Freedom's Fall in Hong Kong

Thursday, May 1, 1997

July 1, 1997, "a day," paraphrasing President Franklin D. Roosevelt's famous words, "that may live in infamy." On that day, the British Crown Colony of Hong Kong becomes the Hong Kong Special Administrative Region (HKSAR) of the People's Republic of China. 1

To be sure, Chinese bombs will not fall on Hong Kong's airport and harbor. The new occupying force, the People's Liberation Army, looks more like a modern-day business conglomerate than a fearsome fighting machine. Moreover, the first chief executive of the HKSAR, Tung Chee-hwa, his key policy advisers, the administrative heads of twenty-three government departments, and the sixty members of the new, China-sanctioned legislature are all drawn from leading members of Hong Kong's business, social, educational, and political communities.

The apparently peaceful transfer of sovereignty and administrative authority from Britain to China over Hong Kong masks what amounts to a fundamental clash of values and institutions. The transfer, or handover as it is called by the Chinese, will decimate the political, civil, and economic liberties that define Hong Kong's way of life. More than six million residents of Hong Kong, largely Chinese, who have enjoyed an enormous degree of personal liberty in their lives will be handed over to the government of mainland China, ruled by the autocratic Chinese Communist Party. Throughout its history, the party has treated personal liberty among Chinese citizens as a virus that must be eradicated whenever it appears.

Mao Zedong, the founder and great helmsman of the Chinese Communist Party and the People's Republic of China, wrote in 1927 that "a single spark can start a prairie fire." Mao referred to an uprising of peasants. Today's feared spark is "democracy," as exemplified in the June 1989 firestorm that erupted in Tiananmen Square on global television, which was put down by tanks and soldiers of the People's Liberation Army.

The clash of values and institutions between colonial Hong Kong and the territory's new authoritarian Chinese rulers requires some background discussion.

BACKGROUND TO HONG KONG

Hong Kong occupies just over 400 square miles. It consists of two large islands, many small ones, and a large landmass. The British occupied Hong Kong in stages, beginning with Hong Kong island, today a center of finance and global business, in 1841. They acquired Kowloon, now a shopping mecca across the harbor, in 1860 and in 1898 extracted a ninety-nine-year lease for the New Territories, which consist of other islands and a landmass that extends to the Shenzhen River, the border with China.

Captain Charles Elliot, Hong Kong's first British chieftain, declared that Hong Kong would be free of tariffs. Free trade, reflecting nineteenth-century British economic thought, became the cornerstone of Hong Kong's economy. Trade grew so fast that the newly established colony soon had tens of thousands of Chinese and European residents trading to all corners of the globe.

Hong Kong's prosperity under British administration rested on the underlying foundations of its institutions and economic policies: private property, the rule of law, limited government, low taxes, balanced budgets, sound money, and sensible regulation.

Budget deficits, commonplace in Western democracies, rarely occur in Hong Kong. Since 1949, the government's budget has been in surplus nine of every ten years. Accumulated surpluses are so large that the government can pay all its bills for months and months without collecting a penny in new taxes.

The Hong Kong dollar is literally as good as the U.S. dollar. Banknotes come in different sizes and colors, with pictures of the Hongkong Bank, the Standard Chartered Bank, and the Bank of China on reverse or front sides. But every one of these pieces of paper in circulation is backed by U.S. dollar assets held by the Hong Kong Monetary Authority. The value of the Hong Kong dollar, at 7.8 to 1.0 U.S. dollar, has remained fixed since 1983.

Along with free trade, limited government, low taxes, and sound money, the Hong Kong government has scrupulously kept out of private business and personal affairs. The playing field was level as the government gave no subsidies to particular firms, sectors, or individuals. It did not favor importers over exporters; manufacturing over commerce, finance, or construction; management over labor; or labor over business. It did not impose a minimum wage. It neither encouraged nor discouraged unions. The government did not favor Hong Kong citizens over foreign investors, nor did it grant special preference to foreign business. It did not own or operate the bus companies, the power companies, the trams, the ferries, the cross-harbor tunnels, or the telephone company--all were private, profitable ventures.

Hong Kong's institutions and policies stand in marked contrast to those of China. Take the rule of law, for example. Redress through the legal system is generally not available in China. In relations between individuals and the state in China, the state all too often simply detains the individual without a hearing and jails him without a trial. In basic commercial transactions, who you know or have paid off is more important than what happened.

The rule of law in Hong Kong has been distinct from and contrasts with the rule of man in China. China's history has little experience with constitutions, parliaments, and courts of law. Its history is that of autocratic emperors, dictators, warlords, and ruthless Communist Party officials. This important difference between British Hong Kong and China cannot be overstated. Put as bluntly as possible, words in treaties, constitutions, and laws do not mean the same thing in Chinese to the Chinese as they do in English to the British, Americans, and others who reside in the West. There is no common ground for a similar understanding of the "rule of law" between Hong Kong and China in light of their different political histories.

The origins of the rule of law in Britain and the United States are more than a thousand years old. Its roots lie in the common law, the Magna Carta, medieval charters, Parliament, independent courts, John Locke's Second Treatise on Government, and constitutions that protect the rights of individuals from the depredations of government. It is exactly the other way around in China. There the law serves the interests of the state against individuals. Individuals had, and still have, no rights, God given or in a state of nature. In matters of law, guilt, not innocence, is presumed and courts serve the state, rather than restrain it. This wide gap in meaning cannot be bridged until China becomes a Western democracy, which is not on the horizon.

The Chinese constitution has gone through five major revisions. No matter. The words do not mean what they say in the Western political tradition. Chinese citizens are granted rights of free expression but are locked up if they speak freely. They enjoy every other right that appears in any Western country's bill of rights or constitutions--unless, that is, they try to exercise them.

Words have meaning, at least in the West. The word liberty means freedom from unjust or undue government control. It does not mean any such thing in Chinese, nor has it ever meant any such thing through all of Chinese history. The word did not exist in China until the nineteenth century. The Chinese word for liberty has no basis in China's linguistic or political heritage to capture the notion of the rights of individuals secured against the power of the state.

Indeed, the opposite is the case. In Chinese, the Western concept of liberty as inherent in the rights of individuals was construed as anarchy, which is a great political misfortune in Chinese lore. Order is the supreme virtue. Individuals expressing their own views and doing their own thing upsets the Confucian scheme of personal and social relationships. In the Chinese tradition, rights are grants of the state--given to and taken back from individuals at the whim of the state, with or without cause.

HONG KONG'S APPARENT LEGAL STATUS UNDER CHINESE SOVEREIGNTY

Hong Kong's social, economic, and political future is defined by two documents. The first is an international treaty known as the Joint Declaration, signed by China and Britain in 1984. This document says that Hong Kong can remain autonomous for fifty years after 1997, with Hong Kong people ruling Hong Kong, save in matters of security and diplomacy. The second is the Basic Law, enacted in 1990 in Beijing by a rubber-stamp legislature, that is supposed to serve as Hong Kong's "miniconstitution." Both documents are full of words that seem to ensure all the liberties that the six million residents of Hong Kong enjoyed under British rule but which China's own citizens do not enjoy, despite China's own constitutional guarantees of identical liberties

The Joint Declaration is predicated on the late Deng Xiaoping's policy of "one country, two systems," which provides for the following arrangements:

  • Hong Kong is to enjoy a high degree of autonomy. Socialist policies in the mainland will not be applied in Hong Kong, and Hong Kong will maintain its capitalist system and way of life for fifty years after 1997.
  • The people of Hong Kong will continue to enjoy their rights and freedoms under Hong Kong law.
  • Hong Kong will retain its common-law system, and a court of final appeal will be established in Hong Kong.
  • Hong Kong will retain its free port status and separate customs status.
  • Hong Kong will have autonomy in economic, financial, and monetary fields. There will be no exchange control, and the Hong Kong dollar will be a freely convertible currency. China will not levy taxes on Hong Kong people.
  • Hong Kong will determine its own shipping and air agreements.
  • Hong Kong people will retain their land rights up to 2047.
  • Hong Kong people will retain right of free entry to and departure from Hong Kong.

Annexes elaborating these policies provided for a Joint Liaison Group that would resolve issues up to the year 2000 but would not interfere in the remaining years of British administration, explained the status of residents who were British dependent territories citizens after 1997, and addressed land leases and rights.

Paragraph 3 (12) of the Joint Declaration stated that the policies of China regarding Hong Kong were to be stipulated in the Basic Law enacted by China's National People's Congress. The drafting process began in 1985 and ended five years later when the Basic Law was promulgated on April 4, 1990. The Basic Law contains a generous grant of rights, including an "economic bill of rights."

However, liberty and the rule of law go well beyond the right to make money. Other freedoms are also important. These include religious freedom, freedom of speech, freedom of assembly, a free press, and academic freedom. Under British rule, churches, newspapers, and universities in Hong Kong were free in word and deed. Religious freedom did not hang on the colonial governor's whim to permit or suppress the right to worship in accord with personal belief. A free press did not hang on some censor's whim. Academic freedom was not bound by the need to obey a political overlord and citizens could march in the streets, present petitions to Government House, and hold political rallies.

Hong Kong residents could form political parties, run for office, and even criticize the most senior government officials--and not fear a midnight knock on the door. Hong Kong residents did not worry about being sent to reform camps in the distant Chinese countryside.

CHINA UNDER DENG XIAOPING

Those who remain optimistic about Hong Kong's future point to the steady economic progress that China has achieved under the late Deng Xiaoping's leadership. Since 1980, China's economy has grown at 9 percent a year, with even faster growth in the coastal provinces adjacent to Hong Kong, Macao, and Taiwan. Billions of dollars in foreign investment have poured in, and trade surpluses run in the tens of billions of dollars. Foreign reserves exceed $100 billion. Hunger and famine have largely disappeared.

Although Deng Xiaoping was always a stalwart Communist Party member, he was a "pragmatist" in economic matters, known for saying that "it doesn't matter if a cat is black or white as long as it catches mice." He launched a series of economic reforms, calling them "socialism with Chinese characteristics," a euphemism for injecting market forces into the Chinese economy. He opened China's economy to the West and established special economic zones along the coast that enjoyed a large measure of economic freedom. He completely overhauled the agricultural sector, creating virtual free markets overnight. He allowed towns and villages to set up their own business enterprises, relatively free from central government control.

As Hong Kong businessmen moved into China, more than a thousand Chinese firms and several hundred thousand mainland residents moved into Hong Kong. The Bank of China commissioned world-renowned architect I.M. Pei to design its Hong Kong headquarters. Mainland firms bought into such well-established Hong Kong firms as the territory's flagship carrier Cathay Pacific Airways. China became the leading foreign investor in Hong Kong, surpassing the United States and Japan. China's investment in Hong Kong listed companies is in the tens of billions of dollars, the assets of its banks in Hong Kong surpass $100 billion, and numerous Chinese state, provincial, and municipal enterprises list their shares on the Hong Kong Stock Exchange.

The economic union of Hong Kong and China served Deng's interests. But Deng remained leery of Western political institutions and "bourgeois" liberties.

On April 9, 1992, the Conservative Party won reelection in Britain. Prime Minister John Major replaced sinologist and Foreign Office diplomat David Wilson as governor of Hong Kong with former Member of Parliament Chris Patten, a career Tory Party politician. Six months later, Patten made his first policy statement on the colony's political institutions: "Democracy is not destabilizing. It helps to make communities more prosperous. It helps to make a government better too."

Alarm bells went off in Beijing and Hong Kong. Overnight, the smooth transition from British to Chinese sovereignty and administration over Hong Kong became turbulent. China's insistence that Hong Kong's internal political development converge with its plans for the territory's future was challenged by Patten, who unveiled proposals for more representative government. For 150 years, Hong Kong had been ruled by benign colonial bureaucrats whose policy decisions were ratified by a compliant, appointed Legislative Council. Now the British government, with Patten as its instrument, rushed to build stronger democratic institutions in Hong Kong before 1997 to help insulate the territory from China's autocratic rulers.

Chinese officials in Beijing and Hong Kong immediately denounced Patten for failing to consult China. Despite vociferous Chinese opposition, polls showed that a majority of Hong Kong residents overwhelmingly supported Patten's proposals for greater democracy. China accused Britain of violating the Joint Declaration, the Basic Law, and other Sino-British agreements and understandings. The colony's Legislative Council did not flinch. It approved bills to lower the voting age to eighteen and make voting methods more democratic, despite strong words from China.

On June 30, 1994, exactly three years before the handover of Hong Kong, the colony's Legislative Council approved Patten's political reforms. The vote was a surprising (given outspoken opposition from China) thirty-two to twenty-four. The reforms substantially broadened the franchise for so-called functional constituencies (legislative seats representing specific professional groups), increased the number of directly elected seats, and replaced the remaining appointed members with representatives of the colony's elected district boards. General elections were scheduled for September 1995.

China's response? In early September its parliament, the National People's Congress, passed a unanimous resolution to abolish the political structure based on Patten's electoral reform package. To repeat, the vote inside China was unanimous--not a single dissent. Political continuity, expressed in the concept of the "through train" on which the members of Hong Kong's Legislative Council elected in 1995 would remain in office until the next scheduled elections in 1999, ceased.

It is wrong to equate gradual relaxation of Communist Party control over China's economy with the fundamental institutions of a free society that underpinned British Hong Kong--private property, the rule of law, limited government. China still lacks well-defined property rights. To all intents and purposes, there is no "rule of law" in China. And its government and the ruling Communist Party are far from limited in their exercise of power.

Hong Kong's institutions, those of a free society, never existed in China. From China's beginning some four millennia ago until 1911, it exhibited great political continuity. Dynasties came and went, but the imperial system remained intact. An emperor reigned supreme. He was bound by custom, not by law, subject only to the Confucian precept of governing by moral authority. The structure of authority ran from the top down. The emperor ruled and the people obeyed. Political parties and elections, the stuff of democracy, were unknown in Chinese politics. Nowhere in the centuries of Oriental despotism did rights and privileges emerge in Chinese political thought or practice.

THE CLASH OF INSTITUTIONS AND VALUES: A SUMMARY

Let us summarize the argument to this point. When Britain departs from its last major colony, it will have bequeathed to the more than six millions residents of Hong Kong the following institutions, policies, practices, and values:

  • The rule of law, characterized by an independent judiciary
  • An honest, efficient civil service
  • An economy ranked as the freest in the world
  • A full range of civil liberties: freedom of the press, of speech, of the academy, of association, of assembly, of religion, of travel
  • A system of free and fair elections for the legislature
  • A freely convertible currency backed by the U.S. dollar

In contrast, in the People's Republic of China the following institutions, policies, practices, and values hold sway:

  • An authoritarian political culture, backed by the use of force, which above all seeks to maintain power for the Chinese Communist Party
  • Widespread corruption, bribery, graft, cronyism
  • State ownership of industry (state capitalism), emphasis on connections, restrictions on foreign participation
  • Denial of civil liberties; severe penalties for those seeking to exercise China's constitutionally guaranteed civil liberties
  • A rubber-stamp legislature
  • A fiat currency


THE ASSAULT ON FREEDOM IN HONG KONG

Under former paramount leader Deng Xiaoping's slogan of "one country, two systems," China promised Hong Kong a high degree of autonomy in its social, economic, and political affairs for fifty years, beginning in 1997. China has said that it will not impose socialism, taxes, or other mainland policies on Hong Kong's capitalist system.

Deng is renowned for his clever phrases, especially "socialism with Chinese characteristics," which became the foundation of China's economic reforms. A good way to evaluate the changes in Hong Kong in the period preceding the transfer of sovereignty is by examining the phrase "Hong Kong with mainland Chinese characteristics." What are these mainland Chinese characteristics as they have thus far been applied to Hong Kong and what do they augur for the HKSAR's future? They can divided into political characteristics, civil liberties characteristics, and economic institutions and policies characteristics.

Hong Kong with Mainland Chinese Political Characteristics

In a blatant display of contempt for Western democratic institutions and practices, China dissolved Hong Kong's duly elected Legislative Council and replaced it with a handpicked provisional legislature to rubber-stamp Beijing's demands. China established a selection committee of four hundred notables from Hong Kong's pro-China leadership, which then selected the members of the Provisional Legislature, most of whom were members of the selection committee itself, including a dozen who had been defeated in the 1995 elections for Hong Kong's legislature. This makes a complete mockery of any pretence at democracy, at least as the word in understood in Western terms. Existing electoral arrangements have been overturned, and China has imposed a new system to ensure that any future legislature will support mainland policies. Hong Kong's new legislature will rival China's National Political Congress in political compliance.

The Provisional Legislature, which takes office on July 1, 1997, lacks any explicit constitutional foundation in China's constitution or in the Joint Declaration or Basic Law. Even though that Provisional Legislature will actually be HKSAR's first legislature, the legislature that will be voted on in elections tentatively scheduled for sometime in 1998 will nonetheless be termed the first legislature of the HKSAR, thereby presenting a fiction of legality.

As of this writing, China plans to introduce a multiseat, single-vote electoral system, which is designed to reduce the election of prodemocracy figures, in place of the current single-seat, single-vote formula. The legislature chosen in 1995 returned prodemocracy candidates in seventeen of the twenty geographic constituencies, making "democrats" the largest elected force in the colonial legislature. Even if the elections are fair--an unlikely prospect--those democrats will be losers in the new regime.

In mid-April 1997, Tung Chee-hwa, a prominent Hong Kong businessman handpicked by China to serve as the first chief executive officer of the Hong Kong Special Administrative Region of the People's Republic of China, appointed several pro-China businessmen to fill out a committee of five to recommend a new chief justice for the region's supreme court. The new members replaced two liberal members: one had contributed to the political campaign of an outspoken prodemocracy China critic and the other was affiliated with the renowned British firm of Jardines, associated with the establishment of colonial rule in Hong Kong in 1841. The new chief justice, when appointed, will do China's bidding. One prominent candidate for the post publicly stated his support for the rollback of several civil liberties (see below).

Hong Kong with Mainland Chinese Civil Liberties Characteristics

In a decision that received international condemnation, the Standing Committee of the National People's Congress (China's legislature) in Beijing voted to scrap fourteen existing Hong Kong laws and modify ten sections of existing laws and auxiliary laws. The vote removed several provisions in a British-introduced bill of rights, required that any group wishing to demonstrate first obtain police permission and that all groups register with the government. The vote constitutes a rollback of Hong Kong's current civil liberties.

The details of the new arrangements were released in April and finalized in May. Any group of thirty or more persons must submit a request to the police before holding any peaceful demonstration or assembly. Demonstrations of more than thirty people will be illegal without the prior submission of a formal request to the police commissioner, replacing the simple act of prior notification. The new chief executive, Tung Chee-hwa, has let it be known that any demonstrations against his new government would meet with his displeasure. He told John Sweeney, president of the AFL-CIO (as reported in the Wall Street Journal), that the proposed new limits on freedoms may be only an indication of things to come. He has obtained the public support of the presidents of the Baptist University and the Polytechnic University for the amendments to the Societies Ordinance and Public Order Ordinance; each of them has given his support for "social order" lest individual freedom prove disruptive.

After July 1997 political groups or parties in Hong Kong will be forbidden to receive any support from foreign political organizations, which will make it impossible for democrats to compete in future elections. Pro-China politicians will have no such restrictions on receiving funds from the Chinese Communist Party.

Both measures are justified by Tung Chee-hwa on the grounds of public order, the protection of public health or morals, and the rights and freedoms of others. They are also justified, with far more damaging consequences to individual liberty, on the grounds of public safety and national security, which are used in China to suppress criticism and prodemocracy activities.

China's interpretation of press freedom bears little resemblance to Western norms. Lu Ping, head of the State Council's (China's cabinet) Hong Kong and Macao Affairs Office, stated that firm limits will be imposed on press freedom. He said that China would regard any published statements that incite action as unlawful and punishable, that it would not permit criticism of China, and that it would not tolerate any Hong Kong publication advocating independence for Taiwan or Tibet. China's view is that press freedom will be a concern only for those papers holding biased or hostile views toward China, of which Chinese officials will be the judge.

Even in the most pro-Chinese papers in Hong Kong, such as the Commercial Daily, China has installed its own people in top positions. Two were sent from the Office of News and Information in Beijing and another from New China News Agency, the Chinese press agency in Hong Kong, to ensure that the Commercial Daily would print the news "correctly."

On April 15, 1997, the leading English daily, South China Morning Post, announced that it had hired Feng Xiliang, a founding editor of the China Daily, a state-backed English-language newspaper in Beijing, to act as an editorial consultant. His appointment is intended to curtail criticism of China and to halt the Post's articles and editorials denouncing China-backed revisions to Hong Kong laws protecting civil liberties.

Several prominent non-Chinese professors of law in Hong Kong's tertiary institutions, including the founder of one department of law and the chairman of another, were dismissed in 1997 for their criticism of human rights in China. Many expatriate social science faculty have had their academic appointments terminated. Deans and university presidents have clamped a ban on "controversial" subjects for university research and faculties.

In mid-April, China announced that Chinese and foreign social science scholars planning to work together must first submit their proposals to security agencies for approval. Social science research in China relies heavily on foreign funding sources such as the Ford Foundation and the U.S. National Science Foundation. The new policy requires that proposals be approved by the Public Security Bureau and the National Security and Foreign Ministries. These regulations are likely to be extended to Hong Kong.

China has banned access to politically sensitive web sites sponsored by Hong Kong newspapers and anti-Beijing China-watching publications and overseas dissident sites including those providing data on Tibet.

Tung Chee-hwa has openly stated on several occasions, including a broadcast interview with Mike Chinoy of CNN, that political liberty is less important to Hong Kong residents than such bread-and-butter issues as the high price of housing, the lack of educational opportunities, the lack of services for the elderly, and the need to assist an increasing number of Hong Kong residents living under the poverty line. Those, he has said, are "the real issues." Mr. Tung has also said that it might be unlawful to make derogatory remarks and attacks against Chinese leaders.

Paragraph 166 in the Joint Declaration, reiterated verbatim in Article 154 of the Basic Law, gives the HKSAR the authority to apply to its territory immigration controls on entry, stay, and departure by persons from foreign states and regions. But on March 5, 1997, Chen Ziying, deputy director of the Hong Kong and Macao Affairs Office, stated that China, not Hong Kong, will have the final say on which mainlanders receive one-way permits to live in the territory. The SAR, he said, would not be able to refuse any legal migrants from the mainland.

In a further squeeze on foreign nationals. China announced in mid-April that immigrant workers would no longer receive permanent multiple-entry visas after July 1, 1997. All foreign workers would need to reapply annually or more often, as the case may be. This policy ensures quiescence on the part of potential foreign critics of China's policies.

Hong Kong with Mainland Chinese Notions of Autonomy

Paragraph 128 in the Joint Declaration, restated in Article 136 of the Basic Law, guarantees that the HKSAR shall maintain the educational system previously practiced in Hong Kong before 1997. Anticipating Chinese rule, the Department of Education has announced that, effective September 1, 1998, all secondary schools will progressively adopt Chinese as the medium of instruction on the grounds that "after the handover, the use of Chinese will be more meaningful than English." Hong Kong's preeminence in international business has been due, in part, to its English-language skills. Hong Kong's education system, despite China's promises to leave it alone, will be sinicized.

The number of places at English-language schools will be reduced to a mere 17,000, for which some 400,000 secondary school students will have to compete. Of the 402 secondary schools that offer instruction in English, in a first reduction, that number will be cut to 96. There is little doubt that only politically privileged Chinese residents will be accorded English-language slots.

In another assault on educational autonomy, Chinese foreign minister Qian Qichen stated on March 10, 1997, that Hong Kong textbooks that do not conform with China's principles should be revised after July 1. He claimed, without providing a single concrete example, that some textbooks conflict with the Basic Law and the "one country, two systems" principle. He further stated that some texts do not accord with history or reality. It should be noted that the HKSAR will also have the power to determine curricula and fees at such foreign-language schools in Hong Kong as the American-based International School and the Britain-based Island Schools.

Hong Kong has a large film industry. Its autonomy is also under threat from mainland officials, who demand that scenes about China be filmed, developed, and processed in China, even though China lacks the technical capability for such work. China will not allow footage into Hong Kong for editing and production.

Hong Kong with Mainland Chinese Economic Characteristics

Conducting business in Hong Kong has taken a dramatic turn away from a level playing field to explicit favoritism for firms with mainland connections. The China Industrial Trade and Investment Corporation (CITIC) is the mainland business arm of the State Council. Its president is Wang Jun, who is also the head of Poly Technologies, the most important trading arm of the People's Liberation Army. CITIC exemplifies many mainland business enterprises that operate in Hong Kong. Citic Pacific, the Hong Kong branch of CITIC, has gained influence over Hong Kong's domestic aviation. In May 1966, Cathay Pacific sold shares to CNAC (China's airline regulatory agency) and Citic Pacific at a 20 percent discount to market, thereby reducing the British firm Swire's holding from 52.6 percent (majority control) to a minority stake of 44 percent. This is an extraordinary transaction because, in almost every instance of the purchase of control of a major global business, the buyer invariably pays a large premium over the market. Citic Pacific also acquired a 20 percent stake in locally owned China Light and Power at a 3 percent discount to market.

An even more egregious mainland acquisition of Hong Kong assets took place in March 1997. A unit of China's largest state-run tourist company, China Travel International Investment Hong Kong, took a 20 percent stake in the Citybus Group at a 34 percent discount to market.

On May 12, 1997, in an unusual transaction between two state-owned companies under the control of China's State Council, Citic Pacific sold its 7.74 percent stake in Hong Kong Telecommunications to Everbright Holdings for $1.47 billion. The price per share was HK$12.60 ($1.60), some 13 percent below the market price of HK$14.50 ($1.85). At the time of the transaction, Britain's Cable and Wireless held 59 percent of Hong Kong Telecom. On the surface, the sale gave Citic Pacific cash to make further acquisitions in Hong Kong, while supplying Everbright a starting point for gaining control over the British-controlled telecommunications firm.

The previous week, China United Telecommunications Corporation, a mainland-based group know as Unicom, said it was interested in acquiring shares in Hong Kong Telecom. Everbright already owns 6.5 percent of Unicom.

The reason for the mysterious, below-market transfer of assets between two China state-owned firms is that one state agency was selling to another to establish the price of Hongkong Telecom at substantially below the market price based on trades conducted on the Hong Kong Stock Exchange. This insider transaction between affiliated parties with separate corporate identities is intended to drive down the price expectations of Britain's Cable and Wireless, which is expected to come under pressure to sell a controlling stake to one or more mainland firms. If state firms can buy control of Hong Kong Telecom at HK$12.60 a share, instead of HK$14.50, they will realize several billion dollars in savings.

Indeed, the success of Citic Pacific and other mainland firms is attributable to the fact that Hong Kong tycoons were willing to sell their assets cheaply. The outgoing colonial administration, trying to put the best face on these transactions, calls them "purely commercial," even though they appear to some observers as extortion or confiscation.

As Hong Kong branches of Chinese enterprises--whether owned by the central, provincial, or municipal governments--acquire large stakes in Hong Kong firms at a discount to market, all doubt that politically influential bodies in China will take control of Hong Kong's previously free enterprise economy has been removed. What to look for? The Bank of China can be expected to acquire interests in Hong Kong's leading private banks, and Chinese shipping companies can be expected to acquire stakes from Hong Kong shipowners; this list can be expanded to similar actions for newspapers, television studios, department stores, and every other line of business.

Jimmy Lai, an outspoken critic of China, has sought a listing for his Next Media Group, which publishes Next magazine, on the Hong Kong Stock Exchange. Next has approached a dozen merchant bankers, but all failed to conclude a deal. Managing Director Peter Fung of Sun Hung Kai Securities, which held discussions with Next magazine, told Lai that his securities firm faced three to four times more pressure from mainland interests not to proceed than he had originally estimated when he opened discussions with Next.

It's no accident that purely locally owned companies listed on the Hong Kong Stock Exchange have enjoyed only modest gains in the price of their shares at the same time that "red chips" (companies with connections to highly placed mainland officials and state bodies) have done much better.

The South China Morning Post reported in its February 27, 1997, edition that locally employed financial analysts were being attacked and fired by their bosses and clients for negative reporting on mainland Chinese companies. As an example, the head of China research at CEF Securities criticized the cabin service of mainland-owned China Eastern Airlines at a stock-listing road show--and lost his job. He had been previously warned by his boss, according to Fortune, not to comment on political matters in China, even though airline service is an economic matter.

HONG KONG'S RESPONSE

Hong Kong's ostensibly pro-China business leaders are guilty of rank hypocrisy. Even as they intensify their public support for the reincorporation of Hong Kong into the Chinese body politic, they have shifted their business and personal assets offshore, largely to British dependent territories.

For example, 60 percent of Hong Kong's publicly listed firms, which trade on the Hong Kong Stock Exchange, have moved their domicile to Bermuda; some have relocated in the Cayman Islands; and even the venerable Hongkong and Shanghai Banking Corporation, whose name is synonymous with the territory, moved its domicile to London. This trend of offshore domicile is especially prevalent among new incorporations and listings.

In another response, the growth of some $500 billion in trust business in the Cayman Islands dates from 1990, when American lawyers were hired by wealthy Hong Kong Chinese businessmen to find a way to protect their personal assets. Pro-Beijing Hong Kong businessmen are among the leading clients of trust businesses in the British Crown Colony of the Cayman Islands. Most claim they have taken these steps for tax reasons, but there has been no major change in estate or capital gains taxation in Hong Kong since 1989 to justify such transfers of assets. In these measures, actions speak louder than words.

Fearing that China would impose a ban on exporting antiques from Hong Kong, the Hongkong and Shanghai Banking Corporation dispatched its collection of ceramics to London. On April 28, 1996, the South China Morning Post reported that ten major antique collections were loaned to the Singapore National Museum for safekeeping. Many Hong Kong residents have moved their valuable art and antique collections overseas.

By the fall of 1996, 65 of the 110 qualified lawyers in the Legal Department's Crown Counsel division had retired. A majority of primary and secondary school superintendents have retired.

ON THE HORIZON

With China's takeover of Hong Kong, no economic issue has received more attention than the future of the Hong Kong dollar. Will the local dollar survive as a separate currency? If so, will the linked exchange rate to the U.S. dollar remain intact, at HK$7.80 to US$1.00?

These two questions raise two separate but related issues. First, can Hong Kong's monetary arrangements withstand attacks from the likes of George Soros and other speculators? Second, will mainland authorities, who hold ultimate power to decide important issues in Hong Kong, defend the separate linked Hong Kong dollar if it comes under attack?

China and Hong Kong have dispatched representatives of the People's Bank of China (China's central bank) and the Hong Kong Monetary Authority on several joint globe-trotting expeditions to reassure international investors and money managers that the Hong Kong dollar will remain separate from China's own currency, the renminbi, and that the Hong Kong dollar's link to the U.S. dollar will remain intact.

Thus the answer to the first question (Will the local dollar survive as a separate currency?) is yes. Hong Kong's monetary system is a modified "currency board" arrangement, similar to the nineteenth-century gold standard, balance-of-payments monetary system. Under Hong Kong's currency board–type system, the Hong Kong dollar is linked to a reserve currency, the U.S. dollar. As long as this mechanism remains intact--meaning that the Hong Kong dollar is convertible on demand and fully backed by external reserves at the defined exchange rate--the local currency can withstand virtually every conceivable speculative attack. Foreign reserves available to the newly constituted Hong Kong Special Administrative Region after July 1 exceed US$60 billion, which is more than five times the value of the Hong Kong note issue. The HKSAR has sufficient reserves to sustain the link at 7.8 to 1.0 even if every Hong Kong banknote, and four times that amount in Hong Kong dollar bank deposits, is converted into foreign currency.

Beyond that $60 billion, China has foreign reserves exceeding US$100 billion, which could also be used to defend the Hong Kong dollar. There are sufficient reserves in the combined vaults of Hong Kong and China to support the entire Hong Kong dollar credit structure at the fixed exchange rate, indeed, to convert it into a U.S. dollar credit structure if need be. In addition, the Hong Kong Monetary Authority has signed a series of repurchase agreements on U.S. Treasury obligations with the central banks of seven Asian nations that puts even more resources at its short-term disposal. Only a complete collapse in confidence, with the demand for any real or financial assets in Hong Kong drying up, would put the Hong Kong dollar at risk.

In purely financial terms, there is minimal risk to the Hong Kong dollar on resumption of Chinese sovereignty. This takes us to our second question: Will China permit the HKSAR government to use its vast reserves to defend the linked exchange rate if the Hong Kong dollar comes under attack?

The answer to this falls in the realm of politics, touching on sovereignty, the most sensitive of all Chinese matters. China's concept of sovereignty, as expressed in its legal journals, is the supreme power of a state to decide independently its internal and external affairs in accordance with its own will. China has repeatedly warned the international community that it will not tolerate criticism of its handling of Hong Kong matters after July 1, 1997, as such matters will be purely an internal affair.

China surely understands, however, that the Hong Kong dollar is, in fact, the U.S. dollar printed in different sizes, colors, and denominations, for under the currency board system, the Hong Kong dollar amounts to the U.S. dollar, one step removed. Hong Kong's domestic credit structure can be thought of as an offshore branch of the U.S. dollar credit structure.

The Hong Kong Monetary Authority, de facto an offshore branch of the U.S. Federal Reserve Bank (Fed) but without any formal participation in its deliberations, cannot conduct its own independent monetary policy for any sustained period of time. Nor should it; its primary job as a currency board is to maintain convertibility of Hong Kong dollars into U.S. dollars at the linked exchange rate. The Fed, led by Chairman Alan Greenspan, thus determines monetary policy in Hong Kong. Whenever Greenspan and his colleagues vote to raise or lower interest rates in the United States, or whenever the market buys or sells bonds in anticipation of a change in interest rates, Hong Kong follows suit. Expectations about the direction of U.S. interest rates, in which market participants hang on every word and gesture by Greenspan and his colleagues, are the primary factor in the rise or fall in asset values in Hong Kong. With a few chosen words, Alan Greenspan can wipe out billions of dollars of market capitalization in Hong Kong.

The crux of the political issue is whether, in the eyes of China's leaders, the Fed's power to determine asset values in Hong Kong is compatible with Chinese sovereignty after July 1. The Fed raised interest rates twenty-five basis points in early spring 1997, which produced an immediate sell-off of shares in Hong Kong. There are expectations of further U.S. interest rate increases in 1997 and perhaps into 1998. How will Hong Kong's new masters respond to a fall in asset values in their new special administrative region? Will they view Fed policy as interference in China's internal affairs? Will they fear that global investors may interpret any fall in Hong Kong asset values as evidence that China is mismanaging Hong Kong?

The Basic Law, Hong Kong's post-1997 constitution, stipulates in Article 111 that "the Hong Kong dollar, as the legal tender in the Hong Kong Special Administrative Region, shall continue to circulate.... The issue of Hong Kong currency must be backed by a 100 percent reserve fund." Of great importance is the next sentence, which states, "The system regarding the issue of Hong Kong currency and the reserve fund system shall be prescribed by law." Article 112 stipulates that no foreign exchange control policies shall be applied in Hong Kong.

The Basic Law does not state what assets are to be held in the reserve fund of the HKSAR. Nor does it state that pre-1997 monetary arrangements shall remain in force after 1997--only that the system shall be prescribed by law. Within the framework of the Basic Law (and the Joint Declaration), the HKSAR government is free to shift its reserves from U.S. dollars to other currencies or financial assets. There is nothing to prevent the HKSAR government from using renminbi-denominated assets as its official reserves (since the mainland currency is separate from that of Hong Kong) and fix a rate between the Hong Kong dollar and the renminbi that would ensure 100 percent renminbi backing for the Hong Kong dollar. Through its link to the renminbi, the Hong Kong dollar would then float up and down against other foreign currencies, as it now does through its link to the U.S. dollar.

There are no large sovereign nations with dual-currency zones, especially one that is an offshore currency zone of a major political, economic, and, possibly, military rival. China's relationship to the Hong Kong dollar and the U.S. Federal Reserve Board after July 1, 1997, would be like Alaska using Russian rubles as its official currency or Arizona and New Mexico using the Mexican peso or Washington using the Canadian dollar, with the central banks of Russia, Mexico, and Canada dictating the respective asset values. Such arrangements would be politically intolerable in the United States. How durable will such an arrangement be in China?

SUMMARY

The future of freedom in Hong Kong is bleak. Future chief executives and legislators will be handpicked by China. Civil liberties will be restricted and severely curtailed. The economy will increasingly come under the domination of firms with connections in China. The new Hong Kong will be antithetical in every important respect from the old, free Hong Kong. Within a few short years, the former cosmopolitan international city of Hong Kong will become just another coastal Chinese city. Money might still be made in the new HKSAR, but freedom will be a casualty. 1 One year ago, I coauthored, with Bruce Bueno de Mesquita and David Newman, a book on the future of Hong Kong entitled Red Flag over Hong Kong (Chatham, N.J.: Chatham House Publishers, 1996). This essay updates event that have taken place in Hong Kong since the publication of that book.