Hong Kong: 7 Months After the Handover

February 24, 1998

Donald Tong

Simon Fraser University Vancouver (at Harbour Centre)

Summary

We have changed the flag, and now have a Chief Executive, Mr. Tung Chee-Hwa, not a Governor, to head the Administration. But other than these visible differences, you do not really see many changes in Hong Kong where "business is as usual". The three branches of the Government - the legislature, the executive, and the judiciary all continue to function normally. Our economy continues to grow, our lifestyle remains the same, our financial foundation remains solid, our society remains pluralistic, and our politicians continue to debate openly on all the topical issues.

One Country, Two Systems
We have absolute confidence in managing our future. The fundamental reason for our confidence is, of course, the solid promises of our Basic Law. It is a comprehensive document that was drafted by people from both Hong Kong and mainland China after some four years of consultation and discussion. The Basic Law provides a constitutional framework for the Hong Kong Special Administrative Region. It institutionalizes the concept of "One Country, Two Systems". It clearly prescribes that the social, economic and political systems in Hong Kong will be different from those in the mainland of China. It protects the rights, freedoms and lifestyle of Hong Kong people. The Basic Law guarantees the independence of our judiciary and, apart from foreign affairs and defence, it gives us full responsibilities to manage our own affairs. It allows us complete financial autonomy, and independence of our monetary system. It establishes Hong Kong as a separate customs territory, and enables us to work directly with the international community to control trade in strategic commodities, drugs, illegal transshipment, and to protect intellectual property rights.

Some may doubt whether the "one country, two systems" concept will continue in Hong Kong. We should not forget that this concept did not originate in London or Hong Kong. It was carefully thought out by the Chinese leadership. We have absolute confidence in China's sincerity and determination in implementing this principle in Hong Kong. The reason is simple: it is clearly in the national interest of China that the "one country, two systems" concept be successfully implemented. By preserving and further enhancing the success of Hong Kong, we can contribute towards continued modernization of China.

Latest Developments
Since July 1, we in Hong Kong have been administering our own affairs. The Chinese leadership during the handover ceremony on July 1st, and on numerous occasions since then, has emphasized that Hong Kong will enjoy a high degree of autonomy under the "one country, two systems" concept as guaranteed by the Joint Declaration and the Basic Law. Eight months after the establishment of the Hong Kong SAR, there is not a single suggestion that autonomy has been undermined. Indeed, people here always ask me whether as the official representative of Hong Kong Special Administrative Region in Canada, do I have to report to the Chinese Embassy or the Consulate General here. My answer is an emphatic NO. My office maintains a very cordial relationship with the Chinese missions here but I report to Hong Kong and to Hong Kong alone. This is one of the guarantees enshrined in the Basic Law (Chapter II).

Some friends of Hong Kong expressed concerns about the continuation of the rule of law in Hong Kong. I can tell you in no uncertain terms that the rule of law is the cornerstone of Hong Kong's success. The Basic Law guarantees that Hong Kong will keep the Common Law system and an independent judiciary with the power of final adjudication in Hong Kong. We take much pride in upholding the rule of law and will do everything to preserve it. Indeed, both the British Government and Judiciary recently admitted that we still maintain the same high standard of legal system as before July 1. The UK Judiciary has also recently appointed, with the agreement of the Hong Kong SAR Government, two Law Lords to serve on the five-member Court of Final Appeal. This is a very welcomed arrangement in Hong Kong as it is clearly a vote of confidence in the Hong Kong judicial system and will further enhance the status of Hong Kong in the international arena.

Some people may also wonder whether freedom, democracy, and civil liberties in the HKSAR can be maintained. The Basic Law ensures that the people of Hong Kong will continue to enjoy the freedoms of speech, assembly, association, the press, as well as other freedoms stipulated by the International Covenant on Civil and Political Rights; and the International Covenant on Economic and Social and Cultural Rights. Since the establishment of the HKSAR, Hong Kong people have been exercising these rights of free speech, of demonstration, and of scrutinizing government policies and decisions. We have on average some 20 demonstrations a week. Although China is not yet a signatory to the two international covenants, it has recently agreed to forward our reports on the implementation of these two covenants in Hong Kong to the United Nations. This is clearly a positive gesture on the part of China to prove to the international community that the freedoms and rights of Hong Kong people will be protected. People also talked about self-censorship by the media before the handover, but if you have been monitoring Hong Kong's newspapers/radio or TV reports, you will conclude that criticisms, complaints and comments about the Government have not subsided. Perhaps there are even more today than before June 30.

The above are not just our own observations. A recent report by the US House Task Force on Hong Kong Transition concluded that "the press and media continue to be open, free and full of criticism and analysis of both the Hong Kong and Beijing Governments" and that journalists continue to cover the news much as they did before July 1 and have no hesitancy in voicing views not welcome by Beijing. It also said that non-government organizations in Hong Kong continue to operate freely and that Beijing appears to have absented itself from involvement in Hong Kong affairs. In a six-monthly report to the UK Parliament in January 1988, the UK Foreign Secretary Robin Cook also admitted that developments in Hong Kong have been encouraging and that the people of Hong Kong retain a free and dynamic press. Rule of law remains strong and durable and the Chinese Government has practical actions to show its commitment to uphold the Joint Declaration and the Basic Law. The American Chamber of Commerce in Hong Kong - one of the city's top business groupings - also reflect a positive medium term outlook for Hong Kong's business environment even against the backdrop of recent financial turmoil in the region. A US State Department Report on Human Rights in Hong Kong issued in end January 1998 also reaffirmed that there has been no substantial change in Hong Kong since the transition. It recognizes that the freedoms in various areas continue to be the order of the day.

Financial Turmoil
On the economic aspect, the economy is growing at a healthy rate. Despite the recent financial turmoil in SE Asia, we achieved a real growth of 5.2% in 1997 while inflation rate remained benign at 5.8%. Unemployment rate is about 2.5%. GDP per capita is about C$38,000 which puts Hong Kong on par with many of the developed economies in the world. In addition, Hong Kong is the busiest airport for international cargo, the busiest container port in the world, and is the seventh largest trading economy. We have also recently been named by the Heritage Foundation of the US as the freest economy in the world for the fourth consecutive year.

As you all know, in recent months, the financial turmoil in Asia has been the talk of the town. Hong Kong is an international city, any change in the external environment will have a direct impact on its social and economic situation. The financial turmoil has dealt a hard blow to Hong Kong but we have been able to weather this storm.

Speculators have attacked more than once our Hong Kong dollar and got badly burned in the mistaken belief that Hong Kong would follow many of its neighbouring economies and abandon the Hong Kong Dollar/US Dollar linked exchange rate. Hong Kong has US$92.8 billion - the third largest foreign reserve in the world. This, together with our strong economic and financial fundamentals and good monitoring systems, enables us to maintain our linked exchange with the US dollar, and rides through the recent turmoil more or less intact. As pointed out by our Chief Executive, Mr. Tung Chee-Hwa, and many other senior Government officials, the Hong Kong/US Dollar linked exchange rate will not change. For 14 years, the link has provided the basis upon which Hong Kong has come through many international crises: the 1987 stock market crash, the 1992 exchange rate mechanism turmoil, the 1995 Mexican peso crisis, and now the largest regional currency crisis. The link has provided economic stability and contributed to the maintenance of confidence in Hong Kong's role as an international and financial centre.

Given the open nature of the Hong Kong economy, any fundamental change in policy on the peg would cause grave uncertainty and undermine investment sentiments and confidence. This view is shared by one of the leading banks in Hong Kong which concludes after a careful study that if the Hong Kong currency were to be delinked, the growth rate in Hong Kong would practically come to nothing and inflation would be in double-digit figures. These are obviously unacceptable to us. De-linking would damage Hong Kong, and do further damage to the regional economy. The peg has been the stability of Hong Kong's currency since 1983, coupled with our greatly improved market regulation and supervision, that has enabled us to develop into one of the world's leading financial centres. Financial services have increased their contribution to our GDP by over 500% in the last decade and we are now the world's 4th largest banking centre and 6th largest securities centre. Most of the crossborder loans and deals in the world are made in US dollars. The stability of our currency against the dollar protects our businesses and financiers from exchange rate risk on those transactions.

As for our exporters, the idea that they can gain sustained advantage from competitive devaluation is ill-conceived. We first must import all our materials before we can export. Devalue and we will import inflation that will wipe out the hope of gain from lower export prices. Any devaluation would undermine public confidence and would have serious consequences for our financial, property and stock markets. It would do lasting damage to our economic prospects.

We understand that in order to protect the linked exchange rate, the interest rate will go up. This means increasing burden for Hong Kong people and the business community with adverse affects on the property market. But the Hong Kong community fully understands that this is a short-term price that we have to pay. Indeed, the lower prices and rentals in some ways arguably have been a blessing in disguise since these would be good for Hong Kong's competitiveness. It forces businessmen to upgrade the quality of their goods and seek higher productivity. It also enables the economy to adjust through lower property prices and rental levels. This is putting home ownership back within reach of the people and is restoring competivetiness in our business costs. The nature of these market-driven adjustments to the Hong Kong economy bring short-term trauma, but not long-term chronic illness. If you look around elsewhere in the region, I think you must agree that Hong Kong is in better shape than most of the economies whose currency has depreciated between 17% and 70% vis-à-vis the US dollar whereas our depreciation is only 0.03%

With our solid economic foundation, a huge fiscal reserve, and effective financial systems, and monitoring mechanism, we are confident that we will be among the first - if not the first - to rebound.

Some of our friends have also expressed concern on the possibility of the Renminbi (RMB) being devalued which they assume is necessary for China to maintain competitiveness of its exports vis-à-vis exports from other East Asian economies, and the consequential adverse impact on the Hong Kong dollar. There are several reasons why we strongly believe that the Chinese Government will not depreciate the RMB.

First, senior Chinese leaders, including President Jiang Zemin and Vice Premier Zhu Rongji, have categorically stated recently that the RMB will not depreciate.

Secondly, Chinese Government officials have indicated that export competitiveness can be restored through means other than currency depreciation, such as product upgrading, import tariff cuts, and mobilization of more of the cheaper labour resources further inland. Indeed, China has since 1 January 1998 exempted tariff on imports of equipment by those foreign-funded enterprises engaged in hi-tech industries while imports of equipment by those engaged in priority industries have had the tariff rates reduced by half.

Thirdly, China's strong external payments position also makes it impractical for the RMB to depreciate. In 1997, China enjoyed a huge visible trade surplus, at US$40 billion. With China's foreign exchange reserves standing at US$140 billion at the end of 1997, the country is therefore fully capable of resisting the depreciation of RMB.

Fourthly, given the huge visible trade surplus, a move to depreciate the RMB would certainly intensify trade friction between China and its major trading partners, particularly the US. Furthermore, other East Asian economies might see this as a move of competitive devaluation, and thus may trigger another round of currency instability.

Fifthly, depreciation of the RMB would increase the cost of imports for China's own production and consumption and hurt China's ability to service its US$119 billion external debts which would have to be repaid in foreign currencies.

Any lingering doubts people might have had over China's commitment to allow Hong Kong to look after its own affairs, apart from defence and foreign relations, would have been dispelled by the way in which we were left alone to handle the crisis. China's leaders pledged full support to Hong Kong, but only if we asked for it. China has shown a clear understanding that maintaining the position of the Hong Kong Dollar is the expression - in economic terms - of the substance of "One Country Two Systems". Equally, there is an understanding that for the Hong Kong Dollar to keep its position, it is vital that it continues to be supported not by political intervention, but by the sound fiscal and economic policies that are practised in Hong Kong.

Future Developments
Despite the present turmoil, Hong Kong's position as the key international financial, trading and business centre of East Asia has been strengthened. Our political stabililty, sound economy and dependable currency, which is freely convertible, have provided a measure of certainty in a region now beset by uncertainties. And this is bolstered by the fact that we have the mainland of China as our economic hinterland -- an economy that grew by around nine per cent in real terms in 1997 and with little spill-over effect from the regional crisis. China is expected to grow by around 8% per annum up to 2000.

The attributes that have put us at the top of the East Asian region remain:
- our geographical location, on China's doorstep and midway between Tokyo and Singapore;
- our hard-working, flexible and well-educated work-force, combined with our enterprising and resourceful entrepreneurs;
- our simple and low tax system, where no individual pays more than 15% on their salary and no company more than 16.5% (to be further
reduced to 16% beginning from April 1998) on its profits;
- our transport and communications infrastructure, which makes it easy to travel to and communicate with almost anywhere in the world; and
- our accessible and predictable legal and judicial system, which ensures that the rule of law is upheld and that no one is above the law.

And we are continually improving on those attributes. Our new state-of-the-art airport will open on 6 July this year to carry us through well into the new millennium, perhaps continuing as the world's busiest for freight and 3rd busiest for international passengers. Further expansion of our container port, already the world's busiest, is under way. And we have just announced major expansions for our mass transit railway and conventional rail systems.

As one of the world's great cosmopolitan cities - a meeting place for East and West and where English remains the language of business - we are also upgrading our teaching methods to ensure our graduates have an even better command of both English and Chinese. This is essential if we are to maintain our competitive edge in the world. As part of this programme, we will be providing more than 700 additional native-speaking English teachers in secondary schools from this September.

On our legislative front, we are preparing for elections for the first SAR Legislative Council, and then to elect one that is genuinely representative of the whole spectrum of public opinion, through a voting system that is fair, open and acceptable to the people of Hong Kong. These elections will be held on May 24 this year. The structure of the new Legislative Council will be the same as that of the 1995 legislature - 20 directly elected members from geographical constituencies; 30 indirectly elected from functional constituencies; and 10 from an Election Committee.

The indirect elections in functional constituencies are pretty well unique to Hong Kong. They have drawn criticism from the time they were introduced under the British Administration in 1985. They remain, as then, a transitional arrangement. The Basic Law sets out a timetable for electoral development in Hong Kong that will see the number of directly elected seats steadily increased to 50% of the total by 2004. After that, it will be up to us to decide for ourselves how to take the electoral development forward to full universal suffrage.

The US$20 billion Airport Core Program projects will be fully completed by July 6 this year with the opening of the new airport and the airport railway. But we are not complacent. We continue to forge ahead and build the necessary physical infrastructure such as highways, railways, and reclamation and provide more and better housing to meet the future needs of the Hong Kong businessmen and public at large. Capital expenditure on these infrastructural projects over the next five years will amount to nearly C$43 billion. These will certainly create job opportunities and provide excellent opportunities for both Hong Kong and overseas businessmen to participate.

Conclusion
Hong Kong is a place full of business opportunities, particularly in information technology, telecommunications, building materials, and physical infrastructure. Its reunification with China has only made Hong Kong Better placed than ever as a gateway to China. More than 550 Canadian companies have already set up offices or are represented in Hong Kong By agents or joint venture partners. I hope you will not miss these business opportunities.

My office would be more than happy to offer you information, guidance and introduction to the right people to establish your profitable ventures in Hong Kong. We will discuss with you one-on-one your interests and needs, to enable you to decide whether to investigate the potential of Hong Kong. We will provide you with specific information to carry out studies. We can also assist you in seeking out OEMs, suppliers, distribution agents and even joint venture partners in Hong Kong. We will put together a visit program for you to meet bankers, industrialists, local service providers, government officials, industrial and trade organizations, your Consulate General and the Canadian Chamber of Commerce there. I am sure that you will find the visit very worthwhile and I hope you will join me in fostering a more close economic tie between Canada and Hong Kong.