, three Shanghais, and two Taipeis, not one each. Competition among them will only underpin and accelerate growth prospects, not hold back the individual locations. Hong Kong is already the world's most service-oriented economy in the world, with the services sector accounting for more than 85% of its GDP. It is in the very area of services where it tends to be more difficult for any competition to catch up, so Hong Kong should simply proceed with its determination to build on its headstart, rather than worrying about how soon others might catch up. The other challenge is to maintain Hong Kong's image as an autonomous region of China, while preserving its identity as an Asian community oriented along Western liberal ideas. This is more difficult since local political opinion in Hong Kong is fragmented, and the current leadership seems reluctant to move forward in terms of constitutional development towards more representative government. It apparently prefers to retain the status quo as long as possible. The next Legislative Council elections will be held on 10 September 2000. The number of geographic constituency seats will then be increased from 20 to 24 as provided for in the Basic Law. Those seats returned by an Election Committee will reduce from 10 to 6, while the functional constituency seats will remain at 30 out of a total of 60. In the following elections in 2004, both geographic and functional constituencies are each to elect 30 members to the Council. Some consider this timetable too slow, but it is prescribed by the constitution. The major political parties have now agreed that in 2008 all 60 seats should be filled through universal sufferage. The Government has not yet committed to this goal. A formal decision would require a two-thirds majority of the Legislative Council, the concurrence of the SAR Chief Executive, and a report to the Standing Committee of the National People's Congress. A number of prominent businessmen in Hong Kong have of late argued that it would be unwise to abolish the functional constituency system, claiming it as a pillar of the Hong Kong political system, a safeguard against irresponsible government spending, and because of an implicit understanding during the negotiations for the Sino-British Joint Declaration. I personally do not agree with these views, although as a Hong Kong legislator in the 1980s I also warned against overly hasty change to an institutional framework that had evolved over a considerable period of time and was well understood and accepted by the electorate. However, time moves on and the long period up to the date of the handover has allowed for the spread of greater political awareness and public willingness to take a more active interest and participate in the political fora. The current system also does not create an easy relationship between the executive and legislative branches of government. Since the Executive is not backed by a defined group of supporters in the Legislature, nor makes much of an effort to engage legislators into the policy-formulation process, a sense of frustration has developed on both sides that is less than productive for the overall working of government. The abolition of the so-called Municipal Councils, and a reorganisation of the District Boards, has further led to a belief that the Executive is not keen on producing more democratic representation in Hong Kong. The fears here are probably exaggerated. The future election of the Chief Executive -- by the Election Committee of 800 representatives from various community sectors -- beyond the year 2007 (rather than by direct vote as provided for in the Basic Law as the ultimate aim), is also a subject of current debate. It is too early to say how the discussion on the 'principle of gradual and orderly progress' mentioned in Art.45 of the Basic Law will progress and be eventually translated into definite electoral proposals. Real political talent and experience are still in short supply in Hong Kong, and where they exist, considerable energy is spent on short-term issues, facile generalisations, and a lot of ankle-biting. Our declared and aspiring politicians have a habit of washing the dirty linen in public, with sometimes predictable results for the external image of the community as a whole. I already mentioned the importance of the human factor in terms of global competitiveness, particularly in the service and high-tech value-added sectors which Hong Kong, like others, is in the process of developing further. In this respect, there are two related worries in Hong Kong at the present time: the general standard of primary and secondary education, and the available language skills both in the mother tongue (Cantonese) and in English. There is universal acknowledgment that they are deteriorating. Ever since I have lived in Hong Kong, now for some 30 years, there have been a series of studies undertaken by a number of commissions and review bodies. They have made the obligatory recommendations which were sometimes implemented and sometimes rejected. Overall little progress appears to have been achieved, particularly when levels of aptitude and knowledge are compared to those of youngsters on the mainland and in neighbouring countries. Hong Kong will have to move a bit faster, and make the education system more flexible, even if the costs have to go up. Otherwise we risk losing ground to these other communities in the global market-place. It is of little use to call for Hong Kong to become a centre for higher education and scientific excellence, as some professional and business groups do, when the foundations are not strong enough to hold up the structure, and when the nurturing of creativity and the need for reaching best standards are not the prime objectives. A final challenge, the most obvious and the most easily solved, if the political will was there: pollution. This is another long-running topic of conversation in Hong Kong and abroad, but smog on a daily basis has now reached a level that is starting to really bother people and affect Hong Kong's attraction as a nice place to live. The Government just last week announced an accelerated plan to introduce low sulphur diesel, and if possible speed up the conversion of taxis to liquified petroleum gas. Not all problems are caused by the rapid industrialisation of southern Guangdong Province, as is often claimed. With somewhat more radical solutions such as creating pedestrian precincts, restricted movement zones, or by absolutely reducing the number of diesel-engined vehicles, the solutions might be closer. As public transport in Hong Kong with the exception of the railways is privately owned, it would of course be difficult to force fleet conversions on the operators without major public subsidies. Hong Kong as a community is rich enough to be able to afford cleaning up its living environment, as others urban agglomerations in Europe, Japan, and North America have done with considerable success. In conclusion, let me say that while it is a human trait to focus and remember more of the bad news than of the good stories, the fact is that Hong Kong maintains an overall attraction that is hard to match in most other places, certainly in East Asia. Hong Kong just needs to be a little bit more astute to propagate its glamour and to reinforce its image and its identity around the world. Hong Kong is now a part of China, but still a very unique Hong Kong. Hong Kong is living proof what human ingenuity can produce: as such it should remain an object of admiration and a model to be studied and emulated.