Hong Kong Under Chinese Rule: The First Year

Part 1

"It is seldom that liberty of any kind is lost all at once."
—David Hume

July 1, 1998, was the first anniversary of the return of the British Crown Colony of Hong Kong to China, becoming the Hong Kong Special Administrative Region (HKSAR) of the People's Republic of China.

Much has happened during the past year, both in Hong Kong and throughout the Asia-Pacific region. Financial markets, including those in Hong Kong, have been rocked by currency and financial instability. Currency devaluations in Thailand, Indonesia, Korea, Malaysia, Singapore, and the Philippines have spilled over into Hong Kong. The HKSAR's defense of the Hong Kong dollar's link to the U.S. dollar, at a fixed exchange rate, has, in the course of the past year, chopped as much as 50 percent off equity and real estate values; these declines reflected the rise in local interest rates that have been necessary to induce Hong Kong residents and foreigners to hold Hong Kong dollars. It would be unfair to blame Hong Kong's new administrators for the decline in Hong Kong's financial and property markets. Indeed, they deserve credit for avoiding devaluation.

The picture is not so bright, however, in the arenas of politics, civil liberties, business practices, and social affairs. The new regime, led by Hong Kong's first chief executive, Tung Chee-hwa, has rolled back fledgling democratic institutions and practices, abrogated some civil liberties, and stood by as mainland cronyism, until the currency crisis, eroded the level playing field that characterized Hong Kong's economy under British rule.

NO CHANGE FOR FIFTY YEARS

Chinese sovereignty over Hong Kong implies that China is free to determine the political, economic, and social institutions and policies of its newly recovered territory. This, after all, is the meaning of sovereignty.

What is different in the case of Hong Kong is that China signed a document with Britain called the Joint Declaration, a formal treaty registered with the United Nations, and then enacted a Basic Law, or miniconstitution, for the HKSAR, which set forth guarantees of autonomy for the fifty years following 1997. The people of Hong Kong were promised that they would rule Hong Kong without interference from China, save in matters of security and diplomacy, and that they would continue to enjoy their former way of life in political, economic, and social affairs.

Has China kept its promises during its first year of sovereign rule over Hong Kong? What follows is a review of the evidence.

DEMOCRACY: THE BANE OF THE CHINESE COMMUNIST PARTY

On July 1, 1997, a body called the Provisional Legislature--handpicked by a China-established selection committee of four hundred notables from Hong Kong's pro-China business community (many of whom were members of the selection committee itself, including eleven who had been defeated in the 1995 elections for Hong Kong's legislature)--replaced the previous, duly elected Legislative Council, or Legco. The 1995 Legco elections had returned pro-democracy (what China saw as anti-China) candidates in seventeen of the twenty geographic constituencies. The other forty members were chosen on the basis of "functional" and district board constituencies.

The new chamber was called provisional to circumvent its lacking any explicit constitutional foundation in the Basic Law. The election held on May 24, 1998, selected the HKSAR's first official legislature. The simple story is that Tung Chee-hwa, the HKSAR's chief executive, with China's full support, changed the electoral rules to reduce the influence of "democrats" and increase the influence of pro-business, pro-China candidates and parties. The individuals and groups referred to as "democrats" are found in several political parties and represent a broad set of interests in Hong Kong including labor, the bar, environmentalists, and popular political figures. They share a commitment to democratic values and a distrust for traditional mainland Chinese heavy-handedness. Within the democratic camp is the Democratic Party, headed by Martin Lee, the single most popular political party in Hong Kong. The pro-business, pro-China parties include the Democratic Alliance for the Betterment of Hong Kong (DAB), the Liberal Party, and the Hong Kong Progressive Association (HKPA). Even as he changed the electoral rules, Tung Chee-hwa paid lip service to democracy, insisting that the Basic Law provides for the ultimate aim of universal suffrage, that half the seats would be chosen in geographic constituencies by 2004, and that a review of the pace of democracy in 2007 would be in order. He refused, however, to commit the HKSAR to a fully elected legislature even by 2007.

Chief Executive Tung Chee-hwa chairs the Executive Council, the executive cabinet of the HKSAR. It met on July 8, 1997, one week after the July 1, 1997, transfer of sovereignty, to approve guidelines for electing a new legislature. The Provisional Legislature approved the new election law on September 29, 1997, by a vote of twenty-nine to nine with eleven abstentions. The new guidelines for the election, which was held on May 24, 1998, are as follows:

• Twenty members are to be directly elected according to proportional representation. Hong Kong is to be divided into five districts, each returning between three and five members depending on constituency size.
• Another thirty members are to be chosen by functional constituencies, consisting mostly of business organizations.
• The remaining ten members are to be selected by an eight hundred–member Election Committee composed of handpicked representatives from four sectors: (1) industry, commerce, and finance; (2) the professions; (3) labor, social services, and religion; and (4) politics. Each sector is further divided into subsectors representing thirty-eight sets of interests in Hong Kong, including the twenty-eight functional constituencies. (S)election of the eight hundred electors is either by election or consensus or as a matter of right granted to members of the National People's Congress, the Chinese People's Political Consultative Conference, and members of the Provisional Legislative Council.

In a show of apparent liberalism, Chief Executive Tung Chee-hwa permitted twelve of the sixty elected (or selected) members of the first legislature to hold foreign passports. But these twelve are restricted to the functional constituencies, which means that popular Hong Kong "democrats" would have to renounce their U.K. or foreign nationality to compete in the geographic constituencies. One prominent "democrat," Emily Lau, renounced her U.K. citizenship because she had no chance of winning a functional constituency (see below) seat dominated by members of the business community. The notion of eligibility is cloudy; several candidates had to withdraw from the elections at the last moment when they discovered that they legally had the right to take up residence in another country (foreign right of abode).

Campaign spending limits also favor big-business, pro-China candidates. In November 1997, Tung Chee-hwa announced campaign spending limits of $64,000 (all prices in U.S. dollars unless otherwise indicated) for any single constituency seat, meaning that an individual or party can spend up to $320,000 in the two five-seat constituencies, $256,000 in the sole four-seat constituency, and $192,000 in the two three-seat constituencies. (The spending limit was capped at $25,000 per seat in each of the twenty single-member constituency elections in the 1995 elections.) This is a considerable sum for candidates from the "democratic" camp, who would have to raise and spend up to $1.28 million in the May 1998 elections to compete effectively against the well-heeled pro-China candidates.

The National Democratic Institute for International Affairs, a U.S.-based nonprofit organization that monitors elections worldwide, issued a report in early November 1997 assessing Hong Kong's electoral framework and its impact on Hong Kong's prospects for future democratization. The report stated that the 1998 elections will "not meet international standards for fair elections" and that the object of these elections is not to accurately reflect public choice but to minimize the representation of popular parties and to obscure the public will.

Each of the following categories differs markedly from the electoral arrangements under which the 1995 elections were held.

Geographic Constituencies

In 1995, twenty members were selected on the basis of single-seat, single-vote constituencies that gave preference to politicians who were popular in their constituencies. Proportional representation makes it possible for candidates who do not win a majority of the votes in a multimember constituency to secure a seat in the legislature. For instance, in a constituency with three elected members, the member elected last could, depending on the number of parties contesting the constituency, be elected with far less than a majority of the votes. Popular "democrats" who would be favored to win a seat in a single-member constituency are likely to split the votes among themselves in the new multimember constituencies. Polling before the May 1998 election suggested that although the "democrats" were supported by more than 70 percent of the likely voters in the Hong Kong Island constituency, which gave them four seats in the 1995 election, they would likely garner only three of the four seats in the new legislature. This division of votes makes it possible for pro-China, big-business candidates to come in second, third, fourth, or fifth and still win one or more seats they would have lost in races pitting a popular "democrat" against a less-popular pro-China candidate in single-seat constituencies. Thus the DAB was shut out on Hong Kong Island in 1995 but was forecast to win one seat in 1997 with less than 20 percent of the vote. Although no official will acknowledge that the new election system was specifically designed to reduce the influence of the democrats, it has been the most significant consequence of the changes in the electoral system.

Functional Constituencies

Another change affected the thirty members chosen in functional constituencies. Whereas Britain's last colonial governor, Chris Patten, had dramatically increased the number of eligible voters in the functional constituencies, the newly redefined functional constituencies removed more than two million voters from the electoral rolls.

Of the thirty functional constituency seats, twenty-one went to sectors adopted for the 1991 and 1995 Legco elections. But the nine new seats, a key component of Patten's franchise-broadening reforms, which added more than a million individual voters to the electoral rolls, were replaced mainly by corporate votes in eight of these nine functional constituencies. One (the Information Technology constituency) was a mixed electorate of corporate plus individual votes. The corporate votes of all thirty functional constituencies have thus been effectively reduced to "one company, one vote" or "one man, one vote by the head of the company on behalf of every employee in that company."

Altogether, at least one million voters were eligible to participate in the nine new functional constituencies created under Patten's franchise. Tung Chee-hwa reduced that number to about ten thousand. Patten's total reforms had extended voting rights to 2,700,000 people in the thirty functional constituencies for the 1995 elections, which included most of Hong Kong's adult population. Tung Chee-hwa reduced that electorate to some 180,000 voters. Shifting to corporate votes ensured the predominance of Hong Kong's pro-China business community. Members of the various democratic parties had little chance in Tung Chee-hwa's refashioned nine functional constituencies because of the switch to corporate votes. This is, to coin a phase, "democracy with Chinese characteristics."

To illustrate the undemocratic character of the corporate vote system, Henderson Land's Lee Shau-kee has a controlling interest in twenty companies in the real estate constituency, giving him power over 5 percent of all the votes in that constituency, and Hutchinson Whampoa's Li Ka-shing has an even higher share of the votes in that constituency. Many of the functional constituencies have a few hundred voters or less. The South China Morning Post of February 23, 1998, reported that the Real Estate Functional Constituency contained 410 corporate "voters," but that a number of tycoons had arranged additional votes for themselves by shelf companies, many registered in the Cayman Islands and other tax havens, each of which received a vote. Robert Ng's Sino Group has nineteen registered companies, eighteen of which have nominated representatives for the election; of these, five are US$1 shelf companies (in name only) registered in the Cayman Islands and one a US$2 company registered in Panama. Thus Ng's eighteen votes are the equivalent, in representative voting power, of 6,100 voters in a geographic constituency, which contains over 200,000 voters. In total, the real estate functional constituency has 340 corporate votes and only seventy individual voters.

The Sino Group is not the only property conglomerate to possess the right to cast multiple votes; the Hang Lung Group holds ten votes, Sun Hung Kai holds thirteen votes, and Henderson Land holds thirteen. Thus these four companies combined possess 14 percent of the eligible votes. Perversities of the election system are not limited to so-called domestic companies. British insurance companies hold almost 14 percent of the votes in the insurance functional constituency--an electoral equivalent to 19,300 people in the geographic constituencies. Foreign firms, in total, possess more than half the votes in the insurance functional constituency. Even foreign governments, which control foreign-flagged airlines operating in Hong Kong, are eligible to vote through designated representatives who are permanent Hong Kong residents. Foreign airlines constitute 5 percent of the total vote in the tourism functional constituency.

Although the argument in favor of the functional constituencies is that the companies casting votes contribute significantly to the economic welfare of the HKSAR, no effort has been made to restrict the vote to those making a positive contribution. Even firms in liquidation, such as CA Pacific Securities, can vote since they have designated an "authorized representative" to act on behalf of the company. The government admits that it has no estimate of the number of firms that have voting rights since those rights are often conveyed by membership in private trade associations. The corporate vote system is similar to the "pocket" or "rotten" boroughs in eighteenth-century Britain in which the franchise was limited to a handful of property owners. (Such boroughs were eliminated with electoral reforms in the mid–nineteenth century.) The only other political jurisdiction in the world that maintains corporate voting is the upper house of the Slovenian Parliament.

Election Committee Constituencies

In 1995, ten members of Legco were chosen by an Election Committee made up of all elected members of the district boards. The qualifications for candidacy in the district board Election Committee constituency elections were the same as those for the geographic constituency elections. Elections for those ten seats were by the single transferable vote system, a complex voting scheme in which all candidates receiving a minimum number of votes, a quota, are elected. To select ten candidates with eight hundred electors, the quota would be eighty votes. All candidates initially receiving more than eighty votes are elected. If a candidate received more than eighty votes, the surplus votes are allocated to those voters' second choices, and any candidate receiving more than eighty votes is then elected. If no candidate is selected and positions are still to be filled, the candidate with the fewest votes is eliminated, and those votes are allocated to those voters' next-highest remaining unelected choice. At the time of the election, there were eighteen district boards (elected in September 1994) with 346 members. Each member had been elected by a simple majority from single-seat constituencies, with electors eligible to vote only in the constituency in which they were registered.

The new eight hundred–member Election Committee represents a major change from its predecessor. The new committee contains mostly pro-China, pro-business members from similar backgrounds. Moreover, the election rules for the Election Committee were changed to bloc voting, whereby each elector must cast ten votes and the winners are those with the most votes. Adopting the first-past-the-post system in the Election Committee indicates that the Hong Kong authorities are not philosophically opposed to such a system. Using proportional representation in the geographic constituencies enhances the chance of pro-China voices being elected in those constituencies, and using the first-past-the-post system in the Election Committee also enhances the chance of pro-China voices being elected. The argument that Legco should reflect a broad set of opinion through proportional voting was selectively applied to impair the democratic voices.

The democrats had little expectation of retaining their two seats from the at-large constituencies in the eight hundred–member Election Committee, which was dominated by pro-China figures, including the sixty Hong Kong members of the National People's Congress (China's legislature) and the Chinese People's Political Consultative Conference. The switch from the single transferable vote to the pro-China bloc vote by members of the new Election Committee crippled the chances of democrats winning any of these seats. Their popular appeal held no attraction for the eight hundred pro-China (antidemocrat) electioneers.

Electors to the Election Committee were selected from narrowly constituted interests from within the commercial sector, the professions, social, cultural, and religious groups, and politicians. These interest groups were each given a specified number of votes on the Election Committee and allowed to select their subsector representatives. Some groups, such as the Hong Kong Chinese Enterprise Association, had uncontested "elections" to choose its eleven electors. One hundred thirty-seven of the eight hundred seats, fully 17 percent, were reserved for members of the Provisional Legislature, delegates to the National People's Congress, and members of the Chinese People's Political Consultative Conference.

Although roughly 140,000 people registered to vote in these subsector elections, only 23.4 percent of them bothered to show up and cast their vote, the lowest functional constituency turnout in the last four elections. We have contrasted the turnout in the Election Committee subsector elections to the functional constituency elections since, in large part, the electors are the same in both. Professor Lau Siu-kai, a spokesman for and member of the Preliminary Working Group, Beijing's advance team in Hong Kong, had to concede that "the middle class was resistant to the Election Committee system which goes against their democratic ideals."

Although the potential electorate perceived that the process was undemocratic, just how undemocratic the elections were was not highlighted. In the Agriculture and Fisheries constituency, the 152 voters elected forty members of the Election Committee. The 11,503 voters in the Education constituency elected twenty members of the Election Committee. One of the basic elements of a democratic election is "one person, one vote." A vote in the Agriculture and Fisheries constituency was worth more than 150 votes in the Education constituency (see table 1). Moreover, it is possible that a majority of the eight hundred seats could derive their authority and legitimacy from as few as 1,230 votes cast in the subsector elections. These shortcomings severely violate basic democratic norms for the conduct of elections.

Electoral Results

Before discussing the election results, let us briefly note that the weather conditions on election day were abysmal. In some parts of the HKSAR close to one foot of rain fell, and several polling places had to close because of flooding. Despite the weather and the general perception among many that the Hong Kong people are only interested in making money and are not interested in politics, over 53 percent of the eligible electorate turned out to vote. The turnout, whether motivated by disgust with the Provisional Legislature, a desire to see Hong Kong people rule Hong Kong, or a hankering to redeem discount coupons at a local clothing merchant on proof of voting, was more than 50 percent higher than the 1995 elections. The story of the elections themselves can be summarized by contrasting the headline from the South China Morning Post, "Record Turnout Poised to Give Democrats Sweeping Victory," with that of the Asian Wall Street Journal, "Pro-China Parties Likely to Dominate Legislature." The democrats received overwhelming support from the electorate, but the electoral system ensured that this support was not converted into seats.

The election system worked like a charm for its designers. The democrats in Hong Kong--the Democratic Party, the Citizens Party, and the Frontier--collectively received 56 percent of the popular vote (see table 2). Under a "pure" proportional representation election system, in which the HKSAR was one district, the democrats would have been a majority party with roughly thirty-four of the sixty seats. With the present contorted Hong Kong election system, however, the majority was reduced to a minority; the Hong Kong democrats garnered only eighteen seats (30 percent) in the legislature.

It is illustrative to see just where support for each of the political parties came from. With the change in sovereignty, the people of Hong Kong have not transferred their loyalty to mainland-appointed Hong Kong officials. As we can glean from table 3, 70 percent (fourteen) of all geographic seats were won by democrats. One seat was won by independent former Legco president Andrew Wong. Note that the terms independent and unaffiliated as used in Hong Kong do not necessarily indicate that the individual is not closely aligned with either the pro-China or pro-democracy forces but rather that, for whatever reason, the individual has decided to run without either the advantages or baggage of a party label. We have generally accepted candidates' self- characterizations and tried not to assign labels to them.

The pro-China DAB won five geographic constituency seats--one in each geographic constituency. The DAB is widely viewed as the major beneficiary of the change in the electoral arrangements; a point it does not dispute. Although its percentage take in this election was 50 percent greater than in 1995, it increased its "yield," in terms of seats, by 150 percent (see table 4).

The Election Committee, viewed in Hong Kong as a "small-circle poll," did its duty and returned ten pro-China provisional legislators to the legislature. No democrats were returned by the Election Committee. Although three of the ten had served in the 1995 legislature, none has broad-based popular support. With the next election in two years, and with the number of legislators selected by the Election Committee reduced to six in that election, the four years of combined service in the Provisional Legislature and the first HKSAR-elected legislature may groom some of these members to compete in geographic constituencies--a prospect none of them likely craves.

The thirty functional constituencies, designed to represent pro-business sentiment in Hong Kong, were decided on the basis of a total of just 76,236 votes and generally, although not always, on the basis of one person, one vote plurality voting. The smaller functional constituencies used preference voting, whereby each elector ranks the alternatives; the Labor functional constituency elected three legislators and each elector was given three votes. One characteristic of such a voting scheme is that electors are not forced to choose which candidate to vote for or to try to coordinate their voting in order to ensure that the right three candidates are selected. The Labor functional constituency returned two former provisional legislators and Mr. Chan Kwok-keung--an unaffiliated candidate who announced after the election that he was joining the DAB (so much for being unaffiliated). Moreover, an "open" and "honest" election is not necessarily simply designed and straightforward.

If we remove the two largest constituencies, Health Services and Education from the total, twenty-eight seats were decided by just over twenty-two thousand votes. Given their size, both the Health Services and Education functional constituencies begin to resemble geographic constituencies and were thus both captured by the Democratic Party. In total, the Democratic Party won four functional constituency seats; the business interests, eleven seats; the DAB, two seats; and nonaffiliated won thirteen seats. Although some of the seats it won were uncontested, the nine Liberal Party seats gained from the functional constituencies were won with just 1,233 votes cast. In one functional constituency seat, the winner received twenty-six votes. In contrast, the Democratic Party similarly won nine seats in the geographic constituencies, but these seats required almost 635,000 votes. The total number of votes received by the Liberal Party in the functional constituencies was only 2,618. The ratio of Democratic Party votes to Liberal Party votes is roughly 240 to 1. (Each vote for a Liberal Party candidate was worth 240 times as much as a vote for a Democratic Party candidate.)

Pace of Democracy

With the elections now over, the political focus in Hong Kong is certain to turn to the pace of democracy. Martin Lee has demanded direct election of the next legislature in 2000 and the chief executive in 2002. The opposition to democratic development will come from Tung Chee-hwa and his handlers, who view a political Hong Kong as contrary to the wishes of the mainland and at odds with Hong Kong's pro-business commercial environment. They are likely to be supported by the Liberal Party and the DAB--two groups whose long-term interests are not truly tied to an expansion of the geographic constituencies.

The tensions between the two sets of interests are likely to be played out in a more politicized Legco where the democrats, in a numerical minority, must point out that they represent the majority of opinion in Hong Kong and thus are more legitimate, having faced a broad cross section of the electorate. Moreover, Annex II of the Basic Law provides that

The passage of motions, bills or amendments to government bills introduced by individual members of the Legislative Council shall require a simple majority vote of each of the two groups of members present: members returned by functional constituencies and those returned by geographic constituencies through direct elections and by the Election Committee.

This requirement effectively gives each faction in the legislature a veto to block bills introduced by an individual member of the legislature. As a practical matter, since the government and the Liberals coalesce on many issues, this Basic Law provision will affect the democrats and the DAB when they want to cooperate on matters of social welfare policy.

Part 2

CIVIL LIBERTIES

A number of civil liberties were rolled back within days of Tung Chee-hwa's ascension to power. These included changes in the Public Order and Societies Ordinances introducing the dangerous and vague concept of "national security," which could be used to restrict the freedom of assembly, demonstration, and speech.

The government-issued guidelines defining "national security" allow the chief of police to ban gatherings if they threaten China's "national security," promote independence for Tibet or Taiwan, or cause public disturbances. Police can also ask the government's security chief to cancel the registration of a society owing to national security considerations. Before the handover, people needed only to notify the police if they wished to hold protests; since the handover, people are required to seek police permission. In general, the authorities have neither provoked nor been provoked on public security matters. Demonstrators were allowed to enter the Legco Building on the night of the handover and make speeches from the building's balcony. Furthermore, demonstration were permitted, and no significant disturbances occurred then or at the World Bank/International Monetary Fund meetings in September 1997. Moreover, no group has reported that its request for a permit to demonstrate has been rejected, and a permit was issued for the annual June 4 Victoria Park memorial of the Tiananmen Square Massacre (now referred to in polite circles as the Tiananmen Square Incident). On May 31, the first legal demonstration commemorating the June 4 massacre took place on Chinese territory. Significantly, the three thousand protestors marched on Tung Chee-hwa's offices, rather than the offices of Xinhua (the New China News Agency)--the historic focal point of the demonstrators. A candlelight vigil in Victoria Park was held on June 4 without incident.

The strongest reaction has been to the display of flags. The annual celebration of Taiwan's National Day, the Double Ten festival, held on October 10 each year, was more subdued this year, with Taiwanese flags generally flown privately. Taiwanese flags placed on government land or public footbridges were removed by police, and several flag bearers were directed by police officers not to display the Taiwanese flag. Two activists were arrested during the year for carrying a defiled HKSAR flag. The government is reviewing whether the mere act of flying a Taiwanese flag is sedition and whether to introduce laws "to punish people who do not stand or show respect when China's flag is raised or its national anthem is played." The two activists charged with defiling flags were found guilty. According to the magistrate, because high emotions were often attached to flags, the actions of the activists could have caused disruption. The two were fined a small amount of money and held over for a year. On the basis of the magistrate's reasoning, many actions could be constrained under the fear that they may cause disturbances.

Within days Hong Kong's new government introduced legislation to suspend seven laws, mostly concerning worker's rights, before British rule ended. By suspending those laws the new HKSAR government scrapped the collective bargaining powers of trade unions with employers on wages and benefits and the right to use union funds for political activity.

Shortly after the handover, the Provisional Legislature passed an Immigration Ordinance to eliminate the right of abode for mainland children of Hong Kong parents, a right granted in the Basic Law. The courts upheld the HKSAR government's administrative revocation of this constitutional right for executive purposes. On review, the Court of Appeal, in a series of split decisions, held that children already in Hong Kong as of July 1, 1997, could not be repatriated to the mainland. One of the three judges was convinced that the ordinance could not be applied retroactively, but the two remaining judges disagreed. What was perhaps most shocking in the case was the government's position on the application of mainland laws to Hong Kong. Although the Basic Law provides that only those laws in Annex III of the Basic Law shall be applicable in Hong Kong, the government asserted in the Court of Appeal that "[Hong Kong] courts must respect all mainland laws which have an effect on Hong Kong." Clearly, then, on this point and in this context, the government did not protect Hong Kong's promised high degree of autonomy.

On February 25, 1998, the unelected legislature struck down a prehandover law that had been added to the territory's Bill of Rights in the closing days of British rule. That law allowed people to sue one another for violations of their basic rights. Proponents of the repeal argued that such laws could unleash a rash of frivolous and trivial lawsuits, which might endanger business and cause confusion. Raymond Wacks, a professor of law at Hong Kong University, said that such fears were unjustified because Hong Kong's judiciary already had a screening process to stop trivial cases from going to court.

Perhaps a more disturbing event, reported in the February 28, 1998, issue of the South China Morning Post, was the failure of the secretary for justice, Elsie Leung to prosecute Xinhua's Hong Kong branch of the mainland Chinese news and political organization for committing an apparent criminal offense.

A file passed to Ms. Leung in early February by the privacy commissioner stated that Xinhua had refused ousted legislator Emily Lau access to her personal file within the legal deadline for such requests. The privacy commissioner, Steven Lau, said on February 27, 1998, that Xinhua had breached the provisions of the ordinance and had thereby committed an offense. Ms. Lau had asked to see her file late in 1996 following the passage of the Personal Data (Privacy) Ordinance. After ten months and following a complaint to the privacy commissioner, Ms. Lau received a one-line reply from Xinhua saying it had no file on her (the deadline is forty days). Ms. Lau claimed that the lengthy delay had given the agency time to move or destroy her file. The maximum penalty for the offense is a fine of HK$10,000.

A Justice Department spokesman said the decision not to prosecute was based on whether there was sufficient evidence and "whether a prosecution was in the public interest." The spokesman continued: "It is not appropriate to explain the reasons, because this would unfairly reveal that someone had been under suspicion for having committed a criminal offense. . . . That is undesirable and unfair to the person concerned." In Hong Kong feelings were widespread that the decision not to prosecute Xinhua was political in that the HKSAR government did not want to prosecute a branch of a major Chinese organization. Ms. Lau is pursuing her own prosecution of Xinhua, but she may be "cut off at the pass."

The precedent of selectively prosecuting cases extends beyond Xinhua. In March 1998, the Department of Justice decided not to prosecute a local publishing tycoon for fraud. Allegedly, Sally Aw Sian, the chairperson of Sing Tao Holdings, publisher of a local pro-Beijing newspaper, along with several employees, fraudulently inflated the circulation figures of her newspaper to increase advertising rates. Ms. Aw is a longtime friend of Tung Chee-hwa and his family and a member of the Chinese People's Consultative Conference, but the secretary for justice, Elsie Leung, assured critics that "political connections or favoritism played no part in the decision not to prosecute Ms. Aw." Many in Hong Kong are skeptical of Ms. Leung's efforts to sidestep the issue and fear for the erosion of Hong Kong's prized legal system.

The most significant and perhaps disturbing change in the area of civil liberties has been the government and legislature's willingness to pass retroactive laws in violation of the Hong Kong Bill of Rights and the rule of law. At around 3:00 a.m. on July 1, the Provisional Legislature passed the Reunification Bill, which ratified thirteen laws endorsed by the Provisional Legislature before July 1, 1997. This law retroactively made demonstrations between midnight and the enactment of the ordinance illegal, in violation of the International Covenant on Civil and Political Rights, which is applicable to Hong Kong under Article 39 of the Basic Law. Keep in mind that an illegal act while demonstrating, other than the act of just demonstrating, would still have been illegal under Hong Kong laws that straddled the transition; there was no gap at midnight in police powers to arrest a demonstrator violating an existing law or disturbing the peace. Thus the purpose of the retroactive ordinance appears to have been to keep potential demonstrators off the streets during the handover. Again, Ms. Leung, secretary of justice, publicly warned citizens "against trying to take advantage of the time lag between midnight of June 30 and the time the Reunification Bill is passed."

On July 10, 1997, the Provisional Legislature passed the Immigration Bill discussed earlier. This bill also attempted retroactively to change the law by requiring individuals arriving in Hong Kong from China do so according to Chinese immigration procedures. This provision of the bill primarily affected young children who had one Hong Kong parent and one mainland parent. According to the Basic Law, Article 24, such children are defined as residents. The government's position was that all children who had arrived illegally had to go back to the mainland regardless of when they arrived in Hong Kong. With one judge dissenting, the Appeals Court found that the law retroactively applied to those arriving before July 1, 1997.

The emerging pattern of expediency over rule in the election of Hong Kong representatives to China's National People's Congress (NPC) even raised concerns within the pro-China community. The Basic Law provides that only certain specified mainland laws will be applicable to the HKSAR. As Tsang Yok-sing, head of the DAB, noted, the national election law setting out "the rules for nominations, voting, and sanctions for electoral malpractices" did not apply to Hong Kong. Moreover, Hong Kong cannot enact a law governing elections to the NPC since the Chinese constitution delegates this authority to the Standing Committee of the NPC. Therefore, no valid election could be held since there is no applicable law, but the elections took place anyway. Most disturbing to Tsang was that there was no legal basis for the election and no judicially enforceable rules governing the conduct of candidates and electors during the election. The legal basis for Hong Kong's deputies to the NPC is so tenuous that even the deputies have indicated that clarification of their role in Hong Kong is needed.

Finally, on April 7, 1998, the Provisional Legislature passed an Adaptation of Laws Bill that exempted mainland state organs from the application of Hong Kong law. The statute explicitly provided that "no Ordinance (whether enacted before, on or after 1 July 1997) shall in any manner whatsoever affect the right of or be binding on the State unless it is therein expressly provided or unless it appears by necessary implication that the State is bound thereby." This bill, which applied to at least seventeen laws in the region, seemed to many in Hong Kong to be at odds with Article 22 of the Basic Law, which provides that "all offices set up in the Hong Kong Special Administrative Region, by departments of the Central Government, or by provinces, autonomous regions, or municipalities directly under the Central Government, and the personnel of these offices shall abide by the laws of the Region." Therefore, even if Xinhua had violated the Privacy Ordinance by not providing Ms. Lau with a copy of her personal dossier, the retroactive application of the Adaptation of Laws Bill made the illegal act legal and blocked all avenues of redress for Ms. Lau.

MAINLAND BUSINESS CRONYISM

The question on everyone's mind after the handover was whether Hong Kong would become more corrupt and whether the rule of law would survive, especially in business affairs. For several months after the handover, it appeared as if corruption was gaining the upper hand. Then business returned to its prehandover ways as the result of an outside shock--the Asian currency crisis.

In the year preceding the handover, a disturbing pattern unfolded in which arms of state-owned mainland business enterprises, known as "red chips," acquired major stakes in Hong Kong listed firms at a substantial discount to the market price. Such acquisitions included major blocks of shares in Cathay Pacific Airlines, China Light and Power, Citybus, and Hong Kong Telecommunications.

Post-handover euphoria drove the Hong Kong stock market to record levels, driven heavily by the expectation of mainland investment in local firms and mainland asset injections into listed Hong Kong firms. Cosco Pacific's announcement that it would buy a 20 percent stake in Liu Chong Hing Bank in mid-July drove the Hang Seng Index to a record close at 15,225.3. In another acquisition, Xinhua News Agency bought 20 percent of CCT Telecom Holdings, a telecommunications equipment manufacturer.

The Economist, in its July 12, 1997, issue, warned of a bubble in Hong Kong, citing as evidence the participation of international banks in loan syndications, on extremely generous terms, that were keen to do business with Chinese companies. The Bank of China, for example, had raised a $256 million loan on terms better than those offered to the Hongkong and Shanghai Banking Corporation, Hong Kong's premier bank.

The article pointed to suspicions on the part of the Securities and Futures Commission, which regulates Hong Kong's markets, that several syndicates with mainland connections were manipulating share prices. It was rumored that directors of mainland companies in Hong Kong were profiting from a substantial rise in share prices after spreading rumors of takeovers or assets injections. Stories abounded that reporters were given insider trading tips in exchange for favorable press coverage.

Below-market acquisitions continued through the end of July 1997. It was reported in the Financial Times on July 22, 1997, that China Everbright, a business arm of China's State Council (China's cabinet), had taken a 9.7 percent stake in Wah Lee Resources Holdings, a Hong Kong electrical appliances trader. The price paid, at HK$1.55 a share, represented a 54 percent discount to the closing share price the previous day. Either Wah Lee felt it was in its interest to arrange a mainland-based partner, and so gave up nearly a tenth of its equity at half price, or China Everbright had made Wah Lee an offer it could not refuse. What is troubling is that, in almost every other stock market around the world, purchasers of major blocs of shares invariably pay a premium to the market price, not receive a massive discount. This transaction, as so many before it in the months preceding the July 1, 1997, handover, smacked of cronyism.

China Everbright continued its acquisitions on August 3, taking stakes in Chevalier International (engineering group) and Chevalier (OA) International (office equipment supplier). These transactions, along with those undertaken during 1997 by arms of state-owned mainland enterprises, were being characterized in some quarters as creeping quasi nationalization of Hong Kong assets.

In the midst of Hong Kong's posthandover euphoria, China's Communist Party held its Fifteenth Party Congress. Jian Zemin, party head and president, announced a major economic reform program, a move to the "market economy," that envisaged selling shares in many of China's money-losing, state-owned enterprises on Hong Kong's stock market and using the proceeds from these sales to inject capital into China's banks, which are saddled with a large percentage of nonperforming loans.

Jiang's plan was put on hold with the sudden collapse of the Hong Kong stock market at the end of August, which continued to fall precipitously during the first half of 1998. Thus one beneficial effect of the Asian currency crisis was that mainland business cronyism was halted in its tracks. Investors began dumping the stocks of red chips and other Hong Kong firms that had previously sold shares to mainland partners at prices well below the market. China-related shares fell much sharper and faster than shares of purely Hong Kong firms, which had no mainland partners. Suddenly, mainland connections, or business cronyism, became more of a liability than an asset.

Part 3

THE STOCK AND PROPERTY MARKETS

The Hong Kong stock market, measured by the Hang Seng Index, peaked at 16,783 on August 7, 1997. Hong Kong's posthandover euphoria quickly gave way to a wave of selling. Blue chip and red chip stocks fell by about half, with the Hang Seng Index fluctuating between 7,000 and 9,000 during June 1998. About two-fifths of the value of equities traded on the Hong Kong Stock Exchange represent shares in real estate firms. Commercial real estate prices have fallen as much as half for prime Central District office space. In mid-1997, the two most expensive residential properties in the world, both located on the Peak, were sold, one for $70 million and the other for just under $100 million, with a view to their subdivision and redevelopment. Luxury apartments have since fallen in price, with some buyers forfeiting multimillion-dollar deposits. For example, in early January 1998, Pearl Oriental Holdings disclosed that buyers defaulted in purchase of three houses in the Skyhigh development worth $71 million on the Peak as property values declined more than 30 percent. Each buyer forfeited a deposit of $2.5 million.

Declining equity and real estate prices were directly linked to the Hong Kong government's vigorous defense of the Hong Kong dollar's fixed exchange-rate link to the U.S. dollar. The government let interest rates rise to attract domestic and foreign investors to hold Hong Kong dollars, rather than sell them for U.S. dollars. The price of this incentive was higher interest rates on Hong Kong dollar deposits. Higher interest rates, however, drive down property prices (and bond prices) and also drive down equity prices, as higher interest rates result in higher business costs and lower earnings.

Interest rates in Hong Kong bounced up and down in response to real or rumored speculative attacks against the Hong Kong dollar. As rates rose, equity and real estate values plummeted. As rates eased, their values recovered somewhat. As long as doubts remain about the durability of the currency's link to the U.S. dollar, Hong Kong's equities and property values will remain volatile.

As brokers and analysts sought to capitalize on the sharp swings in Hong Kong's markets, there were some amusing incidents. For example, after a sharp downturn in August 1997, on September 3 the Hang Seng Index rose 979 points (7.13 percent) to 14,714. The red chip index of Hong Kong firms that are branches of mainland firms gained 12.9 percent. The H-share Index, which monitors thirty-four state-owned China-incorporated firms, whose shares trade in Hong Kong, gained 17.1 percent. It was then that John Schofield, regional technical analyst at NAVA SC Securities, said that "the shortest bear market in history is over."

By mid-October the Hang Seng Index had fallen to 12,403, its lowest level in six months. International fund managers dumped their Hong Kong stocks and advised clients to reduce their exposure to Hong Kong. On October 21, the Hang Seng Index fell 765 points to 11,634. The investment community began to talk of a currency crisis in Hong Kong. As other countries in the region had experienced substantial devaluations of their currencies, Hong Kong was, it was argued, losing its competitiveness as a place to do business.

The next day panic selling kicked in, with the Hang Seng Index losing 1,211 points, or 10.4 percent. The Hongkong and Shanghai Banking Corporation took the unusual step of restricting early redemption of time deposit accounts by charging a 10 percent fee to redeem such a deposit ahead of its due date. The Hong Kong Monetary Authority raised overnight interest rates to 300 percent and sold U.S. dollars to defend the currency link. The Hang Seng Index lost 23 percent of its value in one week.

To defend the currency link, Hong Kong interbank interest rates remained well above domestic U.S. interest rates. Those higher interest rates continued to beat down stock and property values. As 1998 opened, the Hang Seng Index fell to 10,680. Another fear in the investment community was that China would devalue its currency to regain some of the comparative advantage it had lost to other Asian countries whose currencies had been substantially devalued. A devaluation of the renminbi, China's currency, was seen in investment circles as the last straw breaking the Hong Kong dollar's link to the U.S. dollar.

The market continued to fall, hitting a low of 8,579 on January 15. The culprits on that day were the collapse of Peregrine Investment Holdings, one of Asia's biggest investment banks and a rumor that Sino Land was having trouble meeting its repayments (Sino Land shares fell 45 percent in one day).

During June 1998, a year after the handover, as the market fell to 7,500, local and foreign investment analysts alike speculated that the Hang Seng Index might fall as low as 4,000–5,000 before the end of the year, which would amount to a loss of 70 percent or more from the posthandover high.

The Hong Kong Dollar

After the Asian currency crisis erupted, the Hong Kong government made defending the Hong Kong dollar's link to the U.S. dollar its highest economic and financial priority. This decision was no accident. Any rupture of the link would have been seen as a departure from China's promise to allow Hong Kong a high degree of autonomy in the management of its monetary system. Moreover, were the link to be severed, Hong Kong's new rulers, in comparison with the former British colonial rulers, would be judged harshly for failing to preserve the value of the Hong Kong dollar. The loss of face for China and the HKSAR government would have been intolerable, especially during the first year after the handover when the eyes of the world remained glued to Hong Kong.

The government was prepared to ride out the sharp fall in the equity and property markets. It was well equipped with massive accumulated financial reserves to defend the Hong Kong dollar. It was able to sustain its public spending programs without making any serious cutbacks. The budget announced in mid-February by the financial secretary, Donald Tsang, contained substantial tax cuts for individuals and corporations and introduced a limited mortgage interest deduction, to assist potential home buyers and help the government meet its accelerated housing program.

SOCIETAL CHANGES

A growing worry of many Hong Kong parents is the gradual loss of English-language education in Hong Kong. In December 1997, the Education Department named one hundred schools that would be allowed to continue to teach in English, but rejected twenty-four applications from other English-instruction schools on grounds that their students did not have the ability to learn effectively in English. The South China Morning Post, in its December 2 issue, quoted Father Simon Lam, principal of the Saint Louis Secondary School in Sheung Wan, as saying, "In a survey, more than 78 percent of parents objected to us using Chinese in our school." Father Lam noted that parents thought that teaching in English was a symbol of prestige, especially as a means of getting a good job. The concern among parents is that the remaining one hundred schools, which were allowed to teach in English in 1998, will be whittled down in future years.

In general there has been fairly close scrutiny by the media and activists to ensure that any subtle changes to the Hong Kong social environment are publicized and challenged. Early in the year, it was feared that several movies critical of the mainland such as Seven Years in Tibet, Kundun, and Red Corner would not be screened. Some local distributors suggested that there was no market for such films in Hong Kong, and one was quoted as saying "We are afraid to buy it. We don't want to get into trouble." Walt Disney had been threatened by China for distributing Kundun. The resulting furor guaranteed that the films were scheduled.

The future vigilance of the media is a concern since various outlets are perceived as increasingly under the control of interests friendly to the mainland. ATV, the second local broadcast company in Hong Kong, was sold to a mainland businessman who previously worked for the commercial arm of the Guangzhou government. Sing Tao, the newspaper owned by Sally Aw, was sold to the Mingly Corporation, which has close ties to Beijing as a result of CITIC's investment in Hong Kong Resorts International's Discovery Bay residential development on Lantau Island.

As the first year of Chinese rule came to a close, Hong Kong's tolerance is being tested by a forty-foot statue commemorating the Tiananmen Square massacre. The statue, designed by Danish sculptor Jens Galschiot, has been moved from university campus to university campus during the past year while efforts were made to find it a permanent home. The Provisional Urban Council denied it a permanent home in a local park, and concern over offending some elements in Hong Kong society has forced it from several private sites. At the moment it looks like it will drift for a while longer.

LOOKING TO THE SECOND YEAR AND BEYOND

Although the story both in Hong Kong and in Asia this past year has been largely about economics, we speculate that the story in Hong Kong over the next year will be about the politics of economics. Whether intended or not, the first year following the change of sovereignty gave the chief executive, Tung Chee-hwa, a one-year grace period to familiarize himself with the mechanisms of governing and gain the trust of the HKSAR civil service without having to deal with an unruly legislature. The Provisional Legislature made for a relatively effortless transition since it was prepared to rubber-stamp most of the government's requests. Clearly, the plan was for this all to take place in a strong economic climate of increasing prosperity. No one a year ago would have credibly forecast the Asian financial crisis and its repercussions on Hong Kong.

The honeymoon is now effectively over. Tung, a former chief executive officer of a major company, is an authoritarian decision maker by nature. Going forward, he faces four years of increasingly politicized battles with a legislature in which there are few generally accepted precepts on the nature of society, politics, or policy. Moreover, as Hong Kong's unemployment rate increases, politicians in this environment will be tempted to discard Hong Kong's traditional competitive advantages in the search for future votes. Evidence of this is already available as politicians and civil servants, joined by businesses' seeking subsidies, toy with elements of industrial policy. As if to show Tung's desperation, and the departure from Hong Kong's traditional laissez-faire economic policy, the government announced on June 3, 1998, in the Hong Kong Government Daily Information Bulletin, that the government would create 100,000 jobs.

The economic downturn, coupled with demands for greater social expenditures, is also likely to prompt a political debate over the role of the accumulated fiscal surpluses. Although the debate may not be timely in terms of exploratory speculative runs against the dollar over the past year, it will be even less timely if the government runs a fairly sizable deficit in the next budget. Politics is now being entrenched in Hong Kong society, with all the attendant benefits and costs. In the coming years, and as long as they are allowed to play on the local scene, democratic politicians will be the protector of rights but at a cost that up to now Hong Kong has avoided.

Political parties from all sectors are likely to find common ground on economic policy in opposition to the government. All the major political parties agree that the government's efforts to revive the economy are too little too late as Hong Kong dips into recession for the first time in more than a decade. The financial secretary, Donald Tsang, in a statement difficult to imagine that a colonial official would have uttered, indicated that he was the ultimate arbiter of economic policy in Hong Kong, not the legislature. In response, Allen Lee, head of the pro-business Liberal Party, warned the government not to underestimate the power of the elected legislature when it comes to economic policy. Evidently Tsang, as an appointed civil servant entrusted with the formulation of economic policy, has let power go to his head.

The ability of the legislature to "hang together" will be challenged by the debate over the government's bill defining treason, secession, sedition, and subversion. Article 23 of the Basic Law requires that the HKSAR legislature pass such legislation. The DAB has indicated that it would support legislation banning advocacy, whereas the other major parties want the legislation to be limited to actions. Many individuals in Hong Kong noted on the ninth anniversary of the Tiananmen Square massacre that this legislation could preclude future commemorations. The debate over this and the resulting legislation are likely to be defining moments in Hong Kong's political development.

Tung's response to the commotions in the legislature is likely to be similar to a schoolteacher's response to a disorderly classroom. In a recent meeting with U.S. diplomats, Tung suggested that a fully democratic legislature may need to be delayed as long as fifteen years. Similar delays in terms of electing the chief executive are likely as long as the democratic forces command the allegiance of the masses. The first year of Chinese sovereignty is likely to be viewed for several years as a high-water mark in the fifty-year transition.

BAD FENG- SHUI

A torrential downpour marred the handover ceremony on June 30, 1997. Heavy rains continued well into the first day of celebration of Chinese rule on July 1, 1997. Indeed, the first full year of Hong Kong under Chinese rule was marked by the largest recorded rainfall in its history. The heavy rains on June 30 and July 1, 1997, were taken, by Chinese seers, as positive omens of future prosperity. Outgoing British governor Chris Patten interpreted the rains as the heavens crying over the British exodus. It now appears as if Patten had the more accurate take on Chinese lore.

As the first year of Chinese rule came to a close, economic panic set in. On June 22, 1998, Standard & Poor's announced that it was putting Hong Kong's foreign currency ratings on credit watch and also the foreign currency ratings of the territory's largest bank, Hongkong and Shanghai Banking Corporation, on credit watch with negative implications. Chief Executive Tung Chee-hwa convened a special Executive Council meeting that afternoon and then hastily recorded a radio and television announcement for broadcast that evening. Stating that the city's economic situation had become "very critical," he announced several measures, of which the most important was a freeze on land sales through March 31, 1999. It was the first time that the government had halted land sales in Hong Kong in more than two decades. The stated objective was to "stabilize" real estate prices by freezing the sale of new government land, protect local banks with large exposure from loans to the property market from ever-larger losses, and halt a further slide in the property values of homeowners, especially those whose recent purchases had placed them in a negative equity position. The government also announced several additional tax cuts, including a rebate on property taxes and a 30 percent cut in diesel-fuel taxes. It doubled the amount of special low-interest loans available to first-time home buyers to $930 million. It eliminated a tax on interest income on Hong Kong dollar deposits held in local banks. The interest tax was abolished to attract offshore holdings of foreign currency back to Hong Kong for conversion into local currency in order to increase available credit resources. The loss in government revenue from forgone land sales immediately transformed Hong Kong's projected modest budget surplus for the current fiscal year into a deficit of $2.7 billion.

Chief Executive Tung Chee-hwa and his executive advisers no doubt wished for bright sunshine on July 1, 1998.

Tables

Table 1: Election Committee Subsector Poll

Sources: South China Morning Post, April 4, 1998; Hong Kong Standard, April 3, 1998; Hong Kong Government.

Notes:

1. "Theoretical voter weight" is calculated as (number of seats)/(number of registered voters).
2. "Actual voter weight" is calculated as (number of seats)/(number of voters).
3. Sector totals include only contested seats.

Table 2: Party Vote Totals in Geographic Constituencies

Table 3: Composition of the 1998 Legislative Council

Table 4: Party Representation in Legco by Constituency, 1995, Provisional and 1998 Legislatures

* Includes Chu Yu-lin, formerly of the Liberal Democratic Foundation and now of HKPA.