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July 1, 1999

Hong Kong Under Chinese Rule

By

Testimony before the East Asian and Pacific Affairs Subcommittee - Foreign Relations Committee - United States Senate

Mr. Chairman and distinguished members of the Subcommittee, thank you for inviting me to address you on this second anniversary of Hong Kong's handover from British to Chinese sovereignty. Today's hearing is one of the many ways the United States Congress demonstrates to Hong Kong, China, and the world that developments in Hong Kong remain vital to U.S. interests in Asia and of great importance to U.S. policymakers.

Mr. Chairman, before making a few observations about developments affecting Hong Kong's Economic leadership and development towards democracy that have occurred since the establishment of Chinese sovereignty two years ago (especially recent controversies affecting U.S. interests), I would first like to return to an analytical framework that I found useful in placing U.S. interests and concerns about Hong Kong in perspective prior to the handover. This framework of weighing reasons for optimism against causes for concern is found in a Heritage Foundation backgrounder titled "The U.S. Interest in Hong Kong," written in December 1996. I bring this analysis to your attention not because I am the author, but because I think its review makes clear how different our perception of Hong Kong is today when compared to the period just prior to the transfer of sovereignty. It is humbling to realize how limited is our ability to forecast events of great consequence, but this review also brings to mind the old cliché, "the more things change, the more they remain the same."

Pre-handover Causes for Concern

Hong Kong's Dependence on Trade. Hong Kong's dependence on foreign trade is a cause for concern because a loss of autonomy could diminish its global competitiveness and put at risk the jobs of millions of workers. The total value of Hong Kong's trade typically amounts to 2 to 3 times its GDP. Such heavy reliance on trade makes Hong Kong vulnerable to government interference, either by undermining competitiveness through burdensome regulation or by politicizing its economic institutions.

Limitations on Freedoms and Democracy. Limitations on freedoms and democracy in Hong Kong are of concern to not only political activists, but businessmen as well. Imposed political limitations unintentionally may diminish economic growth and market efficiency. Beijing's intention to replace the Legislative Council and limit the application of two international covenants on human rights raises serious questions about its tolerance for freedom and democracy within its "one country, two systems" model. Similarly, China's harassment of Hong Kong reporter Xi Yang, together with the widespread fear of self-censorship in the Hong Kong press, has caused concern about the viability of freedom of the press after 1997. A free press is not only vital to democracy; the free and efficient flow of information is also vital to free markets.

Corruption and the Rule of Law. With the establishment of Chinese sovereignty over Hong Kong, many have feared that the corruption that has plagued business in China will find its way into Hong Kong. One of Hong Kong's main attractions has been the clean, modern business and legal environment it provides for foreigners to conduct business with China. Notwithstanding the real success of the Independent Commission Against Corruption (ICAC) in fighting corruption in Hong Kong since 1975, the import of Chinese-style corruption greatly would diminish the attractiveness of Hong Kong as a regional operations center for international business.

The People's Liberation Army. The role of the People's Liberation Army in Hong Kong after 1997 is critical to the success or failure of the transition. An assertive military presence will undermine confidence in Hong Kong's future autonomy. China's military--the PLA--will replace the British Garrison currently stationed in Hong Kong as part of the transition process. The mission of the PLA in Hong Kong is to provide for the territory's defense, and interference in the local affairs of the Region is forbidden. But Article 14 of the Basic Law states that the SAR government can ask Beijing "for assistance from the [PLA] garrison in the maintenance of public order." With Tiananmen still fresh in their minds, some Hong Kong residents want protection from, not the protection of, the PLA. And if the Chief Executive of the SAR is appointed by Beijing, the people of Hong Kong will wonder how cautious he will be about requesting such "assistance."

Pre-handover Reasons for Optimism

China's Economic Dependence on Hong Kong. Hong Kong's high level of investment in China, not to mention China's high level of investment in Hong Kong, may be Hong Kong's best security guarantee. Hong Kong plays a vital role in facilitating trade and investment with China. Moreover, China's economic development depends on foreign investment and trade. Because China's access to foreign trade and investment depends on the continued rule of law and free flow of capital, goods, and information in Hong Kong, Beijing may not be inclined to do anything to destabilize or undermine international confidence in Hong Kong. Doing otherwise could deal a fatal blow to its own development.

Communist Party Legitimacy. China's Communist Party's need for a successful transition in Hong Kong to bolster its own legitimacy is another reason for optimism about Hong Kong's future autonomy. The Communist Party has made reunification of the motherland a key pillar of its legitimacy. Increasing the living standards of the Chinese people is the second pillar. A turbulent assimilation of Hong Kong into Chinese sovereignty would threaten to destroy both pillars and thereby undermine the legitimacy of Communist Party rule in China. A destabilized Hong Kong would obstruct the vital flow of foreign investment and trade that supports Beijing's current economic reform and modernization. The failure to sustain economic growth and development along with the failure to fulfill the mission of national reunification thoroughly would undercut both pillars of Communist Party legitimacy.

The Taiwan Factor. The dramatic effect an infringement on Hong Kong's promised autonomy would have on the independence movement in Taiwan is another reason for optimism. The importance of Taiwan in Beijing's Hong Kong calculations cannot be overstated. China's "one country, two systems" model was crafted with reunification with Taiwan in mind, and Hong Kong is the critical first test of this model. Although a successful transition in Hong Kong is no guarantee that the "one country, two systems" approach will work with Taiwan, a failed transition would eliminate virtually any possibility of peaceful reunification with Taiwan. Nothing would mobilize domestic and international support for Taiwan's independence--an outcome Beijing wants desperately to avoid--more than a botched transition in Hong Kong.

Familiarity with the Mainland. Hong Kong's familiarity with Mainland China is another reason to be optimistic about the success of the transition. Hong Kong's transfer to Mainland sovereignty is no blind date. To residents of Hong Kong, China is a known quantity. In fact, Hong Kong's prosperity today is a testament to its knowledge of and ability to work within the Chinese system. The wealthy in Hong Kong achieved that status because of their connections inside China and in the West. They have profited from helping join foreign capital with opportunity in China. For this small but very influential group, the transfer of Hong Kong's sovereignty is a matter of politics catching up with economic reality.

Progress of the Joint Liaison Group. Significant progress has been made to adapt Hong Kong's independent legal and judicial systems to post-1997 requirements. Since 1984, the Sino-British Joint Liaison Group has done a tremendous amount of work to pave the way toward a smooth transition. Major achievements of the Joint Liaison Group include the Sino-British agreement on the construction of the new airport; the establishment of the Court of Final Appeal in Hong Kong on July 1, 1997; Hong Kong's continued participation in 30 international organizations; and the continued application of some 200 multilateral treaties to Hong Kong after 1997.

The Role of the United States heading into the Transition

Even though a successful transition that maintains Hong Kong's high level of autonomy clearly serves China's own best interests, the United States must remain vigilant in its efforts to protect U.S. interests at risk in the transition. The United States must protect the many U.S. citizens and businesses in Hong Kong as well as minimize the risk to market access and regional peace and stability generated by uncertainty over Hong Kong's future. U.S. interests will be served best by a realization of the level of autonomy promised Hong Kong in the Joint Declaration. To protect U.S. interests and help preserve the freedom, stability, and prosperity of Hong Kong, the United States should:

  • Beware of the impact U.S. policy toward China has on Hong Kong. Protection of U.S. interests in Hong Kong depends very much on the China policy of the U.S. government. Politically generated trade friction between the United States and China, such as is created by threats to revoke China's most favored nation trading status, puts U.S. interests in Hong Kong in jeopardy and destabilizes Hong Kong.

  • Articulate U.S. interests in Hong Kong to leaders in China. A clear understanding of how the United States intends to protect the security of the 35,000 U.S. citizens and 1,000 U.S. firms in Hong Kong, as well as its multibillion-dollar investment and trade interests, will help China's leaders avoid miscalculation when responding to U.S. actions in Hong Kong.

  • Maintain a strong U.S. presence in Hong Kong. U.S. officials, businessmen, students, and tourists are a vital source of information, and their presence demonstrates to the people of Hong Kong that the United States is observing the transition process carefully.

  • Strongly urge Beijing to allow the current democratically elected Legislative Council to serve out its term. If Beijing insists on replacing the current legislature, the United States should urge Beijing to shorten the term of the provisional legislature by preparing now for elections to take place as soon after July 1 as possible.

  • Support Hong Kong's continued participation in international organizations. As the world's freest economy, Hong Kong should play a key role in international organizations in leading the world toward a more free and open trading system.

  • Urge Beijing to sign international human rights covenants. Such a move by China would assuage the fears that led Hong Kong's residents to demand a Bill of Rights Ordinance [over Beijing's strong objection] in the first place.

  • Closely cooperate with the Hong Kong Special Administrative Region government to fight drug trafficking, money laundering, alien smuggling, and commercial piracy. For this cooperation to work, it is important that the United States not allow differences with Beijing to alienate or put at risk the new SAR government.

Key Developments Since July 1, 1997

Much has happened since the launch of Deng Xiaoping's "one country, two systems" experiment on July 1, 1997:

Development Towards Democracy. On July 1, 1997, Hong Kong's democratically elected legislature was replaced with an appointed provisional legislative council. On May 24, 1998, Hong Kong voters turned out in record numbers (53 percent) and in a torrential downpour to elect the new Special Administrative Region's first Legislative Council--the first legislature in the history of the People's Republic of China to be chosen (albeit partially) by direct popular election.

Financial Crisis and Market Intervention. On July 2, 1997, the Bank of Thailand allowed the baht to float, introducing a new word into the Asian vocabulary--recession. The impact of economic turmoil in Thailand, Indonesia, and Korea was felt throughout Asia and beyond. As panicked investors fled and hungry speculators attacked, Hong Kong was bound to be hit. In 1998, Hong Kong Economy contracted by 5.1 percent, the Hang Seng Index fell to lows near 6,000 (down from pre-handover highs near 16,000), and property values and tourism revenue plummeted. On August 14, 1998, the Hong Kong government broke with tradition by purchasing an estimated $15 billion in stocks in an effort to ward off hedge fund speculators betting against the government's ability to maintain its currency peg to the U.S. dollar. Recently, the government announced its intention to gradually dispose of its investments, but it is concerned that an abrupt withdrawal might send another shock through Hong Kong's jittery market.

Judicial Independence Challenged. On January 29, 1999, Hong Kong's Court of Final Appeal (CFA) rendered a very controversial decision having to do with the rights of certain children born on the Mainland to claim "right of abode" (a form of permanent residency) in Hong Kong. The CFA adopted a very expansive interpretation of the relevant provisions in the Basic Law, granting the right of abode to all children of legal Hong Kong residents, even children born on the Mainland out of wedlock and prior to the parent becoming a legal resident of Hong Kong. Under this broad interpretation, a 50-year-old man, as soon as his 75-year-old father attains legal resident status in Hong Kong, automatically inherits the right of abode in Hong Kong. So too do his children and grandchildren. Due to the perceived social welfare consequences of such an immigration boom, and the belief that the CFA had incorrectly interpreted key elements of the Basic Law, the Hong Kong government on February 24 asked the CFA to "clarify" certain aspects of its ruling and in June requested an authoritative interpretation of the legislative intent behind relevant provisions in the Basic Law.

Cox Report and Export Controls. On May 25, 1999, the House Select Committee on U.S. National Security and Military/Commercial Concerns with the People's Republic of China released an unclassified version of its report, cataloguing China's efforts to acquire sensitive military technology through espionage and commerce. Among the recommendations made by Select Committee Chairman Chris Cox (R-CA) is a call for tightened controls over sensitive dual-use technology exports to Hong Kong.

Human Rights Covenants Signed, But Dissidents Denied Entry. In the fall of 1997 and summer of 1998 respectively, coincident with Sino-U.S. presidential summits, China signed the United Nations Covenant of Economic, Social and Cultural Rights and the Covenant on Civil and Political Rights. This move was welcome as a gesture to assuage concerns about the continued application of the terms of these covenants in Hong Kong. Political opposition and free expression have remained vigorous and relatively uninhibited in Hong Kong. Tiananmen anniversary vigils and public debates over the fate of democracy on the Chinese Mainland continue. But starting on April 21, 1999, the HKSAR began denying entry visas to exiled Chinese dissidents wishing to participate in these activities. While Hong Kong remains home to several high-profile Mainland dissidents, and the views of others are freely broadcast and discussed, this most recent gesture smacks of Beijing-like intolerance.

U.S. Military Port Calls Halted. In response to the tragic, but accidental, U.S. bombing of China's embassy in Belgrade on May 7, 1999, China announced that U.S. military vessels would no longer be permitted to port in Hong Kong. Most analysts consider this to be a temporary expression of China's sovereign prerogative but do not take it as a given that U.S. military vessels will be able to resume port calls in Hong Kong in the near future. Prior port calls were viewed as a sign of continuity and good faith in U.S.-Hong Kong relations. Their termination, even temporarily, sends a disturbing strategic signal to the United States, but also to Hong Kong. Those most hurt by the absence of such visits are merchants in Hong Kong's well-traveled tourist and entertainment districts. This gesture reduces Hong Kong to a pawn in China's geopolitical chess game with the U.S. and demonstrates a disregard for the impact of such political moves on the well-being of Hong Kong residents.

New Causes for Concern

Since the establishment of Chinese sovereignty over Hong Kong, all of the pre-handover causes for concern remain. Hong Kong remains heavily dependent on international trade and investment. Its vulnerability to dramatic fluctuations in regional and global trade and investment flows has become shockingly clear to Hong Kong residents over the last two years. Hong Kong residents and outside observers remain anxious about the continued protection of political liberties and further development of democracy. An effective Independent Commission Against Corruption and firm commitment to the rule of law remain critical to Hong Kong's future success. And the People's Liberation Army presence in Hong Kong remains a latent concern to many, especially since the government has yet to define crimes against the state (as described in Basic Law Article 23) and how it intends to enforce such a prohibition. Notwithstanding these concerns, few problems attributable to the change of sovereignty have emerged over the last two years. I will briefly discuss two challenges to Hong Kong's high degree of autonomy that have captured a lot of recent attention.

Judicial Independence. As mentioned above, Hong Kong's Court of Final Appeal rendered a particularly controversial decision in January that many executive officials feared would pose a grave challenge to Hong Kong's social welfare. Few question the government's concern that a dramatic flow of Mainland migrants into Hong Kong would strain government services and tax the generosity of current residents. The controversy arises from the question of whether the CFA's ruling reflected a correct interpretation of relevant provisions in the Basic Law and the fact that the SAR government has been seeking ways to address the immigration concerns created by the ruling in ways that may compromise the Court's authority and Hong Kong's autonomy.

The CFA's interpretation of the Basic Law does appear to be unnecessarily (perhaps erroneously) broad, and the SAR government's request for an authoritative interpretation of the relevant Basic Law articles does appear to be an appeal of what was supposed to be a final adjudication. I speak here only in terms of appearances. There is a vigorous debate in Hong Kong among distinguished legal professionals (which I am not) over the merits of both of the above claims. But the dispute is rarely focused on the underlying issue--who qualifies for permanent resident status in Hong Kong and by what means. The central government and the SAR government clearly have the legal authority to control population flows into Hong Kong, and coordinated efforts in this regard are appropriate. I suspect that the means used in this case to resolve the underlying issue are not worth the political cost.

The problems created by this case appear to be more political than legal. As sovereign, Beijing has the right to interpret and amend the Basic Law any time it likes according to its own constitution and legislative process. If Hong Kong's autonomy has been compromised in the process, at least in this case, it would appear that it was done at the behest of many of Hong Kong's people and not initiated by Beijing. It is ironic that many who argue that the CFA's ruling must be final--one that would bring a large flow of Mainland migrants into Hong Kong--view the flow of Han Chinese into Tibet as a threat to Tibet's autonomy, special identity, and culture. Events have proceeded too far in this case for there to be an ideal or even positive outcome. The court created a problem with no proposed solution, and the government responded with a solution that created more problems. In the end, this issue becomes a concern to the United States only if Hong Kong's judiciary continues to be questioned by the executive branch and overruled by the central government. If it remains an isolated incident, then it will be a regrettable event with manageable consequences.

Proposed U.S. Export Controls. Representative Cox's recommendation to consider new controls over sensitive dual-use exports to Hong Kong is understandable, given security concerns raised in the Select Committee's report and China's sovereignty over Hong Kong. The problem is that there has been no evidence that the SAR government has been anything less than cooperative with the United States in controlling the flow and monitoring the end use of sensitive technologies. Given the Hong Kong government's continued cooperation with these and many other security concerns, imposition of export controls risks dealing an unnecessary blow to Hong Kong's autonomy.

New Reasons for Optimism

As before the handover, Hong Kong's successful integration into the People's Republic of China under the "one country, two systems" model remains critical to Beijing's key goals of expanding economic development and eventual reunification with Taiwan. The primary reason for optimism about Hong Kong's continued freedom and prosperity under Chinese sovereignty is the fact that its most debilitating developments are the result of events outside of China. Very few predicted that Hong Kong's greatest challenge over its first two years under Chinese rule would be economic. And even those visionary few who did mistakenly assumed that Hong Kong's economic downturn would come about as the result of Mainland micromanagement and corruption. That may yet occur, but it is important to note that throughout this economic crisis, while much of the world offered Hong Kong its advice and criticism, Beijing was notably restrained and Hong Kong remains highly integrated and open to the global system of trade and investment.

Even some of the emerging causes for concern give rise to a measure of optimism. The decisions to block exiled dissidents and to seek an interpretation of the Court of Final Appeal's "right of abode" decision both appear to be the result of decisions made within Hong Kong. On nearly every issue other than the denial of U.S. military ship visits, Beijing has erred on the side of caution to avoid even the appearance of interference in the Special Administrative Region's affairs. Indeed, the one area most analysts feared would become the first casualty of Chinese sovereignty--political freedom--has perhaps gone the most smoothly. The Hong Kong people remain enthusiastic about exercising their right to vote and ensuring government responsiveness to local needs. And Hong Kong continues to progress along its admittedly slow democratization path--next year's legislative election will bring a slight increase in the number of directly elected seats. I remain hopeful that this franchise will continue to expand and that the people of Hong Kong will have the means at their disposal to guarantee that their judicial, legislative, and executive leaders are accountable to them before all others.

The United States has a deep and abiding interest in seeing that Hong Kong maintains its high degree of autonomy and continues to be a shining example of how freedom works in a Chinese society. The U.S. should avoid policy measures that compromise Hong Kong's autonomous status or undermine its economic vitality. Continued expressions of support and concern for Hong Kong's future success, such as this hearing and the frequent visits by Members of Congress to Hong Kong, are important signals to all concerned that U.S. policymakers remain engaged in these issues and will continue to press for progress.

Thank you very much, Mr. Chairman and members of the Subcommittee, for your interest in these issues. I look forward to your questions to help fill any gaps in my presentation.

Stephen J. Yates is a Senior Policy Analyst on China of The Heritage Foundation

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