Hong Kong Reborn: Why Asia's Big Test Case Will Succeed

ON June 30, 1997, the sun will set on the last Asian colony of the British Empire. The Union Jack will be lowered from where it has flown atop the majestic Hong Kong Government House, and officials from the People's Republic of China (PRC) will raise a red flag bearing a tropical bauhinia blossom highlighted by five star-tipped stamens.

The conventional wisdom is that after July 1, 1997, Hong Kong's economy, and the rule of law and civil liberties associated with it, are sure to wither away under the new sovereign. The conventional wisdom is wrong. To paraphrase Mark Twain, reports of the end of Hong Kong's economic and political life are premature. In fact, the bauhinia flag will mark the reincarnation of the most dynamic capitalist economy in the world, Hong Kong, into the Hong Kong Special Administrative Region (HKSAR).

Three arguments support the forecast that the HKSAR will prosper under Chinese rule as its predecessor did under British rule: politics, economics, and law.


Political reality argues a bright future. Beijing needs to impress Taiwan. The PRC's highest reunification priority is Taiwan, not Hong Kong. Mao Zedong said that reunification with Taiwan would be addressed before Hong Kong. Deng Xiaoping's "one country, two systems" policy originally was devised for the Taiwan issue. It was hoped Taiwan would trade ultimate sovereignty for considerable administrative autonomy. As it turned out, Hong Kong had to be resolved first, before Britain's lease expired in 1997.

Reunification with Taiwan has become a more complex problem as the latter is now vastly more democratic and prosperous. But how China's rulers manage Hong Kong's reincarnation is the best available test case for how they would handle the reunification of Taiwan with the mainland. The PRC's ambition of "one China" is an important check on its behavior toward the HKSAR. The PRC is bound by the terms of the Sino-British Joint Declaration, signed in December 1984. It guarantees that the economic, social, and legal systems in Hong Kong will continue to function in substantially the same manner after 1997, for 50 years. If the PRC ignores these terms, ravages HKSAR's economy, and tramples civil and human rights, then it will be unable to entice Taiwan to reunify peacefully with the mainland. By applying the "one country, two systems" concept in the HKSAR, the PRC has a strategic opportunity to prove that this dualism works well in practice.

There is an important cultural dimension to this political reality. In the governance of Hong Kong after 1997, PRC leaders have put a great deal of their own "face" on the line. The concept of face is endemic in Chinese culture. To lose face is to be publicly embarrassed. The PRC is the acquirer in the most stunning friendly takeover in history: the acquisition of a free, capitalist society by a far larger, nondemocratic, haltingly capitalist country. To oversee the decline of HKSAR is to lose all face. Beijing can preserve face only by governing Hong Kong without destroying it.


Economic pragmatism also points to a successful reincarnation of Hong Kong in 1997. Hong Kong plays a vital economic role for China. Chinese leaders negotiated the terms of the Joint Declaration with Britain in part to safeguard Hong Kong as one of the main engines of China's growth. PRC officials like Chen Yuan, vice governor of the People's Bank of China, understand Hong Kong's importance as a financial gateway. At a recent conference on China-Hong Kong financial relations after the handover, Mr. Chen stated that the HKSAR will be China's international financial center, while Shanghai will be its domestic financial center. This statement does not bespeak a callous indifference to Hong Kong's future.

Since China's great economic reform started in 1979, Hong Kong has been a crucial source of capital, management talent, marketing expertise, worldwide networks, and technology. To Hong Kong businesspeople, China is a huge market to which they sell their goods and services. It is also a much cheaper place to manufacture goods, as the price of land and labor is a fraction of Hong Kong prices.

Guangdong, the southern province of China and the one closest to Hong Kong, has benefited most from the symbiotic PRC-Hong Kong relationship. The province has achieved an average annual growth rate of about 12 percent since 1979. This explosive growth brought tremendous improvements in its citizens' quality of life. Food shortages have been eliminated. Mao suits have been replaced by stylish, even designer, Western suits. Half of rural households and nearly all urban ones have TVs and radios.

Economic integration between Hong Kong and the rest of China is equally inexorable. Two-thirds of the huge foreign investment flowing into China since 1979 has been from Hong Kong. By the early 1990s, 3 out of 4 Hong Kong companies had operations in China, comprising about 23,000 joint ventures. Five out of 6 employees of Hong Kong companies work in the PRC. Hong Kong's economic and corporate influence stretches from Heilongjiang in the northeast to Xinjiang in the west. Take Xian, for example. Those who go to this tourist site on business or pleasure stay at one of its top six hotels, all Hong Kong joint ventures.

Not only are Hong Kong companies engaged in manufacturing and services in China; many are involved in large infrastructure projects. Chinese authorities are eager to enter joint ventures with Hong Kong companies because of the companies' past successes in the PRC. Hopewell, a property and construction company in Hong Kong, has built a superhighway across Guangdong. New World Development is engaged in building two power plants in Guangzhou and an expressway that links Guangzhou to Zhuhai. Hutchison Whampoa, which manages the largest container terminal in Hong Kong, is working with the Shanghai Port Authority to build three additional terminals at its port.

The incorporation of Hong Kong and its capitalists into the PRC's economy is a key reason for the success of reforms in China. Fortunately, the reforms continue, because Beijing seeks to reach the level of development enjoyed by Asian "dragons" such as Singapore and Taiwan. It is widely believed that Deng Xiaoping chose a period of 50 years for Hong Kong's transition because he expected China to take that amount of time to catch up with Taiwan. Hong Kong will continue to play a large role in China's march toward modernization. To do so, it must retain the free and capitalist system it currently enjoys.


The main pillar to support Hong Kong's continued existence in its pre-1997 form is the 1984 Joint Declaration. HKSAR will retain Hong Kong's status as a free port, separate customs union, and international financial center. It will represent itself at international meetings, which means in particular that it will maintain its membership in the World Trade Organization and its rights under the General Agreement on Tariffs and Trade and the Uruguay Round Agreements - none of which China yet enjoys. Moreover, HKSAR may, on its own, enter into "relevant agreements with states, regions and international organizations." The Hong Kong dollar will remain freely convertible. Detractors who argue that Beijing will drain Hong Kong finances should note that the PRC will not levy taxes on the HKSAR. The territory will have independent finances and hold its own considerable foreign exchange reserves. Beijing has acknowledged it has no right to touch these reserves. Indeed, the People's Bank of China reiterated that the reserves must be used exclusively by the HKSAR.

As to legal and legislative autonomy, the Joint Declaration ensures that "laws currently in force will remain basically unchanged." The region will be "vested with executive, legislative and independent judicial power, including that of final adjudication." Laws promulgated by its legislature will be recorded with the Standing Committee of the PRC's National People's Congress (NPC). But the NPC is not granted the ability to write any laws for HKSAR.

Article 3 (2) of the Joint Declaration states that, "[r]ights and freedoms, including those of the person, of speech, of the press, of assembly, of association, of travel, of movement, of correspondence, of strike, of choice of occupation, of academic research and of religious belief will be ensured by law in the Hong Kong SAR. Private property, ownership of enterprises, legitimate right of inheritance and foreign investment will be protected by law."

In almost all respects, the Joint Declaration underpins the "one country, two systems" concept. The transfer of sovereignty of the colony was approached in a pragmatic manner. The colonial power and the new sovereign knew full well that it was the laissez-faire economic environment, coupled with the rule of law and political stability generated by a noninterventionist government, that stimulated the success of Hong Kong. To argue that the PRC does not comprehend the significance of these factors assumes the PRC's rulers are fools lacking self-restraint. This assumption does not withstand careful scrutiny.

It may come as a surprise to Western skeptics that, as William Overholt states in his recent book, "The Rise of China," "China has an excellent record in honoring past international agreements." Indeed, studies accepted by independent scholars conclude that the PRC's record in honoring its international obligations is at least as good as that of the United States.

Despite this record, critics doubt Beijing's desire to honor the terms of the Joint Declaration. To be sure, this concern was deepened by the Tiananmen Square massacre. No doubt it was an ill-conceived action causing a needless tragedy that perhaps even some PRC officials privately regret. Yet, it must be remembered that the PRC honored the terms of the second Convention of Beijing, leasing the New Territories, a major portion of Hong Kong, to Britain for 99 years from July 1, 1898. The Chinese submitted to the treaty under military force. China has had many opportunities to invade and recapture the New Territories. The war-weary British would have been no match for Mao's conquering army in 1949. In October 1949, Lin Biao's army stopped 25 miles short of the Hong Kong border and informed the British they would be left in peace.

In recent years, the colony has been almost completely dependent on the PRC for its water supply. Beijing could have dehydrated it into submission and not bothered with protracted negotiations over the Joint Declaration. Beijing's rulers were pragmatic enough to see Hong Kong as useful to China's own development.

Lingering risks

Of course, the reincarnation of Hong Kong poses risks that stem mainly from the PRC's own political system. Unlike the United States, China lacks a long tradition of the rule of law. Instead, historically it has known the rule of man. Laws have been changed and manipulated to suit the expediency of leaders and those who are well connected. There has been insufficient respect for individual civil liberties.

At times, Beijing's approach to international relations has been overbearing and insensitive. Worst of all, China's rulers have no concept of democratic succession, because they remain paranoid about maintaining their hold on power. As the Tiananmen massacre illustrates, when the leadership fears losing control, it reacts in a manner to preserve that control and achieves this short-term objective. But the leaders compromise the long-term future of the country, their own legitimacy, and their standing in world opinion. The best China experts cannot anticipate what will happen in the power struggles after Deng's passing. It is therefore imperative that after 1997, China's actions be monitored and its abuses of the Joint Declaration censured. As President Reagan warned about US-Soviet relations, "trust, but verify."

The responsibility to verify must fall upon the US, Britain, and people of the HKSAR. As the world's only superpower, the US has sufficient economic and political leverage to extract good behavior from the PRC with respect to the HKSAR. In fact, the secretary of state is required by the United States-Hong Kong Policy Act of 1992 to report to Congress on the conditions of Hong Kong in 1993, '95, '98, '99, and 2000. These reports will take on more importance after 1997 as official, highly publicized means by which the US monitors compliance with the Joint Declaration.

Unfortunately, thus far the US has proved incapable of meeting its responsibility. The Clinton administration lacks a strong, coherent China policy, which was the hallmark of the Nixon and Bush administrations. It adopts clumsy, unfocused tactics that lead to humiliating retreats - as was illustrated by the 1994 reversal over linking human rights to annual renewals of most-favored-nation trade status. Every PRC leader recognizes an American paper tiger, so the credibility that existed prior to the Clinton administration must be regained. The US should encourage continued economic, political, and legal reform in China. It should discourage, through unequivocal threats, rampant disregard of international laws (such as weapons sales). These dealings should acknowledge the importance of face and not always be in the full light of the world's news media.

As a signatory of the Sino-British Joint Declaration, Britain has a moral obligation to Hong Kong. It ought to muster up some energy to maintain a vigilant eye on China's compliance. The Joint Declaration is governed by the 1969 Vienna Convention on the Law of Treaties. The usual remedy for breach of a treaty is to bring a case to the International Court of Justice (ICJ). Unfortunately, China does not recognize the jurisdiction of the ICJ, a significant point that Her Majesty's negotiators failed to address in the Joint Declaration. (Western skeptics should not draw too much from China's policy. The US adopted a similar stance toward the ICJ when the ICJ ruled against it in Nicaragua v. US.) At first glance, it would appear that the Joint Declaration is unenforceable and China could breach it with impunity.

However, two factors are likely to restrain Beijing. First, there will be severe international censure - that is, almost universal outrage - should China stray from the treaty's terms. By behaving like a bully, the PRC will damage its dynamic economy and risk becoming an international pariah. No rational businessperson would invest in China then for fear of chaotic conditions or expropriation. Second, the PRC is a major player in the world. For its own self-interest, it requires membership in multilateral organizations and will need to enter into future international agreements like the World Trade Organization. By verifying Beijing's compliance, Britain can help ensure the operation of these two checks on China's behavior.

Asian Realpolitik

The people of the Hong Kong SAR must take their autonomy seriously and govern themselves responsibly. A strong executive branch and responsible legislature must take up this task. They should not allow Beijing to interfere in their jurisdiction and must be firm in resisting unwarranted intrusion into any part of their government. Conversely, the people of the HKSAR should not give the PRC reason to break the terms of the Joint Declaration. If the HKSAR does not wish the PRC to interfere in its internal policies, then it will have to respect the PRC's internal affairs. Hong Kong should not allow itself to be used as a pawn to actively push for the democratization of China. It is not in a position to do so. Perhaps this accommodation is unseemly to Western skeptics, but it is a matter of Asian Realpolitik.

In the end, the US, Britain, and people of the HKSAR should hope that the reincarnation of Hong Kong is a nonevent. Changes will undoubtedly occur, but Hong Kong has always shown a resiliency and flexibility that has helped it through difficult times. Its future rests on an agreement, a strong economy that the acquirer depends upon, and a sovereign that must demonstrate its ability to rule wisely to a skeptical world. When reflecting on the question of what will happen to Hong Kong after 1997, it's best to recall the response of Lee Kuan Yew, Singapore's senior minister: He replied simply, "1998."

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