. .: Spot Survey lillbE Hong Kong 1997 Society in Transition November 1996 .•. .• I::::-":.>«:•:•.:••:.":">."-:.••:.".•:•.•'. ^ • ." ."..' •". "-"--.•v- •- - »' •.. ; :• .• I".I"... A y,>.>.•:.• ^.1*^ -:. OF DEVELOPING ECONOMIES INSTITUTE TOKYO Theaim ofthe InstituteofDeveloping Economies (Ajia Kcizai Kenkyusho) is to conduct basic and compreliensive research o;; economic and related affairs in Asia and otiier areas lolucli are on tlie road to development. It, tliereln/, coiitrilnites to thepromotion ofeconomic coop- eratio)i a)id the improvement oftrade relations between Japan and these areas and, ultimately, toward thepros- perity and welfare ofdeveloping cou)itries. The Institute was founded in Decend'er 195S as a non- profit organization. In July 1960, it urns recognized by law as a senii-goveriniiental bodi/. As ofjuh/ I, 1996, the juiiidvr ofstaffmembers was 253, of'whom about t(Oo-thirds are engaged in research (including 34 stationed overseas), with the rest employed as librarians, statisticians, or secretarial personnel. The budget ofthe Institute for the fiscal year 1996/97 is estimated at IIS$52.7 million ofwhich 90 percent is subsidized by thegovennnent. IDE Spot Survey i)itejids to respond to public demand by offering prompt and properanalyses ofevurging problems in dei\'lopiug coutitries. Previous issues i)iclude Investtnoit Risk in Post-Deng China, March 1995, Dynamic Viet- nani, ]une 1995, The Automotive Industry in Asia: The Great Leap Forward?, October 1995,—aiul Excha)ige Rate Fluctuations and Asian Responses Growth Strategy — in the Age ofGlobal Money August 1996. , 42 Ichigaya-Hommura-cho, Shinjiiku-ku, Tokyo 162, Japan Telephone: 81-3-3353-4231 Fax: 81-3-3226-8475 Homepage: http://www.ide.go.jp IDE Spot Survey , , . Canada-Hong Kong Resource CewJ,-a tSiMdintCr«Keiu.Rm III-Toronto.C«A»d»•M5S l-^l Hong Kong 1997 Society in Transition November 1996 INSTITUTE OF DEVELOPING ECONOMIES TOKYO Preface In just a year's time, China will resume its sovereignty of Hong Kong from the hands of the British. There is not only a psychological countdown by the people of Hong Kong, but an actual countdown by a clock installed in the Hong Kong Macao office in Beijing. I^ut, is a countdown now necessary? For some people 1997 is no longer an issue, it has come and gone! This is largely true because Hong Kong had thirteen years of preparation for the event after the Sino-British Joint Declaration signed in 19S4. More importantly, China has been playing an increasing role in Hong Kong in the past fev/ years in the run up to 1997. In a sense, most Hong Kong people have realistically accepted Hong Kong's return to China and are well prepared for it. There are many reasons for us to believe that Hong Kong will have a smooth transition in 1997 and the prosperity of Hong Kong will continue. First, despite the absence of a "through train" in the Legislative Council, the disruption will be minimal. Hong Kong people will soon come to terms with the reality. Things will be alright as long as the executive-led government system is maintained and there is continuity in the operation of government businesses. We should not even be concerned with some changes in the top civil servants as long as the civil service system remains unchanged. The future political system which allows for a gradual process of democratization has been well-defined by the Basic Law and could not therefore be drastically changed. Second, the existing high-handed policy adopted by China over Hong Kong is largely a result ofChina's objection to Governor Patten's (or Britain's) China policy and style. After the change of sovereignty in 1997, Hong Kong as a Special Administrative Region (SAR) can protect its own interest and negotiate with the Central government in its own right. During the transition period, the interest ofHong Kong is submerged amongst the arguments between China and Britain. Third, there are absolutely no incentives for China to destroy Hong Kong's vibrant economy. First of all, it is a question of face. How could China face the world if the economic success emerged during the British Colonial rule cannot be sustained under Chinese sovereignty! Also, Hong Kong is still ofvital importance to the further modernization and development of the Chinese economy. Hong Kong's major contribution in the near and medium future is not so much entrepot services, direct investment, financial services, etc. but more important in providing the mastermind and software in binding up some economic institutions (especially tho.se related to financial development and macroeconomic control) in China. Hong Kong can play a more significant role in this because ofour better understanding of the Chinese situation. For a long time to come, the role of Hong Kong in China's development remains irreplaceable. If there are any risk factors, they are whether the institution in Hong Kong at large will be preserved and whether the superior quality of human resources in Hong Kong could be maintained. The institution at large prefers the ways that things are done in Hong Kong; it can be readily recognized but is difficult to define. It sums up such things as the rule of law, the predictability of policy, the certainty of procedures, the efficiency of operations, etc. While China certainly has no intention whatsoever to destroy Hong Kong, it may inadvertently damage the corporate culture of Hong Kong Inc. With the ma.ssive influx of population from China (150 a day legally and possibly another 50-100 a day illegally), we need to have vigorous and well thought out programs of training, retraining and formal education to maintain the quality of our labor force. Edward K. Y. Chen Contents Chapter I Transition fronn "British Colony" to "Special Administrative Region" 1 Chapter II Relationships between Hong Kong and China in the Post-1997 Era 6 Chapter III The Hong Kong Economy on the Eve of Return 10 Chapter IV Borrowed Land : How does the "rug" under Hong Kong economy work? 21 Chapter V What Does 1997 Mean to Japanese Businesses? 31 Chapter VI Rising Cost of Social Welfare: Coming Due on Lalssez-Faire Policy 35 Bill Chapter VII Immigration, Emigration, Migrant Labor and Employment Hong Kong 39 in Contributors Edward K. Y. CHEN President, Lingnan College, Hong Kong (Preface) Mariko TANIGAKI Assistant Professor, Tokai University, Japan (Chapter 1) Thomas M.H. CHAN Head, China Business Centre, Hong Kong Polytechnic University (Chapter 2) Toyojiro MARUYA Overseas Senior Research Fellow in Hong Kong, Institute of Developing Economies, Japan (Chapter 3) Mariko WATANABE Overseas Research Fellow in Hong Kong, Institute of Developing Economies, Japan (Chapter 4) Koichi ISHIKAWA Deputy Director General, JETRO, Hong Kong, Japan External Trade Organization (Chapter 5) Yukari SAWADA Lecturer, Kanagawa University,Japan (Chapter 6) NG Sek Hong Reader, School of Business, University of Hong Kong (Chapter 7) The views expressed in this paper are those of the authors and do not necessarily coincide with those of the Institute of Developing Economies. No part of this book may be cited or reprinted by any means without written permission from the Institute. Exclusive right to publish inJapan by the Institute of Developing Economies. Chapter I Transition from Colony" to "Britisli "Special Administrative Region" Issues in the Ne\sr Nation Building Before the war, the British crown colony of Hong Kong had maintained close relationswith the TJie Chinese have erected a clock in Beijing's Chinese mainland. As seen by the participation of Tiananmen Square counting down the time left Hong Kong workers in the strike ofmaritime work- until the return ofHong Kong onJuly 1, 1997. Vie ers in 1922 and thegeneral strike in Guangzhou and clockreads "XXDaysandXXSeconds UntilReturn." Hong Kong in 1925 to 1926, pre-war Hong Kong Tliesecondfigurechangeswith eachpassing instant was closely linked politically with mainland China impressing upon viewers the incintability ofHong as well. The establishment of the People's Republic of Kong's return. The return ofHong Kong willprobably be the China in 1949 and the subsequent Cold War struc- last big event in the history of 20th century East ture wrought changes in the relations between Hong Kong and China. The participation of China Asia. in the Korean War through the dispatch of a "Vo- From China's viewpoint, regaining control lunteer Army" led to the adoption ofa containment voevsetrigHeosnogf Kthoenghumwiillliaatliloonwsiftrtoomelmiomdineartne thihsetolrays.t pnaotliiocnys.toTwhaerd19C5h1iUnaNbbyanthoenU.tSh.eaenxdpoorttheorfsWtersatteegrinc After all, Hong Kong gained its place on the world materials to China and the U.S. ban on imports of stage in the aftermath of the Opium War. This was Chinese products dealt destructive blows to Hong the beginning ofa string ofChinese defeats and the Kong, which had traditionally served as the main semi-colonization of China by foreign powers. The port for entrepot trade with China. Hong Kong island has remained as a thorn in For Hong Kong, the new path to survival lay in China's side ever since it was ceded to Great Britain industrialization. At the time, Hong Kong received in the 1842 Treaty of Nanking. an influx of capitalists from Shanghai fleeing life Despite the fact that the return is nominally an under the Communist regime. These entrepreneurs "emancipation from imperialists," the residents of tapped the huge number of refugees from the Hong Kong are not very pleased at being reem- mainland to build textile and other light industries. braced by their "mother country." The media con- Accordingly, Hong Kong was the first among the tinues to predict that the exodus of the people will present Asian NIES to succeed in economic devel- lead to Hong Kong's downfall after return. opment through an export orientation. What issues are involved in the return ofHong Along with the progress in industrialization, Kong? Hong Kong made strides in integrating various groups of new immigrants. Faced with a huge refugee population, the government began con- A Community Different from the structing large blocks of public housing in 1954. Mainland China The mix of Cantonese, Teochews, Shanghainese, and Hakka in this housing gradually led to the use The problem of the return of Hong Kong can of Cantonese as the lingua franca. Classes con- be summarized in a few words. While Hong Kong, ducted in English became the educational norm. like mainland China, is primarily comprised of Han The postwar baby boom also resulted in a Chinese, it represents a different community from large post-war generation of people born in the the mainland China. territory. The second generation of immigrants had A major change in Hong Kong history oc- no experience with life on the mainland China. For curred at the time of the Second World War. them, unlike their parents. Hong Kong was not a 2 Hong Kong 1997: Society in Transition temporary shelter where they could accumulate While Hong Kong has not had elections for most of wealth before returning home, but a true home in its history, a network of advisory committees its own right. spanned the government and served to absorb and reflect public opinion. Establishment of the Hong Kong As a result, despite the fact that it has tradition- ally operated under a non-democratic political sys- System tem, Hong Kong has exhibited strong political sta- bility. Building on the integration of various new gHroonugpsKwointhginestitiaebiiimsmiiiegdraintts poowpunlatsiyosntse,mpo—stownaer Contradictions in the Method of sharply different from mainlantl China. Integration First, mention may be made of the "laissez- faire" policy adopted in the economic system. The Hong Kong's return to the mainland arose as a Hong Konggovernmentstresses the market mecha- practical issue when the Cultural Revolution ended nism and limits its own role to the provision of and the open-door policy was launched on the public property and avoidance of market collapse. mainland. The issue of return was in fact raised by Public disclosure ofinformation and thorough Hong Kong itself With the expiration of the lease adherence to the principles of competition are on the New Territories (99-year lease of the New necessary for the adoption of a laissez faire policy. Territories by England from Qing Dynasty in 1898) Hong Kong meets these criteria. Hong Kong has a fast approaching, it became necessary to plan for highly independent media and the government the future of Hong Kong after 1997 in order to adopts a competitive tender system. There is a maintain its economic prosperity. tendency towards a light view ofwelfare under the While the U.K. w^anted to continue its admin- rule of this "small government." istration over Hong Kong, China expressed its in- The political system, including the .social .sy.s- tention to reclaim .sovereignty. Hong Kong relies on tem in its broader sense, has the following features: the mainland for its food and water Therefore, The political system in Hong Kong has tradi- independence from the mainland was never a real- tionally been a non-democratic one with power istic option for Hong Kong. concentrated in the hands ofthe colonial governor This being said, after successfully integrating The governor was appointed by the Queen of the various new groups within the immigrant popula- llniteci Kingdom (UK.) and never had to undergo a tion and establishing a "Hong Kong System," the baptism of public opinion through elections. He territory found itself too socially distant from the was the only real power in the territory's legislative mainland. Rapid reintegration would harm thevital- and executive branches. ity of Hong Kong and would also run counter to Judicial independence, however, has long China's desire to use the territory to contribute to its been maintained in Hong Kong. Hong Kong adopts own modernization. the Common Law, the liquity. as well as its own As a result, the "one country, two system" customary law. When di.ssatisfied with decisions in approach has been adopted as the method of rein- the territory, it is possible to lodge an appeal at the tegrating Hong Kong with China.This framework is Judicial Committee of the Privy Council in London. that r^'o systems, the Chinese system and the Hong This legal tie with the U.K. creates a judicial envi- Kong system, might function harmoniou.sly in one ronment conducive to foreign capital in Hong country, the People's Republic of China. China will Kong. regain sovereignty over Hong Kong onJuly 1, 1997, HcMig Kong enjoys the iiighest level of free- but it is assumed that Hong Kong will enjoy a high dom of press in all of Asia, with various iinglish degreeofautonomy, except in foreign relations and language media using Hong Kong as a base for defense, as a Special Administrative Region (SAR), reporting in Asia. for the following 50 years. In addition, a series ofgovernment reforms in This"onecountry, twosystem" approach, how- the 1970s enabled Hong Kong's civil service to ever, contains some fundamental contradictions. exhibit a high level of administrative efficiency. When the Hong Kong Special Administrative Re- Transition from "British Colony" to "Special Administrative Region" 3 gion government differs on an issue witli tlie Chi- begun by the Hong Kong government. This is nese central government, wiiich choice will priority linked with the LI.K.'s desire for an "honorable be given to? Namely, will the "one country" or the withdrawal." "two systems" be stressed?. The U.K. and Portugal have adopted different While Hong Kong is calling for respect on the approaches to their colonial charges. The U.K. "two systems," China has leaned heavily toward amended its Nationality Act in 1981 to legally re- "one country." China includes within its borders the strictentryofHong Kong residents. Portugal, on the vast minority regions of Xinjiang, Tibet and hiner other hand, stands in sharp contrast by guarantee- Mongolia, and therefore deems stability and unity ing the right of persons born in Macau to abide in tobe ofprime importance.There is concern that the Portugal. very existence of Hong Kong will stir calls from The decision to return all the territory ofHong these minority regions for upgrades to "special Kong, including both the ceded and leased territo- administrative regions" as well. ries, was seen by many in Hong Kong as the U.K. selling Hong Kong out. Itwas necessary for the U.K. to eliminate the apprehensions of Hong Kong resi- Political Backlash dents over life under Chinese control so as to ensure smooth return. Political reform in Hong In the transitional period until return, friction Kong was undertaken within this context. Young over the "one country, two system" approach has Hong Kong intellectuals supported the reforms as already become visible between Hong Kong and establishing a "bulwark" protecting the Hong Kong China. The main issue is the political reforms in system. Hong Kong. In the transitional period, the differ- As a result, a tide ofdemocratization began to ences in the two political systems have become sweep Hong Kong beginning in the 1980s. The relatively greater government-led reform of the political system The open-door policy beginning in the late mainly took the form of the introduction of an 1970s has reduced the differences between Hong electoral system. In 1982, direct elections were held Kong and China in their economic systems. China for the District Boards responsible for local admin- aggressively worked to attract foreign investment, istration. Democratic forces in Hong Kong called adopted the market mechanism, and established for the introduction ofdirect elections to the Legis- ability- and performance-based wage systems. lative Council in the territory in 1988. Rapid changes have been made in dismantling This series of events prompted China to cau- China's socialist planned economy and its underly- tion restraint, stating that rapid changes could invite ing principle of state ownership. political instability and threaten the prosperity and Progress has been made in the economic inte- stability of Hong Kong. The Tiananmen Square gration ofHong Kong and China during this period. crackdown of 1989, however, increased the fear of When the Pearl River Delta region adjoining Hong Hong Kong residents over their future after return Kong was opened to investment in 1985, Hong and further spurred the democratization of the Kong manufacturers began successively moving territory. their factories there. Access to the Delta relieved The support for democratization in Hong greatly the problems of labor shortages and Kong might be seen in the landslide victory of the cramped space endured by Hong Kong manufac- democrats in the 1991 direct elections for the Le- turers up to this point. China has also made positive gislative Council. Governor Patten, who took office use of Hong Kong as an international financial in 1992, proposed further reform of the political center Being the largest investor in Hong Kong, system aimed at maximum democratization in the Chinese state-owned enterprises were hrst listed framework of the Basic Law, a mini-constitution for directly on the Hong Kong stock market in 1993. In Hong Kong after return. 1994, the Bank of China even began issuing Hong Patten's proposal again fueled tension in rela- Kong dollar notes. tions between the U.K. and China and relations On the other hand, the political reforms in between China and Hong Kong. China criticized Hong Kong, the bone ofcontention between Hong Patten's proposal as violating the Sino-British Joint Kong and China in the transitional period, were Declaration, Basic Law and related agreements. Pat- 4 Hong Kong 1997: Society in Transition ten's Proposal, however, passed the Legislative Kong. The difficulties in reintegration may well be Council in 1994, and as a result, new elections were more of a burden to the leaders of the Chinese iield in 1994 and 199S. China subsequently adopted central government than to the people of Hong a tough stance of ignoring these political develop- Kong. ments in Hong Kong. It has repeatedly said that it The reason is that the market is assessing the will dissolve the tertiary councils elected under die value of Hong Kong's future moment by moment. new electoral system after Hong Kong's return. To Although the exchange rate of the Hong Kong avoid a power vacuum after the dissolution of the dollar is stable because ofbeing pegged to the U.S. Legislative Council, China plans to launch a provi- dollar, the Hang Seng Index is not subject to gov- sional legislature - something not provided for in ernment control. Its wild upswings and down- the Basic Law. swings will starkly reveal to the outside world any turmoil inside Hong Kong. In addition, China's open-door policy has led to di- New Issues in the verse new political demands in- Nation Building side the society. After losing the charismatic presence of Deng Will Hong Kong's return Xiaoping, China will have its proceed smoothly then? The an- hands full governing itself, much swer is yes. Of course, all three less the return of Hong Kong. parties, China, the U.K. and Hong In whichever case, with the Kong, want return to proceed 21st Century fast approaching, without harming the territory's China will have to integrate a new "prosperity and stability." Since population, that of Hong Kong, Hong Kong and China remain so into its society. What happens to different in terms of their societ- Hong Kong after its return will be ies, however, it would be too watched with great interestbyTai- simplistic toexpect return to pro- wan — another potential candi- ceed with no friction. date for reintegration into the The friction between Hong mainland. The results of die elec- Kong and China in the transi- tions held in Hong Kongsince the tional period is simply a prelude 1980s demonstrate Hong Kong of things to come. The difficulty residents' support for democrati- of reintegrating Hong Kong into zation. The recovery of this "lost China will instead become more A moot election territory" may place a heavy bur- severe afterthe return.This is not for SAR Executive Chief den on the running of the Chi- because China is likely to force a "one country" nese state with the reintegration of a new approach and risk sapping the vitality of Hong "stranger"