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HONG KONG: A CASE OF
SELF-DELUSION
Part 2: Missing the boat to
renewal
By Henry C K Liu
Part 1: From colonialism to confusion
By the late 1970s, British Hong
Kong's colonial officials and business leaders realized
they could no longer put off the question of what would
happen to the New Territories, which makes up more than
90 percent of Hong Kong's land area. The New Territories
had been leased to Britain in 1898, for 99 years, so
that lease was set to expire on July 1, 1997.
In
1979, the British government initiated talks with China
about Hong Kong's future. Governor Murray MacLehose
unexpectedly brought up the subject during a private
meeting in Beijing with Chinese leader Deng Xiaoping,
who made it clear that China intended to reclaim Hong
Kong.
In 1982, on the heels of victory in the
Falkland Islands, British prime minister Margaret
Thatcher made an ill-fated attempt to perpetuate British
colonial rule over Hong Kong. She proposed British
administration of Hong Kong after 1997, which Chinese
officials rejected outright. Thatcher not only insisted
on British sovereignty in Hong Kong, but also insisted
that the unequal New Territories Treaty signed in 1898
was legal. China is not Argentina, and Deng stated his
clear intent to take back Hong Kong in 1997. The
bilateral talks over Hong Kong quickly deadlocked. The
British had hoped to extend their control over their
most valuable colony, but China refused to recognize the
validity of what it considered unequal treaties forced
on it by the British in 1841.
London finally
conceded that there was no legal basis to force China to
renew the New Territories lease, and that modern-day
Hong Kong could not survive without that major portion
of the colony, nor without Chinese acquiescence. In
1984, after two years of lame posturing about China's
need to honor international treaties, Britain was left
with little choice but to agree to China's proposal for
a Joint Declaration. Hong Kong would be a Special
Administrative Region (SAR), with its own legal and
economic systems until 2047, 50 years after its return
to China.
The Joint Declaration set a framework
to handle bilateral issues between Britain and China.
Deng Xiaoping applied the "one country, two systems"
(OCTS) formula to the Joint Declaration for the return
of Hong Kong to Chinese sovereignty. That formula had
been originally fashioned as a solution to the Taiwan
problem as a Chinese internal affair. Subsequent to the
Sino-British Joint Declaration, Deng approached
Washington directly for acceptance of the same formula
for solving the Taiwan problem. The administration of
president Ronald Reagan summarily turned the idea down
as a non-starter. Nevertheless, the OCTS formula became
official Chinese policy for the reunification of Taiwan,
with wholesale Chinese political compromise on Hong Kong
in deference to its implication on Taiwan.
OCTS
is a fundamental error of multi-level dimensions on the
part of China, not the least of which is Chinese
acquiescence on the principle of foreign meddling in
Chinese internal affairs. Short-term, it permitted the
continuation of neo-colonialism on Chinese soil under
Chinese sovereignty for another half century. This was a
significant backsliding. Since the 1911 revolution, no
colonialism had been allowed to exist under Chinese
sovereignty, even though it continued to exist in
occupied territories where Chinese sovereignty had been
temporarily suspended. One of the two systems referred
to in the policy of OCTS is in fact neo-colonialism
disguised as capitalism. Furthermore, the system in
Taiwan is national capitalism, not colonialism. Thus the
policy of OCTS may apply to Taiwan, but not to Hong
Kong. Because the policy of OCTS was misapplied to Hong
Kong, it gave Taiwan an opening to say it did not apply
to Taiwan because Taiwan is not a foreign colony. Thus
the policy's original purpose was negated while
political compromise on the return of Hong Kong was made
for naught.
The reality today is one country:
China; two governments: Beijing and Taipei; and three
systems: socialism (with Chinese characteristics) on the
mainland, national capitalism on Taiwan, and residual
colonialism in Hong Kong. The British are gone from Hong
Kong administratively, but Anglo-US neo-imperialism
continues to rule Hong Kong by proxy through its
overwhelming economic prowess.
The events at
Tiananmen Square in 1989 altered the geopolitical
context affecting Hong Kong. More ominously, Beijing's
overture to gain US acceptance of the policy of OCTS
opened the way for US interference on the future of Hong
Kong. Up to that point, Washington had been officially
neutral in a bilateral problem between China and Britain
involving the redress of historical colonialism.
After Tiananmen, the issue of Hong Kong was
abruptly transformed from one of righteous termination
of British colonialism on Chinese soil to official
Chinese acceptance of colonial institutions for 50 more
years in the name of democracy and free enterprise
market fundamentalism. Moreover, the issue of Hong Kong
prompted the US Congress to adopt the Hong Kong Policy
Act, which provides a legal basis in US law for
self-righteous US monitoring on Chinese acceptance of
Western democracy and capitalism in Hong Kong and, by
extension, within Chinese territory.
US
recognition of the People's Republic incurred the price
of the Taiwan Relations Act, which binds the US with the
force of domestic law to interfere in China's internal
affair by helping Taiwan defend itself militarily
against reunification by force from China. Similarly, US
recognition of Hong Kong under Chinese sovereignty
incurred the price of the Hong Kong Policy Act, which
also interferes in China's internal affair by holding
China to the observance of the OCTS policy with the
force of US domestic law. China rejects both these US
domestic laws as unacceptable interference in its
internal affairs. Yet Chinese policies on Hong Kong and
Taiwan are operationally constrained by these two US
domestic laws.
Until Hong Kong and Taiwan are
free of foreign intervention, China's status as an
independent power remains blemished. If the US could
unilaterally withdraw from the Anti-Ballistic Missile
(ABM) Treaty on the grounds that it no longer served US
national interest, why shouldn't China have the same
option on OCTS when and if the policy no longer serves
Chinese national interest? Because there was nothing
Russia could do about US's unilateral withdrawal from
the ABM Treaty, while the US can cause economic pain to
Hong Kong by denying the SAR its special trade status
with the US if the OCTS policy is not observed. The US
has no such power over Shanghai, or Shenzhen, or any
other city in China.
The British exploited to
the maximum this new post-Tiananmen geopolitical climate
with the full backing of US moral imperialism. Hong
Kong's last colonial governor, Christopher Patten, an
ambitious Conservative politician who had earlier lost
his seat in parliament, arrived in 1992 to pursue the
goal of setting Hong Kong up as an anti-China base by
1997, in the name of democracy as the parting gift of
British colonialism. In direct violation of a bilateral
understanding of "50 years without change" for Hong
Kong, Patten embarked on a crash program of "democratic
reforms" in Hong Kong now that British colonial rule was
ending by 1997.
This was coupled with the
evacuation of century-old British monopolies through
inflated financial compensation from government funds.
Even the British military was paid handsomely (US$1
billion) for removal expenses, for which the newly
installed financial secretary, never given the option to
resist, was rewarded with a knighthood for being of
service to the British crown. Faithful collaborators
with British colonialism were hailed as democratic
community leaders and defenders of freedom. The lead
member of the Executive Council that "advised" the
British colonial governor (Lydia Dunn) was made a
baroness for faithfully protecting British interests in
the name of preserving freedom for the people of Hong
Kong.
In a crash localization program, Patten
hand-picked key locals to lead the civil service.
Well-trained running dogs such as Anson Chan were
groomed to head the allegedly apolitical civil service,
with a strategy aggressively focused on insulating Hong
Kong from any influence by China. Key civil servants
were sent to Harvard University's Kennedy School of
Government for special indoctrination in the basics of
neo-liberal governance, complete with sham degrees and
diplomas. Neo-liberalism replaced old-time colonialism,
introducing a neo-colonialism of US economic imperialism
under the pretext of preserving Hong Kong as an
international city with the rule of law, free
enterprise, press freedom, small government - scripts
written by the Heritage Foundation and the American
Enterprise Institute. This fantasy is in direct
contradiction to the historical fact that Hong Kong was
never more than a British colony structured to serve
British geopolitical and economic interests and to
enrich British monopolies through a British command
colonial economy.
After the signing of the Joint
Declaration in 1982, Hong Kong, still under British
rule, wasted 15 years prior to its return to China, with
no long-range plan to deal with the new geopolitical
landscape. Hong Kong hung on to fantasies created by
Anglo-US propaganda, totally intoxicated by a bubble
economy created by its currency peg and a trade regime
heavily dependent on geopolitical preference. While in
office, Patten, working feverishly to cater to US
ideological fixation, ran what British career diplomats
in Whitehall labeled a sideshow, oblivious to British
interest in, and need for, good long-term Sino-British
relations. While Britain had no power to resist Chinese
demands, the US had its trade card on both Hong Kong and
China.
The agreement of "50 years without
change" was surreptitiously rendered meaningless by
Patten's stealth change in the political structure of
Hong Kong to make the SAR ungovernable after 1997. A
so-called Democratic Party with only a handful of
members was formed with open US support to oppose China
in the name of liberty. It was the latest version of the
British strategy of perpetuating "divide and rule" in
its involuntary decolonization program throughout the
shrinking British Empire. On the issue of the rule of
law, British common law, which was practiced only within
former territories of the British Empire and not in
former territories under continental civil law of the
Napoleonic Code, was allowed to continue in Hong Kong
under Chinese sovereignty. Yet the arrangement of the
highest judicial authority resting previously in the
Privy Council in London was not reciprocated by
transferring that authority to the People's Supreme
Court in Beijing. Hong Kong was allowed to set up its
own Court of Final Appeal. This bizarre arrangement
promptly produced a constitutional crisis over the issue
of sovereignty in Hong Kong soon after its return to
China.
As China adopted its "open to the
outside" policy in 1979, Hong Kong and China both soon
reaped the immediate benefits of the colony's early
participation in the modernization of China. Hong Kong
entrepreneurs were able to provide expertise and capital
for joint venture projects on the mainland, beginning
with tourism and hotels, and soon moving into
infrastructure and manufacturing. As a result of this
collaboration, China in return increased and changed the
types of investments it had made in Hong Kong up to
then. For example, in the 1970s Chinese investments in
Hong Kong were mainly centered on transport, shipping,
finance and distribution of Chinese export goods beyond
Hong Kong. These investments were targeted to serve the
needs of a still largely closed Chinese economy. By the
early 1980s, investments began to include a cigarette
factory, real estate and related businesses, department
store chains selling mainland products, printing
presses, periodicals and gas stations. These investments
were focused on trading profits, beyond serving the
needs of a closed economy on the mainland. China
Resources, which had organized Chinese export trade
through Hong Kong, evolved into a huge conglomerate.
Chinese banks and insurance companies formed joint
ventures with Hong Kong investors.
Between 1976
and 1981, the value of Hong Kong's domestic exports to
China multiplied 120 times. The amount of Chinese goods
re-exported from Hong Kong - then acting as China's only
"door to the world" - comprised 31 percent of the
colony's total in 1981. Today, Chinese companies and
financial institutions are major players in the Hong
Kong economy. Clearly, both sides enjoyed a significant
increase in trade as a result of Hong Kong's effort to
profit from helping China reach its goal of
modernization through economic growth.
But the
adverse effect on China has been the acceptance of Hong
Kong's colonial economy as a model of reform for the
Chinese economy. By learning about the modern world
after five decades of near-total isolation through the
warped experience of colonial Hong Kong, China modeled
the first phase its modernization as a revival of a
semi-colonial regime that the nation had endured two
political revolutions to throw off. This key compromise
poisoned Deng's "Four Modernizations" program and sowed
the seeds of corruption in all levels of Chinese
government and society and of ideological decay within
the Communist Party. The Chinese economy fell into the
trap of excessive dependence on exports to the West,
primarily to US markets, by building a sweatshop economy
along the Hong Kong model, and on foreign capital, along
the path welcomed by Western imperialism. It would have
been arguably acceptable as a short-term compromise for
the "take-off phase" of economic development. But the
export frenzy went on for 25 years at the expense of
balanced domestic development, in the process letting a
social services and health network and a regime of
equitable distribution of wealth that had been the envy
of the world deteriorate into chaos and decadence.
The adverse impact of compradore culture and
associated corruption on the ideological erosion of the
Chinese Communist Party was allowed to become
structural. It is only recently that China has begun to
refocus on internal development, away from exports, to
address the imbalance between the coastal regions and
the interior, to stimulate domestic consumption and to
correct the problem of extreme disparity of income and
polarization of wealth. On the issue of foreign capital,
China has yet to apply the principle of creditary
economics based on the State Theory of Money to free
itself from dependence on foreign capital for domestic
development. On the ideological front, the noble
aspiration of serving the people has been replaced by
the crass aim of serving foreign capital for profit.
Getting rich at the expense of the people is not
glorious, even under capitalism.
The Nazis came
to power in 1933 in Germany at a time when its economy
was in total collapse, with ruinous war-reparation
obligations, and zero prospect for foreign investment or
credit. Yet, through an independent monetary policy of
state credit and a full-employment public-works program,
the Third Reich was able to turn a bankrupt Germany into
the strongest economy in Europe within four years, even
before armament spending began. While this observation
is not an endorsement for Nazism, the effectiveness of
German economic policy in this period, some of which had
been started during the last phase of the Weimar
Republic, is undeniable.
China's pace of growth
in the past two-and-a-half decades has been much touted
by Western neo-liberals. Yet a case can be made that
China's growth rate had been unnecessarily slow, that
despite self-congratulatory complacency, China is still
falling behind world standards on many measures even by
its own projections. And this relative slow growth is
not caused by the absence of liberal markets but by
China's mistaken view that a disadvantaged participation
in neo-liberal globalization is its only option.
It is time for China to realize that acceptance
of this fate is not ordained by nature. Furthermore, the
economic growth came with the price of unsustainable
structural imbalance, malpractice in human-resource
utilization and environmental management, and continuing
transfer of the nation's wealth overseas through export
under dollar hegemony. This self-arresting sluggish
growth rate is in large measure the result of the undue
influence on China's development strategy exerted by the
colonial-economy mentality of Hong Kong tycoons. Such a
mentality sees subservient support for economic
neo-imperialism in the form of neo-liberal globalization
as the only option for growth, instead of the game of
voluntary perpetual indenture that it actually is.
Hong Kong's balloon economy had boomed with its
new China trade beginning in 1978. By 1987, it recorded
a 13.6 percent annual gain in gross domestic product
(GDP). On Black Monday, October 19, 1987, the Hong Kong
stock market, alone among the world's financial centers
facing contagious global collapse, closed for four days.
The British Hong Kong government had to use HK$4 billion
(US$513 million) to rescue the Hong Kong Futures
Exchange from insolvency. The international press called
the Hong Kong stock market under British regulatory
supervision "a badly run casino".
On the other
side of the globe, Alan Greenspan, newly appointed
chairman of the US Federal Reserve Board, built his
reputation by releasing a single sentence that said he
would supply all the liquidity the banking system needed
to stay afloat after the 1987 crash. He pumped tens of
billions of US dollars, a fiat currency that he could
print at will, into US financial institutions by pushing
down the overnight lending rate aggressively.
Greenspan's move flooded financial markets with money,
which helped preserve liquidity and restore confidence
in the US financial system, but it started the bubble
economy of the 1990s, which ended in Asia on July 2,
1997, one day after Hong Kong was returned to China.
Greenspan did in essence the same thing in 1998 and
again after September 11, 2001. Greenspan will go down
in history as the central banker who revived moral
hazard.
When the Asian financial crises began in
Thailand on July 2, 1997, the new SAR government
maintained with hubris that the fundamentals of Hong
Kong's economy were sound. It had US$112 billion in
foreign reserves, no external debt, a currency pegged to
the US dollar, low taxes, business-friendly government,
rule of law, freedom of information, etc, etc. Hong Kong
was confident enough to contribute US$1 billion to the
International Monetary Fund to help contain the crisis
within Thailand. Government leaders were calmly
announcing that all Hong Kong needed was to stay the
course and keep its "confidence" in what they mistook as
a passing storm. They were painfully oblivious to the
fact that staying the course would lead Hong Kong
directly toward a whirlpool of economic collapse in not
a passing storm but a fundamental structural collapse of
the neo-liberal global financial architecture. They were
also blind to the fact that the Hong Kong economy's easy
ride on the geopolitical magic carpet was coming to an
end.
The neo-liberal mantra began to sound like
empty pitches of snake-oil pushers on the Cross Harbor
Ferry. No one could answer the embarrassing question:
with such good fundamentals, why are the factual data so
consistently bad and for such a protracted period?
By August 1998, the SAR government had to
intervene in the Hong Kong stock market, buying up more
than US$15 billion in publicly traded blue-chip stocks
to fend off speculative attacks on the Hong Kong dollar.
Since 1997, Hong Kong has been locked in a downward
spiral by staying the course.
All kinds of
harebrained schemes surfaced. The government used
US$1.74 billion of public funds to lure the Disney Co to
Hong Kong, at a time when Disney has been facing
financial problems worldwide, and the potential of theme
parks as a development stimulant having visibly peaked.
Hong Kong Disneyland Phase 1 will include a Disney theme
park, Disney-themed hotels and retail, dining and
entertainment facilities. It will occupy 126 hectares,
and can be expanded to 180 hectares in the future. Phase
1 is expected to open in 2005. The project involves a
total commitment of HK$22 billion (US$2.8 billion) in
public funds (infrastructure, loans and equity). In its
first full year of operation, Hong Kong Disneyland is
expected to attract more than 5 million visitors,
including 1.4 million new tourists, and stimulate
additional spending of HK$8.3 billion. The government
claims that over a 40-year period, the project is
expected to generate economic benefits amounting to
HK$148 billion. Any Hong Kong entrepreneur would tell
you that a sixfold return over a 40-year period is
hardly a financial gold mine, notwithstanding that the
estimated return is denominated in soft "economic
benefits", not hard cash.
In all, Hong Kong has
proposed some US$77 billion in government-supported
infrastructure and other major projects over 15 years,
intended to get the stagnant economy moving again. That
is massive by any standard - amounting to US$12,000 per
resident, about 50 percent of 2001 per capita GDP. But
many of these proposed projects fail to coordinate with
mainland development plans, let alone fully integrate
with them, if not in predatory competition with the
Pearl River Delta economy. Hong Kong's vision of itself
as the front parlor for entertaining foreign investors
and the well-appointed sales office, with the Pearl
River Delta as the servants quarters and the factory
floor, has not been well received by mainland officials.
Many of Hong Kong's plans have to do with keeping the
Pearl River Delta from effectively competing with Hong
Kong rather than true cooperation on an equal basis for
mutual benefit. This is because compradorism does not
thrive on equality. It is also the mentality behind Hong
Kong's insistence of not wanting to be a "Chinese" city,
a view relentlessly expressed by Patten protege chief
secretary Anson Chan until her "early retirement".
Such grand schemes have pushed public spending
up to 24 percent of GDP, producing a budget deficit
while contributing little to constructive restructuring
of the Hong Kong economy, which requires full
integration with the mainland economy. In the manner
that SAR government Requests for Proposals are written,
many of the construction and consulting contracts will
go to foreign firms in the name of an open market, at a
time when the local unemployment rate is over 7 percent,
inching toward 9 percent by most forecasts. Also, the
thinning demand for local professionals further
exacerbates the ongoing brain drain from Hong Kong.
In 1997, when the British returned Hong Kong to
Chinese sovereignty, public expenditures accounted for
just 17 percent of GDP, albeit calculated on a
substantially larger GDP. From 1998-99 to 2001-02,
government expenditure recorded a cumulative growth of
17 percent in money terms, while GDP registered a
cumulative fall of 5 percent. Public expenditure in the
economy averaged about 16 percent in the mid-1980s,
about 17 percent in the mid-1990s, but rose to 22
percent in 2001-02. In the face of economic downturn
since 1997, the SAR government has consciously adopted a
counter-cyclical fiscal policy, keeping expenditure
growth above the projected growth trend of the economy.
But the government's fiscal stimulant has been focused
on ineffective spending, neglecting unemployment and
public housing, and integration with the mainland
economy. The government has recently cut social welfare
payments by 11 percent and in effect reduced the minimum
wage for new contracts of foreign domestic helpers by
about the same. A recent deal with civil servants will
cut their salaries by 6 percent in two stages.
In addition, price rigidity in
public-expenditure contracts causes prices to continue
to rise despite general deflation in the economy. The
government's stated target is to reduce public
expenditure to 20 percent of GDP or below by 2006-07.
Unless this reduction is achieved through a rise in GDP
rather than a cut in public expenditure, it will further
distress the economy.
Land premium, constituting
22.6 percent (HK$63.6 billion) of revenue in 1997-98,
fell to 4.4 percent (HK$8.5 billion) in 2002. This is
the center of the problem. Hong Hong's export partners
are mainland China (34 percent), the United States (23
percent), Japan (6 percent), Germany (4 percent), the
United Kingdom (4 percent), Taiwan (3 percent), and
Singapore (2 percent), with China trade expected to be
the leading growth potential. Yet a proportional share
of public expenditure has not been directed toward
further integration with China.
With the
outbreak of the Asian financial crisis in the second
half of 1997, the Hong Kong economy suffered severe
setbacks, and for the first time in recent memory it
recorded negative growth on an annual basis in 1998. The
economy rebounded temporarily and attained double-digit
growth in 2000 on naive and false expectation that what
went down must go back up. But along with the global
economic downturn, the Hong Kong economy slowed abruptly
again in 2001. The Hong Kong economy yielded growth
averaging only about 2 percent per annum between 1998
and 2002. Yet China, Hong Kong's largest trading
partner, consistently registered growth rates above 7
percent in the same periods. This disconnect is largely
the result of Hong Kong's failure to integrate its
economy with the mainland economy.
And there is
serious talk of new taxes in Hong Kong, including one on
border crossing to the mainland and a new tax on goods
and services. New taxes are always unpopular, especially
in a traditionally tax-shy city with a maximum 15
percent tax rate on personal salary income and a 16
percent tax on business income. Most in Hong Kong pay no
salary income tax at all and only 13,000 people in a
city of 7 million pay the peak rate of 15 percent. But
the real regressive impact is the obstacle such
border-crossing taxes erect against the needed
integration of the two economies.
Disparity in
costs between Hong Kong and the Pearl Delta is about
10:1 at present. Integration with the Pearl Delta would
require Hong Kong costs, particularly wages and rent, to
fall drastically even as Pearl Delta costs rise. This
cost disparity vastly exceeds that between West Germany
and East Germany or that between New York and New
Jersey. Since the opening up of the mainland in the
1980s, Hong Kong enterprises, leveraging the low costs
there, have expanded their production capacity and
enhanced Hong Kong's cost competitiveness globally. Hong
Kong's domestic economy has upgraded itself in tandem
with its exploitation of low labor and land cost on the
mainland. But Hong Kong has been siphoning off most of
this profit, only a small portion of which has been
reinvested on the mainland. Even then, the reinvestment
has been concentrated in more sweatshop production for
more export, rather than in socio-economic development.
The rest of this profit has been going into bidding up
real estate prices in Hong Kong and into money-losing
real-estate investment in the US, Britain, Canada and
Australia in the form of flight capital through most of
the 1990s. In recent years, profit from Hong Kong has
been poured into wireless and telecommunication ventures
overseas, with unhappy results.
Support services
for the Hong Kong trading sector and its mainland
factories replaced the local manufacturing sector as the
fastest-growing sector. The South China region has now
evolved into one of the world's prolific production
bases. Since the mid-1990s, service industries on the
mainland have also been developing apace. During this
period, a bubble economy emerged in Hong Kong, giving
rise to high operating costs in the colony, pushing some
Hong Kong service industries to move northward as well.
Moreover, after its return to China, Hong Kong
residents, in increasing numbers, travel across the
boundary to shop and vacation, adversely affecting Hong
Kong's domestic consumption and the retail sector and
its real-estate base.
In the process of economic
integration, the price differential between Hong Kong
and the mainland will inevitably narrow gradually
through factor price equalization. The price of tradable
products should adjust swiftly because of relatively
free trade between the two economies. But fixed rents in
Hong Kong prevent this adjustment from taking shape
without widespread business failures and bankruptcies.
The adjustment of non-tradable factors such as
land and labor will be slow and painful. However, factor
price equalization does not mean that price levels
between Hong Kong and the mainland will be the same,
just as New York, London and Tokyo have relatively
higher prices than their neighboring areas. Prices in
Hong Kong will generally remain higher than prices in
the Pearl Delta for some time, but the exponential gap
cannot remain forever. The conventional wisdom is that
the magnitude of this price differential will hinge
largely on Hong Kong's ability to provide
high-value-added services and goods. But God has not
forbidden the Pearl River Delta from developing
high-value-added service and goods production.
Ironically, the high cost disparity gives more of a
boost to the Pearl River Delta's downhill effort to
develop such services and goods than to Hong Kong's
uphill effort to maintain the cost differential.
As the bursting of the bubble economy coincided
with economic restructuring, Hong Kong has experienced
heavy deflationary pressure, exacerbated by the
linked-exchange-rate mechanism tied to a US dollar that,
despite its recent decline, is still overvalued. Hong
Kong property prices have dropped from their peak by
more than half. And because of the economy's
disproportionate reliance on the real property sector,
this has magnified the economic crisis. High labor costs
in Hong Kong force pay cuts and layoffs, causing high
unemployment and underemployment, which in turn reduces
domestic demand, particularly consumer spending, as well
as incentives for more education and training, shrinking
the economy further in a downward spiral.
China's growth so far is based on labor-cost
advantage in the global export market, coupled with low
land costs and environmental liabilities. Even then, the
growth rate is unsustainable on exports alone as the
global economy stagnates and global trade shrinks. To
keep the growth rate above 7 percent, China would have
to focus on domestic development. Hong Kong's future
rests on its role in China's domestic development.
Shenzhen, the Special Economic Zone (SEZ) just
north of Hong Kong, is keeping a close watch on its cost
structure to ensure that it does not escalate to levels
that have weakened Hong Kong's competitiveness.
Increasingly, other Chinese cities, including Shanghai,
are using Hong Kong as a model to avoid, rather than to
emulate.
The Hong Kong government budget deficit
at the end of the financial year in March was a record
amount that represents more than 5 percent of projected
2003 GDP. It was far above the original estimate, mainly
because government revenue was 19.2 percent less than
originally estimated. Moody's, a major international
rating agency, has estimated the 2003 deficit to be as
high as HK$90 billion. Government revenue will continue
to shrink, as the bulk of it comes from land revenue.
Since Hong Kong has no capital-gains tax, there will be
an adverse impact on revenue from salary income as Hong
Kong shifts wage-earning activities to the Pearl River
Delta. The currency peg is a hindrance to economic
recovery and cannot hold, notwithstanding government
intransigence on the issue.
Local polls on top
popular concerns repeatedly show democracy trailing by
wide margins major livelihood issues, such as rising
unemployment, small business bankruptcies, home mortgage
foreclosures, education, crime and public health. The
chief executive has introduced a mild form of industrial
policy that will help the SAR compete in select,
strategic industries. Hong Kong is now solidly dependent
on its ability to integrate with the rest of China's
economy.
The effect from exports on the domestic
sector has been weakening in the past 20 years. Less
than 30 percent of the working population is now in
trade-related fields. Domestic demand is still very weak
as the local economy has yet to recover from the severe
wounds of the economic crisis and all disposal income
has been soaked up by real estate costs, depleting
purchasing power even for the still employed.
China feels the need to support the stagnant
Hong Kong economy to prevent the link between Chinese
sovereignty and economic depression, but is rather
helpless because Hong Kong's Basic Law, its
mini-constitution, specifically forbids Chinese
interference in Hong Kong. Yet the cause of Hong Kong's
economic woes has little to do with Chinese sovereignty.
It has to do with Hong Kong's delusion about its
geopolitical free ride as a free market, made
inoperative after 1997 when the United States abandoned
preferred trade treatment for Hong Kong for lack of
geopolitical incentive now that it is part of China. But
the mainland economy is thriving. Hong Kong's economy is
in trouble not because it is now under Chinese
sovereignty, but because Hong Kong refuses to be
Chinese. Why should China feel the need to defend
residual colonial compradorism in Hong Kong, which
claims superiority over socialism with Chinese
characteristics on the mainland?
Hong Kong's
self-styled central banker, Joseph Yam Chi-kwong, head
of the Hong Kong Monetary Authority, whose central bank
function has in effect been stripped by the peg,
recently warned publicly in writing that "a fiscal
deficit carries the risk of leading to an interest-rate
shock if a budget package lacks credibility or community
support". Since the Monetary Authority operates under
the direct control of the Financial Secretary, one can
assume that its head was speaking for the government.
The message is clear that the danger of a budget deficit
is directly related to the defense of the currency peg.
In other words, the peg is preventing Hong Kong from
using a fiscal deficit to counter the most difficult
economic crisis, despite the fact that Hong Kong has
more than US$100 billion in reserves. Yam is an open
admirer of Alan Greenspan, whose style Yam tries hard to
emulate, notwithstanding the difference in background
and training between the two. But Greenspan is flooding
the US, and by extension the world, with US dollars that
he can print at will, and in fact threatening to print
more to fight deflation and to support President George
W Bush's $300 billion deficit. But Yam, with US$120
billion in reserves, is unable to tolerate an US$11
billion deficit because of the peg.
An
interest-rate shock resulting from an attack on the peg
in 1997-98 pushed Hong Kong dollar inter-bank rates far
above their US dollar equivalents and sent the Hong Kong
economy into a tailspin. Hong Kong is not Argentina,
which has been done in with dollar debts and its
currency peg. But it is acting like Argentina with its
budget crisis.
Yam also warned that the ability
of Hong Kong's banks to absorb such an interest-rate
shock without adjusting their lending rates has been
eroded in recent years by greater competition and lower
profitability. Thus the government is acknowledging that
a free credit market is detrimental to Hong Kong's
financial wellbeing.
On November 12, the
Heritage Foundation and the Wall Street Journal released
the 2003 Index of Economic Freedom. The Index is an
annual survey of the world's economies, including
country-by-country analyses and the most up-to-date data
available on foreign investment codes, taxes, tariffs,
banking regulations, monetary policy, black markets, and
more. For the ninth consecutive year, Hong Kong was
named the world's freest economy. The Heritage
Foundation rates Hong Kong No 1 in its index of economic
freedom and the People's Republic of China No 127.
Apparently, freedom is inversely related to growth rate.
In 2001, Hong Kong's GDP was US$162.6 billion
with an export value of $201.9 billion. The Pearl River
Delta had a GDP of $258 billion with an export value of
$289.1 billion. The growth rate differential between the
two is 15:1 in favor of the Pearl River Delta. For Hong
Kong to be calling the shots for the future of the
region would be the tail wagging the dog.
Concerted efforts have been made by the
government to promote and position Hong Kong as Asia's
world city. The Brand Hong Kong program, launched in May
2001, is billed as a long-term undertaking to focus
greater international attention on Hong Kong's strengths
and advantages as the most free, open and cosmopolitan
city in Asia. In July 2000, the government established a
dedicated department, Invest Hong Kong (InvestHK), to
spearhead efforts to attract inward investment. InvestHK
actively promotes Hong Kong as the premier business hub
in the Asia-Pacific region, and as the best location to
access the enormous potential of the mainland market.
The government's message to the world is that major
reasons companies are attracted to Hong Kong are low and
simple taxes, the free flow of information, political
stability and security, corruption-free government and
excellent communications, transport and other
infrastructure. But the real reason is the potential of
the China market.
Central to Hong Kong's
long-term success is greater economic cooperation and
inter-dependence with the adjoining Pearl River Delta
hinterland, which has specific advantages and
significant potential as a consumer market, a trading
hub, a manufacturing base, a services market and as a
destination for investment. An economy cannot be sold
like brands of cigarettes or diapers. If fundamentals
behind prosperity are missing, no amount of selling will
make up for a delusion of grandeur. Hong Kong will do
better to spend its money where it counts, such as a
full-employment program.
The Pearl River Delta,
which includes Hong Kong and Macau, is the
fastest-growing and most affluent region in China. It
has a population of about 48 million, which is more than
the populations of Canada, Taiwan or Malaysia. The Pearl
River Delta has a GDP of US$258 billion - more than
Switzerland, Sweden or Austria - which would put it
among the world's top 20 economies. Hong Kong has helped
fuel the Pearl River Delta's rapid growth and
development over the past two decades. Hong Kong is the
largest investor in the area, and there are more than
36,000 Hong Kong-linked companies employing more than 5
million people in Guangdong province.
Despite
the depth and breadth of these links, there is a need to
boost significantly cross-boundary cooperation and
integration to build on existing strengths and synergies
and maximize the area's potential. The emphasis is on
free flows of people, goods and capital between the Hong
Kong SAR and the Pearl River Delta's major cities, which
include Guangzhou, Shenzhen, Zhuhai, Zhongshan,
Dongguan, Foshan, Huizhou, Huiyang, Huidong, Zhaoqing
and Jiangmen as well as Macau. This cannot be
accomplished with Hong Kong setting itself apart as an
autonomous and non-Chinese entity.
Yet not until
last July did Hong Kong's first Economic and Trade
Office in the mainland open in Guangzhou to promote
economic cooperation and to strengthen business and
economic liaison between Hong Kong and the Pearl River
Delta.
The chief executive, Tung Chee-hwa,
announced in his Policy Address in October 2001 an
ambitious infrastructure plan worth HK$600 billion
(US$77 billion). Of this, one-third would be spent on
expanding the railway network to make it the backbone of
Hong Kong's public transport system. From 2002 to 2007,
six new rail projects costing US$13 billion (HK$100
billion) will come on line at a rate of about one a
year. The existing railway network will be expanded by
40 percent to more than 200 kilometers. Urban areas will
be connected with new towns in the eastern and
northwestern parts of the New Territories. Yet there
were no priority projects to improve linkage with the
mainland until recently. A second rail passenger
boundary crossing at Lok Ma Chau will be developed to
handle the substantial growth in two-way travel and
commerce across the boundary, but no target date has
been announced. By contrast, a dedicated rail link will
be built to Hong Kong Disneyland, due to open in 2005.
Plans are being developed for another six new
rail projects before 2016. These include a Port Rail
line linking the container port at Kwai Chung with the
railway network in the Pearl River Delta and a
high-speed railway linking Hong Kong to Guangzhou via
Shenzhen. The year 2016 is 13 years in the future.
Over the next decade, more than 100 kilometers
of major trunk roads will be constructed and improved,
including the Deep Bay Link and the Shenzhen Western
Corridor. Total investment on these projects will be
more than HK$100 billion. The proposed Shenzhen Western
Corridor will provide a strategic link between Hong Kong
and Shenzhen across Deep Bay. It is an integral part of
the infrastructure being put in place to provide more
and faster cross-boundary links with the mainland to
expedite the flow of people, cargo and capital between
Hong Kong and the Pearl River Delta. Again, no target
completion date has been announced.
Hong Kong
has one of the world's busiest boundary crossings. In
2001, about 106 million people and 11.3 million vehicles
crossed back and forth between Hong Kong and the
mainland. Every day, an average of about 313,000 people
and more than 31,300 vehicles cross back and forth
between the Hong Kong SAR and the mainland, with most
people heading into neighboring Guangdong province.
Container Terminal 9 (CT9), now being built on
Tsing Yi Island by the private sector, is aimed at
consolidating Hong Kong's position as the world's
busiest and most efficient container port. The
68-hectare project will have six berths and a design
capacity to handle more than 2.6 million
20-foot-equivalent units (TEUs) a year. CT9 is expected
to be completed in 2004, and will bring annual total
capacity at the Kwai Chung Container Terminal Basin to
more than 15 million TEUs. The new marine basin will be
able to handle the largest container ships currently on
the drawing boards. Yet the private interests behind
these projects have emerged as the most vocal and
influential opposition to logistic integration with the
Pearl River Delta. A proposal for a 15 billion yuan
(US$1.83 billion) bridge linking Hong Kong, Macau and
the mainland Chinese city of Zhuhai, which neighbors
Macau, has sparked bickering among Hong Kong tycoons
over their special interests (see The New York of Asia: Port in a
storm.
The container-terminal
industry, speaking through the powerful Hutchison
Whampoa Group, opposes moves that may affect the current
governmental arrangement of privately developed
container terminals. The Hong Kong Container Terminal
Operators' Association, which represents private
terminal operators, including Wharf's Modern Terminals,
CSX World Terminals and Hutchison Whampoa's Hongkong
International Terminals, while claiming not to be
against the bridge project, was quoted by the press as
being opposed to "proposals that changed the
government's port development policy so as to create an
unfair situation for the existing players".
The
proposed bridge would be a regional infrastructure that
would be key in integrating Hong Kong and the Pearl
River Delta into one vibrant regional economy. In that
sense, would be vital to the economic survival of Hong
Kong and beneficial to Guangdong province and China in
general.
Shenzhen's port reported fast growth
last year. The SEZ port handled about 87.67 million tons
of cargo and 7.62 million TEUs, representing a 32
percent increase in volume and a 50.1 percent growth in
container throughput. The figures elevated Shenzhen
ahead of Los Angeles and Rotterdam to become the world's
sixth-busiest container port in 2002.
Hong Kong
remained the world's busiest container port and handled
an estimated 19 million TEUs in 2002 - a 6.6 percent
increase over 2001. Shenzhen aims to increase its
container-handling capacity to 11 million TEUs by 2005
and 18 million TEUs by 2010.
Shenzhen airport's
passenger and cargo traffic increased 20 percent and 35
percent year-on-year respectively in 2002. Passenger
numbers jumped to 9.35 million, while cargo volume
leaped to 334,100 tons. By comparison, Hong Kong
International Airport's growth was slower - passenger
numbers grew 4.5 percent to 33.5 million in 2002, while
cargo traffic was up 19.5 percent to 2.5 million tons.
Shenzhen airport operated 120 domestic and nine
international flight routes in the year, whereas Hong
Kong had 130, of which 40 were to and from the mainland.
The number of mobile-phone users in Shenzhen
increased to 6.05 million in 2002 from about 3.88
million in 2001. Some 174 fixed-line and mobile phones
are owned by every 100 residents in Shenzhen in 2002.
During the year, the SEZ's Internet user numbers surged
to 1.88 million, from 1.06 million in 2001. Hong Kong
had about 6.22 million mobile-phone users in 2002, up 82
percent over the previous year, representing a
penetration rate of about 91 percent. Registered
Internet users in the SAR totaled 2.36 million in 2002.
But Hong Kong's population is about 6.8 million while
Shenzhen's is about 4.7 million. Taking this into
consideration, Shenzhen had caught up with Hong Kong in
telecommunications. Both Hong Kong and Shenzhen have
reached saturation in telecom market growth. Future
growth would come from other cities in the Pearl River
Delta. Shenzhen's gross domestic product grew 15 percent
last year to 223.9 billion yuan, enabling per capita GDP
to reach US$5,561 (HK$43,376), the highest in the
mainland.
Hong Kong government revenue has
fluctuated wildly between 14 percent and 21 percent of
GDP in the past decade, largely affected by volatile
land lease revenue. The government's long-term fiscal
strategy and tax reform needs to address issues related
to its excessive dependence on land lease revenue and
the narrow tax base.
The performance of
companies involved in real estate in Asia has lagged far
behind those in non-real-estate sectors since 1997. In
Hong Kong, the five-year average return on capital
employed for non-property sectors since 1997 was 17.3
percent, compared with merely 6.7 percent for
diversified firms with both property and non-property
businesses and only 6.5 percent for real-estate
companies. The listed companies in Hong Kong that have
done well since 1997 are the ones with heavy investment
in China.
Even the British-dominated Hong Kong
General Chamber of Commerce has been urging the SAR
government to listen more to the business community on
economic integration with the Pearl River Delta. Chamber
director Eden Woon, a US citizen and a former US Air
Force intelligence officer, said he was pessimistic
about the government's handling of issues concerning
integration with the Pearl River Delta. He complained
that businessmen generally did not have enough say in
such issues as cross-border infrastructure,
environmental protection and immigration policies. Woon
called on the government to set up a "Greater PRD
Council", an unofficial forum like the Asia Pacific
Economic Cooperation (APEC) forum, in which council
members would meet annually to discuss business issues
of delta integration. Under a proposal Woon handed
recently to the government, several committees would be
set up to deal with key issues. Michael Enright,
co-author of The Hong Kong Advantage and a
professor at the School of Business at the University of
Hong Kong, notwithstanding the embarrassment of the
mysterious disappearance of the so-called Hong Kong
advantage, echoed Woon's views.
The proposal of
Woon and Enright of an APEC-type forum, a loose
coordination body of private interests from different
sovereign states, would further reinforce the separation
of the Hong Kong from the Pearl River Delta by treating
the two Chinese entities as de facto sovereigns.
While Adam Smith realized the growing importance
of capital in economic progress, he also was
apprehensive of the growing danger of its abuse. His
attitude of distrust toward the capitalist as an advisor
of government has been clearly stated: "The interest of
the dealers in any particular branch of trade or
manufactures is always in some respects different from
and even opposite to that of the public. The proposal of
any new law or regulation of commerce which comes from
this order of men ought always to be listened to with
the greatest precaution, and ought never to be adopted
till after having been long and carefully examined, not
only with the most scrupulous but with the most
suspicious attention."
The SARS crisis shows
that far from wanting smaller government, the public
wants stronger government leadership and action, to
improve public hygiene and health services, to reduce
unemployment, to help small businesses in distress, to
revitalize the economy with full integration with the
mainland.
Three things have been made clear by
the severe acute respiratory syndrome (SARS) crisis: 1)
People when frightened look to the government for help.
People want more government, not less, in times of
crisis. 2) People are prepared to give up freedom for
protection, especially when they never enjoyed freedom
under colonialism to begin with. 3) Everyone wants
government intervention to save the market; no more
laissez faire, which never existed under colonial
command economy. Bottom line: when things get tough,
people want more socialism.
With 30,000 people
lining up to apply for 3,600 openings, to call it a
crisis is an understatement. The "round up the usual
suspects" approach will not be enough.
The
government has announced that US$128.2 million will be
set aside to promote Hong Kong and to encourage the
return of exhibitions, to get trade activities back to
normal after the spread of the SARS crisis is brought
under control. The government has also announced it will
create 21,500 training places and short-term jobs to
strengthen service training in the most SARS-affected
areas. These jobs will provide home-cleaning services
for the elderly and boost environmental hygiene. The
program will cost about US$55.12 million. This
public-health budget is less than half of the
government's public-relations budget. The government
will do well to reverse the priority. What is needed is
a full-employment program to improve environmental
hygiene and other community services (see On offer: A full employment program for
Hong Kong by Henry C K Liu and L Randall
Wray, March 30, 2002).
Chief Executive Tung
Chee-hwa has been the target of political attack by the
so-called Democratic Party members in the Legislative
Council, blaming him for alleged incompetence and weak
leadership in this period of economic crisis. These
individuals were noticeably docile and silent during
colonial rule. What kind of democratic party is it that
has only 590 members, with a chairman who never faced
even token elective challenge from the party's founding
in 1994 to his voluntary retirement in 2002? And they
have the nerve to accuse the chief executive, who has
faced two elections since 1997 in accordance with
election procedures stipulated by the Basic Law, of
being not democratically elected? But most hypocritical
of all is that the loud opposition from this party of
590 to Hong Kong's integration with the mainland is one
reason Hong Kong is in such a state of economic
paralysis.
Tung is an honest, hard-working,
conscientious and patriotic leader that any city would
be lucky to have. If anything, he is excessively
democratic, trying to represent fairly all the diverse
and often opposing interests in the community and
overseas. His constitutional authority is much weaker
than that of the British colonial governor, who enjoyed
total dictatorial power, unchecked by any Basic Law, and
with the colonial judiciary system in his pocket.
Hong Kong's economic woes are the result of a
paradigm shift in geopolitics, not poor leadership. Hong
Kong's problems are not made by Tung Chee-hwa, nor can
he be expected to solve them without Hong Kong waking up
to the geopolitical reality that its fate is tied to its
willingness to be an integral part of the motherland.
The people of Hong Kong should unite behind Tung to let
him lead Hong Kong into an era of renewed national pride
and prosperity.
Henry C K Liu is
chairman of the New York-based Liu Investment Group.
(Copyright 2003 Asia Times Online Co, Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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