Hong Kong

China's Challenge

Michael Yahuda

• Publisher: Routledge
• Year: 2018
• eBook ISBN: 9781317761624
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

The return of Hong Kong to China in July 1997 has the potential to benefit China's rapidly expanding economy. China's handling of the transition will have enormous implications for her international standing. This is the first study to analyse the serious problems and real opportunities that the return of the colony poses to China's international status.
Examining the relationships between Greater China, Hong Kong and the West, Hong Kong: China's Challenge explores the challenges that Chinese policy makers face up to 1997 and beyond: the clash of political cultures; handling problematic negotiations; dealing with conflicting economic interests. The book concludes by suggesting that a laissez faire approach to the lucrative Hong Kong markets will ensure that China harnesses the full political and economic benefits of sovereignty over the colony.

Chapter 1
The significance of Hong Kong

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In the half century from 1945 to 1995 Hong Kong has been transformed from a derelict backwater to become the eighth largest trading economy in the world. When the Japanese surrendered in 1945, the 600,000 inhabitants were on the verge of starvation; fifty years later the six million people of Hong Kong enjoy on average a higher income than the population of Britain: Hong Kong ranked seventeenth in the world in terms of GDP per person.¹ In the late 1980s, Hong Kong overtook Rotterdam to become the world’s busiest container port. It is Asia’s leading financial centre and the third in the world after London and New York. Such significance as is usually attached to Hong Kong stems to a considerable extent from these economic achievements that have enabled it to play a major role in the international economy of East Asia and a crucial role in the rapid economic development of China itself. But as a plethora of recent books have shown, the significance of Hong Kong extends far beyond the realm of economics.²

The purpose here, however, is not to attempt to describe the significance of Hong Kong in its own right, but rather to attempt to do so with Chinese interests in mind, particularly in view of the impending reversion of sovereignty. Economics is crucial here too, but so are politics, culture and the relations with Taiwan. Hong Kong is also at the centre of a complex web of relations linking China with the so-called Overseas Chinese, and it is also at the heart of ‘Greater China’ – the economic entity that integrates southern China with Hong Kong and Taiwan. More broadly, Hong Kong plays a vital role in providing China with a gateway to the economies of the Asia-Pacific and beyond that to the global international economy. Although this has not been generally recognised, Hong Kong has become an important element in China’s foreign relations as a whole. It has also played an important role as the agent of the modernisation of the country through investment, transfers of technology, management, financial skills, access to western markets etc. By the same token, as the agent of modernity and marketisation Hong Kong also constitutes a challenge to the traditional command economy and to the centres of administrative and ideological authority of the communist-led state.

Many factors have contributed to the success of Hong Kong including its geographical location and its possession of the best deep water port on the Chinese coast. But the most important have been the administrative structure and the rule of law provided by the British which have enabled the Chinese people of Hong Kong to improve their living conditions by working hard and to expand their entrepreneurial flair and, in time, to develop their professional skills. These key elements allied to an efficient infrastructure, sound finances and low taxes, and a free port that have enabled goods and capital to flow in and out freely have given an edge to Hong Kong over most other business centres throughout the world. Hong Kong’s achievements have been realised without subsidised loans and against a background of instability and turmoil in China. China was fortunate to have had such a place flourishing on its doorstep when it embarked in 1978 on the long and rocky road of economic reform and openness.

From Beijing’s perspective, the undoubted economic significance of Hong Kong is tempered by the nationalist pride in at last re-establishing sovereignty over the first territory to have been lost to foreign imperialists in the century of shame and humiliation that began with the Opium Wars of 1839–1842. The intensity of the nationalistic sentiment about the prospect of regaining sovereignty was nonetheless keen, even though the Chinese side could have regained Hong Kong more or less at any time of its choosing since 1949. Indeed, the British negotiators in the early 1980s were surprised by the depth of the Chinese feelings on the matter. As one of the most senior people on the British side remarked, ‘Deng Xiaoping was determined to take [Hong Kong] back into full Chinese sovereignty even if it meant taking it back as a barren rock’.³ For China’s leaders, the retrocession of sovereignty is also part of re-establishing the unity of the Chinese state. That has always been a critical issue in Chinese thinking since ancient times. Modern nationalism has intensified that sentiment for China’s communist leaders, especially as the appeal of communist ideology has waned. The nationalist sentiments of the Chinese communists, however, can be a mixed blessing for Hong Kong. On the one hand, it is associated with a pride in demonstrating that Hong Kong can be run successfully without the British and, on the other hand, it is associated with a fear that Hong Kong and its freedoms may subvert communist rule on the mainland. Matters are not helped by the fact that very few Chinese officials are sufficiently appraised of what makes Hong Kong work as to be able to weigh the delicate balance between these contradictory impulses.

THE ECONOMIC DIMENSION

The economic significance of Hong Kong may be said to be a direct result of the communist victory in China in 1949. For the previous hundred years Hong Kong had been a relative backwater, servicing little more than Guangdong Province as it was outshone by Shanghai. However, the advent of the communists led many of the more entrepreneurial Shanghainese to flee to Hong Kong. While Shanghai atrophied and decayed under the centralist and anti-bourgeois Maoist regime, Hong Kong rapidly began to build itself afresh after the influx of more than two million refugees. The American economic embargo that was imposed on China at the outbreak of the Korean War in June 1950 proved to be a boon in disguise as it forced the colony to develop its own manufacturing industries and move away from its earlier entrepôt role. At the same time it became the principal avenue through which the communist regime earned a modicum of hard currency that was still necessary for its largely autarkic command economy. It was through Hong Kong that remittances were sent by Overseas Chinese to their relatives on the mainland. These were estimated at $500–600 million per year when the total value of trade in the 1960s rarely reached $4000 million. In fact, if the bill for supplying Hong Kong with water and food were added, it would be clear that the huge country of China gained nearly half its hard currency income from the tiny British colony.⁴ Moreover, during the Maoist period from 1949 to 1976, Hong Kong was China’s principal gateway to the capitalist world. It was there, for example, that the grain deals with Canada, Australia and Argentina were reached initially to alleviate the acute shortages in 1961 that had been caused by the disastrous Great Leap Forward.

As China changed course at the end of 1978 to embrace the policies of economic reform and openness to the international economy, some thought that Hong Kong’s significance would decline as China would no longer use it as its main point of access to the capitalist world beyond. But Hong Kong adapted to the new situation to become even more important to the Chinese economy and to its engagement with the international economy. Hong Kong manufacturers were quick to take advantage of the cheaper land and labour force across the border so that by the early 1980s three million of the four million people employed in Hong Kong factories were located across the border in China. This meant that at a stroke the Chinese economy had access to the managerial know-how, the appropriate technology and the marketing skills of Hong Kong so that in one fell swoop the Chinese were able to bridge the gap between their low quality and unfashionable styles of clothing to reach the demanding high standards and latest fashions of western markets. However, Deng Xiaoping and his advisers had from the outset shrewdly recognised what an enormous asset their compatriots in Taiwan, Macao and especially Hong Kong could be. Four Special Economic Zones were opened adjacent to these territories so as to attract their investment and export skills. The most notable of these is Shenzhen, across the border from Hong Kong, which has mushroomed up from being a sleepy village of twenty thousand inhabitants in 1978 to becoming a bustling modern city of two million people within fifteen years.

In 1985, Hong Kong became China’s biggest trading partner until it was overtaken by Japan in 1993, but from the outset Hong Kong became and remained its biggest foreign direct investor.⁵ Hong Kong has accounted for between 60 and 80 per cent of the total foreign direct investment in China. According to Chinese official statistics, by 1993 there were 50, 868 investment projects of Hong Kong and Macao businesses in China with a contract value of $76.754 billion and actual utilisation value of $17.862 billion. The bulk of these were located in Guangdong Province across the border,⁶ but as the detailed breakdown of the statistics of the foreign trade and direct foreign investment of each of China’s thirty provinces and municipalities showed, Hong Kong ranked either first or second in both categories in all but five of them.⁷

Clearly, the economic impact of Hong Kong on China is immense and can hardly be exaggerated, but by the same token, as Chinese officials are quick to point out, so is the significance of the Chinese economy for Hong Kong. Governor Patten made the following point in 1994 in surveying the decade since the Sino-British Joint Declaration agreed on the future of China:

Trade with China had grown by 500 per cent in real terms so that China had become the largest market for the territory’s exports and the biggest supplier of its imports; China had become the biggest investor in Hong Kong as Hong Kong had become the biggest investor in China. The benefits for Hong Kong had been immense as total GDP grew by 79 per cent in real terms; and the growth of per capita GDP had elevated the ranking of the territory from 28th in 1984 to 17th ten years later. As manufacturing had shifted across the border, Hong Kong had increased its weight as an international business centre with the service sector providing 75 per cent of GDP and 70 per cent of total employment.⁸

The benefits for China cannot be measured in economic statistics alone. The huge growth of the service sector in Hong Kong is indicative of the scale of the service that the territory provides for the mainland. In the absence of a legal culture on the mainland and its shifting regulatory character for the conduct of business, it is hardly surprising that Hong Kong with its internationally respected rule of law and with its reliable and efficient financial services has become the main base for the conduct of business with China. The territory not only provides China with the facility for myriad economic exchanges with the outside world, but it is also a major centre of learning where China’s key international trade and investment organisations acquire expertise and invaluable experience in dealing with the many facets of the international economy. Thus, major institutions such as the China International Trust and Investment Corporation (CITIC), China Resources and the Bank of China have been long established in Hong Kong and may be said to understand its economic character well.

Xu Jiatun, the former director of the Hong Kong Branch of the Xinhua News Agency (the official representative of the Chinese government in the territory), once put it well in 1988:

The principal changes of modern capitalism find expression in the fact that it has a relatively [good] legal structure, which ensures an environment of free competition and which enables the productive forces to develop further.

He concluded that unless legal and operational structures of modern capitalism were mastered, it would not be possible to carry out the socialist modernisation programme properly in China.⁹ It might be added that, seven years later, such structures have yet to be mastered in China and that it is Hong Kong which provides a great deal of these services to China. Another measure of the significance of Hong Kong’s role in facilitating China’s deepening engagement with the international economy may be seen from the importance of foreign direct investment for China’s capacity to export. Although it accounted for less than five per cent of the value of China’s output, it was the source for two-thirds of the country’s exports.¹⁰ It will be recalled that Hong Kong is responsible for 60–80 per cent of direct foreign investment in China.

In sum, Hong Kong may be said to play crucial economic roles for China, first as perhaps its most important partner in trade and investment and, second, as its most important provider of business services and its key agent in contributing to modernisation. Curiously, Chinese officials are reluctant to acknowledge this publicly. Instead, they prefer to emphasise how dependent Hong Kong is upon the Chinese economy. That may be true, but it is hardly relevant in a context in which China will be re-establishing sovereignty over Hong Kong in a way that could very well damage the institutional basis of its operations precisely because of a failure to understand it.

THE LINK WITH TAIWAN

As seen from Beijing, Hong Kong is intimately linked with Taiwan in at least two ways. First, China’s leaders have put forward the same political framework to both places as a basis for re-establishing sovereignty and reunifying the country. Second, Hong Kong is the main economic conduit through which exchanges are conducted with Taiwan.

The concept of ‘one country two systems’ was first devised with Taiwan in mind. Following the full normalisation of relations with the USA in December 1978, Beijing sought to capitalise on Taiwan’s sense of abandonment by its American ally. Putting aside Mao’s long established policy of seeking to ‘liberate’ Taiwan (which implied the overthrow of the nationalist party: the Kuomintang or KMT), Deng and his colleagues proclaimed a new policy favouring peaceful reunification. This ostensibly allowed for the continuation of the capitalist system and KMT rule, but within the sovereignty of the People’s Republic of China (PRC). Although the scheme was brusquely rejected by the government in Taipei, Beijing has continued to adhere to it. The ageing communist leaders hoped that they could reach an understanding with the older leaders of the KMT based on old personal ties established in the 1920s and 1930s. The older generation of the KMT was judged to be more attached to the mainland – their place of birth – than the next generation that was born in Taiwan and, in many cases, married to Taiwanese. But the KMT’s resistance to the blandishments of the distrusted communists was strengthened by the passing of the Taiwan Relations Act by the US Congress that once again provided a legal framework for an American defence commitment to Taiwan. Once it became clear that there would not be rapid progress in solving the Taiwan problem, Beijing adapted the concept and, with the agreement of the British, applied it to the reversion of Hong Kong to Chinese sovereignty.

As seen from Beijing, if the concept were to work well in the case of Hong Kong, it would strengthen its appeal to the people in Taiwan. Conversely, were it to be seen to have failed in Hong Kong, Beijing would lose the only policy for peacefully reuniting with Taiwan that it has advocated consistently for the last seventeen years since 1978. It would be left with only the military option. The repercussions would be damaging for Beijing: Taiwan would have to strengthen its defences; the USA would be alarmed and may take counter measures; Japan too would be greatly concerned as would be the other countries of East Asia; and China might find that it had put in jeopardy its general strategy of economic engagement with the Asia-Pacific that has been deemed essential for its broader objectives of economic development and modernisation.

Meanwhile, Taiwan has come round to the position of broadly supporting Beijing’s policy on Hong Kong. Dropping its initial opposition to the Sino-British Joint Declaration of 1984 as cutting across its own claims to be the true government of China, Taipei in May 1991 formally recognized that China was ruled by two governments and that its own jurisdiction did not extend to Hong Kong. That acknowledged publicly a position that had already developed in practice since cultural and economic ties developed with the mainland via Hong Kong from 1986 onwards.¹¹ This meant, in effect, that Taiwan was shielded from the full blast of Beijing’s attentions until the retrocession to the PRC of sovereignty over Hong Kong was settled in 1997. It also meant that whatever doubts that may be entertained in Taiwan about the feasibility of Beijing to carry out its policy of ‘one country two systems’ in Hong Kong, Taiwan also had a reason to hope that the policy would not fail.

Interestingly, neither Beijing nor Taipei saw the Hong Kong situation as fully analogous to that of Taiwan – although they did so for different reasons. Beijing’s view was that as Hong Kong was ruled by Britain, its fate was subject to negotiations between the two sovereign powers without the participation of representatives from the territory. At best, the people of Hong Kong were the putative members of a local Chinese government to be vested with considerable powers of autonomy as worked out between the Chinese authorities and prominent Hong Kong people deemed to be patriotic. Moreover, the future Hong Kong SAR would have to defer to Beijing for defence and foreign affairs. Taiwan being ruled by Chinese could negotiate directly with Beijing either as a prospective local government or as between the Nationalist and Communist Parties. In any event, it would be allowed to retain its own armed forces. The precise terms of what Beijing had to offer would be subject to negotiations, but they would be more generous than what had been offered Hong Kong. Taipei, of course, rejected any analogy at all. Until the late 1980s it had claimed to be the true government of China as a whole and since then it has sought recognition as a separate government altogether.

Nevertheless, both Beijing and Taipei in practice found Hong Kong to be the main conduit for the exchange of visits involving several million people from Taiwan and at least a million from the mainland. It was also the principal place for cultural and even unofficial political exchanges. Above all, it was through Hong Kong that the bulk of the economic exchanges have been conducted.

The economic exchanges be...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Foreword
• Acknowledgements
• Introduction: the challenge and the opportunity
• 1 The significance of Hong Kong
• 2 Differences between the Hong Kong and Chinese systems
• 3 The troubled negotiations
• 4 Problems of the last phase of transition
• 5 1997 and beyond
• 6 Conclusion: a turning point for China?
• Postscript
• Notes
• Further reading
• Index