Hong Kong: The Business Environment in the new Special Administrative Region. Page 2

In order to keep its state-owned-enterprises (SOEs) afloat and maintain employment levels, the PRC government has directed banks to continually supply credit to loss-making SOEs. Such loans are unlikely to be paid back, and in effect represent a subsidy from the government to the SOE. The affect on the financial health of the banks has been catastrophic: while the People's Bank of China (the PBOC, China's central bank) estimates that non-performing loans represent 18% of GDP, Merrill Lynch estimates the figure at 40% of GDP, and Standard & Poor's estimates that such bad loans represent 60% of GDP - much worse than either Thailand or Korea [The Economist Intelligence Unit. (1998) “China's Rickety Financial System? In Business China, January 19, 1998, p. 3]. Using the PBOC's estimate that 20% of outstanding loans are bad, Rmb 1.2 trillion (USD 145 billion) in loans are non-performing. Since the combined capital base of the banks is only Rmb 448 billion (USD 54 billion), the banks are “technically bankrupt?[The Economist, ibid.].

The World Bank has estimated that bad loans exceed USD 200 billion, and confirm that these banks have “negative net worth?[Wonacott, Peter. (1998) “Is China's New Bond Deal a Loan trick or Bank treat ?? In The Asian Wall Street Journal, March 9, 1998, p. 25]. While the USD 32.6 billion `special treasury bond' announced by China's Ministry of Finance in early March 1998 is at least an initial first step towards addressing the banking problem, it falls far short of the scale of solution required. Analysts also recognize the plan as partly “accounting sleight of hand?[Wonacott, ibid.].

Financial Secretary Tsang's third Hong Kong budget, but first wholly for the new Hong Kong Special Administrative Region of the People's Republic of China, was entitled “Riding the Storm. Renewing Hong Kong's Strengths.? He described the reasons for this title, and his focus in preparing the budget, in point 5. of his budget speech: “The main thought that has shaped this Budget is that in this time of economic uncertainty, when many people and businesses have experienced reduction of asset values or face gloomier prospects, the measures that I have set out must aim to provide comfort, bolster confidence, and strengthen competitiveness. Their object is to help us to ride out the present storm and to work to renew Hong Kong's distinctive strengths.?

The Hong Kong dollar to U.S. dollar exchange rate was HK$5.69 = US$1 in September 1981, but by September 1983 it had fallen to HK$8 = US$1. When China made an announcement threatening unilateral action if agreement with the British was not reached, the Hong Kong dollar all but collapsed, reaching its lowest point on 24 September, 1983 when it fell from HK$7.20 to HK$9.50 for US$1. The peg was announced on October 15, 1983 and fixed at the exchange rate of HK$7.8 to US$1, where it has remained ever since.

After the New York stock exchange's `Black Monday' crash on October 19, 1987 - one week after the famous Wardley advice to `buy buy buy' [South China Morning Post (1997) “Market Shake-up Instilled some Pride after the Fall? In South China Morning Post, October 20, 1997] - the Hong Kong stock exchange closed its doors for 4 days, in an effort to protect its prices [Mulcahy, John (1997) “Black Monday: 10 years on? In South China Morning Post, October 20, 1997]. When the Hong Kong stock exchange was finally re-opened on the following Monday, it plunged immediately, its Hang Seng Index falling 1120.7 points (thus losing over one-third of its value) on that single day [Lo, T. Wing (1993) Corruption and Politics in Hong Kong and China, Buckingham: Open University Press, p. 115].

It might be added that although the root cause of this collapse lies with external forces, the crisis was very badly managed by the authorities in general, and by Ronald Li, the chairman of the Stock Exchange, in particular. The futile effort to protect prices by closing the exchange for 4 days significantly harmed Hong Kong's reputation for financial management. The Financial Secretary of the time, Piers Jacobs at first supported the closure (“the closure was necessary to protect the economy and that the government had been consulted beforehand?, however he later re-thought this position and said that “he did not regard a single telephone call as consultation?[Lo, T. Wing (1993) Corruption and Politics in Hong Kong and China, Buckingham: Open University Press, p. 115, 117]. It should be noted that Li was later to spend a sojourn in Stanley prison for certain stock transgressions, having been convicted of receiving shares in return for supporting applications for listing [Heath, Ray (1993) “Crash ended day of shame? In South China Morning Post, November 5, 1993]. Li was released on June 16, 1993, having served 973 days of his 4 year sentence.

The Joint Declaration guarantees that the Hong Kong Special Administrative Region will “enjoy a high degree of autonomy? that “the current social and economic systems in Hong Kong will remain unchanged and so will the life-style? and that these basic policies of the Joint Declaration, and the later Basic Law, “will remain unchanged for 50 years.?[Miners, Norman (1995) The Government and Politics of Hong Kong (Fifth Edition), Hong Kong, Oxford University Press, p. 261]. Beijing coined the term `Hong Kong people ruling Hong Kong' during the 1983-4 negotiations with Britain that led to the agreement. Chinese leaders - such as Lu Ping, when director of the Hong Kong and Macau Affairs Office - repeatedly specified that Hong Kong should be an economic city, not a political city [South China Morning Post (1994) “Set on a Political course? In The South China Morning Post, May 10, 1994].

Article 5 of the Basic Law reproduces Annex I of the Joint Declaration, and provides that the “previous capitalist system and way of life shall remain unchanged for 50 years.? The key economic provisions in Articles 105 to 119 support this principle of independence, with virtually the only constraint appearing in Article 107, which obligates the HKSAR to strive to maintain a balanced budget, and ensure that the budget is “commensurate with the growth rate of its gross domestic product? [The Consultative Committee for the Basic law of the Hong Kong Special Administrative Region of the People's Republic of China (1990) The Basic Law of the Hong Kong Special Administrative Region of the People's Republic of China, p. 6.]

Patten attempted to use the rubric of the Basic Law to maximise the democratic base of the Legislative Council. The People's Republic of China strongly objected to these reforms, and promised to void them if they were put into practice. This removal was performed very quickly indeed once the SAR was established and the new, hand-picked Provisional Legislative Council was inaugurated.

The May elections in Hong Kong are so complicated that the election commission themselves have difficulty explaining the finer points. For our purposes the election arrangements are as follows. There are sixty sets in the new Legislative Council. Of those sixty seats: twenty will be elected in a multi-seat constituency using proportional representation, thirty are reserved for functional constituencies which are overwhelmingly biased towards business representation, and the last ten are to be chosen by an election committee who will ensure that business interests are safeguarded simply because the eight hundred members of this election committee are either from the business community or are closely allied to it.

There is one aspect of their respective performance that the British Chancellor of the Exchequer, Gordon Brown, and his counterpart in Hong Kong, Financial Secretary Donald Tsang, have in common: the imprudent use on all possible occasions of the word `prudent'. On a more serious note, the Hong Kong Government's surpluses and accumulated reserves are the envy of any country: in point 52 of his 1998 budget speech, Tsang expected reserves at the end of March 1998 (including the Land Fund) to be almost HKD 450 billion.

Harris has described Hong Kong as an “Administrative State? whose Civil Service rulers are “permanent, practiced, anonymous for the best part, and, at best, impartial? and whose ideology is a strict “non-ideology; its basic credo is survival.?[Harris, Peter (1978) Hong Kong: A Study in Bureaucratic Politics, Hong Kong, Heinemann Asia, p. 58]

Two major political characters in the post 1997 system are the Financial Secretary, Donald Tsang and the Chief Secretary, Anson Chan. Both are civil servants, but they do not conform to the British system of civil service silence. They are decision makers, in their respective fields, in every sense of the word.

In March and April 1998, concerns arouse over judicial independence in relation to Bureau of Justice actions in two high profile cases. The first involved the failure of the New China News Agency to release information within the statutory period of forty days to describe any files they held on Emily Lau, an eminent local dissident. The second related to the allegation of fraud against a Ms. Au, the proprietor of the newspaper The Hong Kong Standard, and a person known to have links to the Chinese leadership. In both cases the Secretary for Justice refused to lay charges, in the first case on the grounds that the breach was a mere technicality, and the second case since it was not in the “public interest?to do so. This begs the question of what criteria the Justice Secretary believes can be used to define the public interest. [Ching, Frank (1998) “Protecting the Public Interest? In Far Eastern Economic Review, April 9, 1998, p. 38]

Some of the figures are most impressive. The overall monthly average wage for craftsmen is $HK7,853 and supervisors HK$10,804. Public Housing, which houses over 40% of the total population costs an average of 18.5% of monthly income. Life expectancy is 76 for a male and 81.5 for females - higher than in the United Kingdom and the USA. Over 18 % of the peer group now enter universities within Hong Kong and another 10% are thought to be studying abroad. Add to this over 87,000 students studying for further qualifications, mostly in the areas of law, accounting and business, and the scale of the transformation becomes clearer [Cheah, Hong Beng and Yu, F.L. Tony, op. cit., p. 251].

The margin earned by Hong Kong middlemen on re-exports is estimated at approximately 25% on consumer goods. [Mok, Wai-kwong Vincent (1996) “Hong Kong's Post 1979 trade with China: The impact of China's trade liberalization? In China Information, Summer 1996, p. 84.]

Between 1979 and 1997, Hong Kong accounted for approximately 56% (US$280 billion of a total of US$470 billion) of contracted foreign direct investment in China. [Hong Kong Trade Development Corporation (1998) Market Profile on Mainland China [online]. Available from: http://www.tdc.org.hk/main/china.htm [Accessed on May 14, 1998]].

Overseas companies are well aware of the advantage of using Hong Kong people in Guangdong because of their language skills and knowledge of local conditions. The Hong Kong government estimates that over 97,300 Hong Kong residents were working in mainland China by the end of 1995. [Hong Kong Trade Development Corporation (1998) Market Profile on Mainland China [online]. Available from: http://www.tdc.org.hk/main/china.htm [Accessed on May 14, 1998]].

Mainland China is the third largest source of foreign direct investment in Hong Kong (after Japan and the U.K.), accounting for over 28% of the total. Chinese government estimates put the number of mainland-backed ventures registered in Hong Kong at over 1,850, representing a net asset value of US$183 billion at the end of 1996. [Hong Kong Trade Development Corporation (1998) Market Profile on Mainland China [online]. Available from: http://www.tdc.org.hk/main/china.htm [Accessed on May 14, 1998]].

The `Hong Kong: The United States - Hong Kong Policy Act' of 1992 was reaffirmed in 1996, and although non-binding, it would be used to pressure the presidency to initiate punitive actions through Bilateral agreements (such as Most Favoured Nations certification) with the HKSAR if it is found that China has violated the terms of the handover treaty with Britain, and that Hong Kong is thus not sufficiently autonomous. [Szulc, Tad (1997) “A Looming Greek Tragedy in Hong Kong? In Foreign Policy, Spring 1997.]

China Daily (1998) “Reunification confidence felt by lawmakers? In China Daily (Hong Kong edition), March 3, 1998, p. 2. It should be remembered that Deng Xiaoping originally created the `One country - Two systems' construct for the purposes of re-integrating Taiwan into the mainland.

Marc Faber, the `Dr. Doom' of the Hong Kong financial community, has repeatedly expressed his “ultra-negative?view of Hong Kong's economic prospects. Faber bases his pessimism on China's lessening need for Hong Kong as it progresses along the road of reform. Faber also gives the example of the fall to insignificance of Salzburg after it was absorbed into Austria in 1803. [South China Morning Post (1996) “Dr. Doom sees change will bring gloom? In The South China Morning Post, November 11, 1996.]

Lam argues that the essence of China's policy towards Hong Kong is to prevent the `peaceful evolution' which the Chinese leadership sees as the result of Western political, economic, and cultural efforts to change political attitudes and beliefs, and which they blame for the termination of socialism in Eastern Europe [Lam, Jermain T.M. (1998) “Chinese Policy Towards Hong Kong: Prevention of Peaceful Evolution? In The Journal of East Asian Affairs, Winter/Spring 1998]. Guyot reports on widespread fears of interference both from Beijing, and from within Hong Kong, on Beijing's presumed behalf. [Guyot, Erik (1998) “Some Fear Hong Kong Could Face Loss of Autonomy? In The Asian Wall Street Journal, April 1, 1998, p. 8.]

Fortune editor Louis Kraar in 1995 predicted that interference from Beijing would jeopardize Hong Kong's special capabilities, and would thus lead to the `Death of Hong Kong'. [Kraar, Louis (1995) “The Death of Hong Kong? In Fortune, July 26, 1995.] Szulc considered it likely that the handover would be the “beginning of the end?of most political freedoms enjoyed in Hong Kong, and expressed the common contention that the Chief Executive would be “largely irrelevant?since major decision-making would be controlled by the central party leadership. [Szulc, Tad, op. cit.] Roberti also shared the belief that power would be exercised through a senior cadre sent from Beijing, nominally responsible only for Foreign Affairs. [Roberti, Mark (1996) The Fall of Hong Kong: China's Triumph and Britain's Betrayal, Chichester, John Wiley & Sons].

Roberts, Elfed Vaughan (1996) “Political Developments in Hong Kong: Implications for 1997? In The Annals of The American Academy of Political and Social Science: The Future of Hong Kong, Edited by Skidmore, Max J., September 1996, p. 28.

It should be remembered that Deng Xiaoping was quoted telling the drafters of the Basic Law that they “should not think Hong Kong affairs should all be handled by Hong Kong people? since “this is impossible, and such an idea is unrealistic? [Nossal, Kim Richard (1997) “A high degree of Ambiguity: Hong Kong as an International actor after 1997? In The Pacific Review, Number 1, 1997. p. 84.]

In a contrast to the `Hong Kong Advantage' study by Enright et. al. mentioned previously, the `Made by Hong Kong' competitiveness study by Berger and Lester argues that Hong Kong is facing serious problems, and must thus reach beyond its middleman role to develop its industry. [Berger, Suzanne and Lester, Richard K (1997) Made by Hong Kong. Hong Kong, Oxford University Press.]

Civil servants have been blamed for a series of embarrassments, such as mismanagement of the mass chicken slaughter to counter the HV51n virus, confusion over land supply and housing policies, resentment over the `high-handed' approach to mother-tongue education, and perceived favouritism in decisions not to prosecute entities aligned with China. Calls have grown for reforms to make it easier for such officials to be replaced if they commit such blunders. [Yeung, Chris (1998) “Searching for a Civil Solution? In South China Morning Post, March 28, 1998, p. 11.]

Guangdong Governor Lu Ruihua said in June 1997 that the “shop front, factory back?symbiotic relationship between Hong Kong and Guangdong had to change. “The relationship, he added, must be on equal terms.?[Gilley, Bruce (1997) “Loosening Bonds? In Far Eastern Economic Review, July 3, 1997.]

Although Shanghai has recently toned down its boasts of its plans to overtake Hong Kong as the financial capital of China - for political reasons, so as to “welcome?Hong Kong back to the motherland - it is increasing its efforts to attract international business. Citibank and Standard Chartered Bank have moved their China headquarters from Hong Kong to Shanghai, and other multinationals - particularly banks and consumer-goods firms - are expected to follow: prompting a certain feeling of unease in Hong Kong. [Yatsko, Pamela (1997) “A Hearty Welcome: Shanghai and Xiamen play down Hong Kong rivalry? In Far Eastern Economic Review, July 3, 1997.]

On October 30, 1997, Chief Executive Tung Chi-Hwa said that “I do not think property prices will drop dramatically because there are real demands? however the Asian crisis soon worsened and proved him wrong [No, Kwai-yan (1997) “Tung soothes fears of falling property prices? In South China Morning Post, October 31, 1997].

A university survey in April 1998 found that “more than 80% of Hong Kong people do not understand?the electoral system used in the May 1998 elections [Kwong, Kevin (1998) “Without the Fanfare? In South China Morning Post, May 3, 1998].

The interests of the Hong Kong business elite will certainly be protected under Chief Executive Tung Chi-Hwa - who as a fellow business person - appears to share their views, which the Economist has described as an “almost 18-century view of oligarchic right [Economist (1997) “All eyes on China? In The Economist, June 28, 1997].

Polls conducted by the University of Hong Kong Social Sciences Research Centre indicated that a sound majority of respondents maintained confidence in the `one country - two systems' model for Hong Kong: 59% of respondents in December 1997, and 66% in February 1998. The polls also found that a high percentage of respondents were confident of the future of Hong Kong itself: 68% of respondents in December 1997, 65% in February 1998, and 70% in March 1998.

Protests from poultry farmers, vendors, politicians, and unionists led the government to pay HK$760 million in compensation to the poultry industry for the 1.4 million birds killed at the start of 1998 to prevent the spread of the `bird-flu' [Ku, Genevieve and Li, Angela (1998) “Slaughter payouts dismissed as inadequate? In South China Morning Post, January 6, 1998] and [South China Morning Post (1998) “Time to clean up our act? In South China Morning Post, April 17, 1998]. Protests from fish farmers led the government to pay HK$17 million in grants and HK$200 million in unsecured, low-interest loans to the aquaculture industry in compensation for the `red tides' which killed their stocks in April 1998 [Lee, Naomi (1998) “Fish farmers' red tide demands thrown out? In South China Morning Post, April 23, 1998] and [Pang, Joice (1998) “Reluctant nod for `deficient' red tide aid? In South China Morning Post, April 24, 1998].

In March 1998, Chief Secretary Anson Chan was quick to admonish local Chinese People's Political Consultative Congress deputy Xu Simin for criticizing the editorial freedom of RTHK, the government radio and television media entity [Choy, Linda and Yeung, Chris (1998) “RTHK row `invites mainland meddling'? In South China Morning Post, March 6, 1998]. It should also be noted that the Beijing government showed admirable restraint by refusing to support Xu's call, particularly when it is remembered that less than two years previously, Zhang Junsheng, the deputy director of Xinhua, called on the Hong Kong government to `“discipline?RTHK and called on the government to “tell its subordinate how to cooperate with the Preparatory Committee?[Lee, Vivian and Fung Wai-kong (1996) “I don't care about editorial policy ... it is a government department? In The South China Morning Post, April 20, 1996].

There are of course areas in social provision which are in need of dire attention in an affluent society such as Hong Kong and they should not be ignored. A Hong Kong Social Security survey released in September 1997 found that the number of people living below the poverty line had almost tripled in the 25 years to 1997 [Kwok, Shirley (1997) “One in 7 survive on less than $90 a day? In The South China Morning Post, September 8, 1997]. The survey found that the top 10% of households accounted for 42% of total income while the bottom 50% accounted for only 19% [South China Morning Post (1997) “Making a Billion the wrong way? In The South China Morning Post, October 24, 1997].

Chief Executive Tung Chi-Hwa has repeatedly ruled out the introduction of the `dole' as compensation to the rising number of unemployed in Hong Kong. [South China Morning Post (1998) “Job Creation? In The South China Morning Post, April 23, 1998].

Guangdong has become the hinterland land and labour source for Hong Kong business:- Hong Kong has de-industrialized at an extremely rapid rate, with the manufacturing workforce contracting by 50% between 1984 and 1994 [Lau, Siu-Kai (1997) “The Fraying of the Socio-economic fabric of Hong Kong? In The Pacific Review, No. 3, 1997, p. 428].

Kraar points out that consumer items, hotel rooms, and other goods/services are often 50% to 100% more expensive in Hong Kong than in other centres, such as New York City [Kraar, Louis (1997) “The real threat to China's Hong Kong? In Fortune, May 26, 1997].

Retail sales for the peak months of January and February (which include the Chinese New Year festival) were down 15% in 1998 from 1997 (adjusting for inflation). This included a decrease in department store sales of 28% over this same comparison period [Tsang, Denise (1998) “Retail woes deepen with Lunar New Year slump? In South China Morning Post, April 25, 1998].

Polls conducted by the Hong Kong University Social Sciences Research Centre indicate that the number of respondents who had confidence in Hong Kong's future fell from 71.8% in November 1997 to 50.1% in January 1998 alone. Compared to the pre-handover period, by February 1998 93.1% of respondents felt that the economic condition was worse.

Transparency International's 1997 index of corruption ranks Hong Kong as the fourth `cleanest' nation in Asia - less corrupt than Japan and Taiwan, and only slightly more corrupt than New Zealand, Australia, and Singapore [Far Eastern Economic Review (1998) “Scandal Inc.? In Far Eastern Economic Review, May 7, 1998, p. 70].

Financial Secretary Donald Tsang ridiculed the idea of Hong Kong adopting a Singapore-style interventionist industrial policy in an April 1998 speech [Gittings, Danny (1998) “Industry Debate Changes Course? In South China Morning Post, April 12, 1998].

Thus, after 1997 Hong Kong retains its membership in international bodies such as the World Trade Organization (WTO), International Monetary Fund (IMF), Asia Pacific Economic Cooperation (APEC), and Pacific Economic Cooperation Council (PECC), and continues to negotiate and operate its own Investment Promotion and Protection Agreements with over twenty major trading partners [Husain, Aasim M. (1997) Hong Kong, China in Transition, World Bank, September 1997, p. 5] and [Hong Kong Trade Development Corporation (1998) Hong Kong's Economic System After 1997 [online]. Available from: http://www.tdc.org.hk/beyond97/after.htm [Accessed on March 17, 1998]].