A world city remakes itself

Colin James on Hong Kong for the Perspectives pages for 22 and 23 December 2003

A question of democracy

First article

In Hong Kong there are two powerful scents. One is the heady incense of freedom. The other is the scorching smell of a dragon’s breath.

Economic freedom has been Hong Kong’s trademark for many decades, as bargain-hunting New Zealanders of the past know. A few New Zealanders also know its commercial vigour first-hand.

That commercial vigour is both a lighthouse and a warning light for China’s communist leaders cautiously courting capitalism, as the second of these articles will canvass.

But now Hong Kong is also a lighthouse and warning light for China on political freedom.

Lawyer-politician Audrey Eu, a campaigner for full democracy in the city, said in an interview that Hong Kong is an international city. “It subscribes to international principles.” China had entered international politics by going into the World Trade Organisation and had incorporated Hong Kong as an international city.

Democracy is one of those “international principles”.

Eu was one of the organisers of a rally of an estimated 500,000 people on a searingly hot July 1 day to protest against a proposed security law. Chief Executive Tung Chee Hwa removed the most contentious parts but then shelved it anyway. On November 23, in elections for near-powerless district councils, voters turned out in unprecedented numbers to throw out district councillors of parties which support the Chief Executive.

The security law is now on the back burner until after the September 2004 elections for the Legislative Council (the parliament). What happens then will be critical to the near-term future for the “special administrative region” established in 1997 when the British ended 156 years of autocratic colonial rule.

Hong Kong is China. Make no mistake about that. There is real pride, everywhere you go, in reclaiming Chinese culture. Striking new museums celebrate the story in historical and artistic exhibitions. There is pride that Beijing is to host the Olympic Games and in its successful launching of an astronaut.

There is no move to separate from China, as there is in Taiwan, led by an independence-minded President Chen Shui-ban. But there is an urge for full-on western democracy.

Under the “basic law”, or constitution, the Chief Executive is appointed by an electoral college of 800, itself only indirectly elected. Only one candidate was considered, approved by Beijing.

The Chief Executive and his ministers are not accountable to the 60-member Legislative Council, half of which is not elected but selected by “functional” constituencies representing mainly business and the professions. The council cannot originate major legislation.

That spells subservience to the Executive and in turn to Beijing.

But the basic law requires a review of selection/election procedures for the council in time for its 2007 election and for the appointment of the next Chief Executive in 2008. Democrats want direct elections for the Chief Executive and the whole council. Almost everyone wants some extension of democracy.

Council elections are a matter for Hong Kong. But any change in the procedure for appointing the Chief Executive must be approved by Beijing. Which is unenthusiastic.

Taiwan is part of the problem. China claims Taiwan as part of China, though for nearly all of the past century it has been in other hands.

China has been using Hong Kong as bait to the Taiwanese, a working example of “one country, two systems” which it says it would apply to Taiwan. Hong Kong has its own legal system and near full autonomy, apart from defence and foreign affairs, though it does maintain quasi-diplomatic relations with many countries, including New Zealand, and negotiates its own trade agreements.

But Taiwan has full democracy and Hong Kong doesn’t. So, democrats argue, Hong Kong should too — or Taiwan will smell “one country” only, not “two systems”, on the dragon’s breath.

“How on earth can you persuade Taiwan to accept one country, two systems if they see it isn’t working in Hong Kong?,” Martin Lee, a veteran campaigner for democracy said in an interview.

Opponents and sceptics say Hong Kong isn’t ready. Its politicians are fragmented and inexperienced, a point made by Shiu Sin Por, executive director of the One Country Two Systems Research Institute.

But looking in from the outside suggests another worry in Beijing: that the democratic virus might spread across the border where only village elections (which don’t disturb the power order) and elections within the communist party are allowed.

Premier Wen Jiabao said in Washington two weeks back that the large population, limited education and developing country status ruled out democracy. But, countered China expert and columnist Frank Ching in an interview, that is not a reason for delaying democracy in Hong Kong: 6.8 million population, well educated and a developed economy.

The word “border” speaks volumes. This may be “one country” but the “two systems” are quarantined. Chinese “visitors” to Hong Kong go through the same slow immigration channel as New Zealanders.

Nevertheless, the border is slowly opening up, not least as part of a package of measures which includes freer movement for Chinese individuals to Hong Kong which is already ringing cash registers

Will that buy off the democrats? There is good democratic precedent. Governments in our sorts of countries are forgiven much if the household balance sheet is in good shape — as politically repressed Hongkongers forgave the autocratic British before 1997.

But the district elections laid that assumption to rest. No one I met denied there is not a popular will for democracy: exit polls on November 23 recorded around 80% in favour. The argument is about how to respond to it. The union-backed Democratic Alliance for the Betterment of Hong Kong, the main government support party, is rethinking its approach after being mauled in the district elections.

There will probably need to be compromise to soothe Beijing’s nerves. The most logical compromise is for the electoral college to nominate candidates, without central government interference, and voters to select among them. Whether Beijing will agree will probably depend on how the democrats fare in the September 2004 Legislative Council elections.

Hong Kong Constitutional Affairs Secretary Stephen Lam said in an interview he will produce a timetable by the end of this year to provide for consultations next year, legislation in 2005 and approval in 2006.

There is a reverse Taiwan connection. China watchers in Hong Kong told me Beijing liberals and conservatives disagree on much but not on Taiwan. Chinese leaders and envoys abroad always reiterate the demand.

Can Taiwan survive? United States President George Bush told Wen in Washington he “opposes” Taiwanese independence, which some (though not all) interpret as a step up in diplomatic-speak from the previous United States formula of “not supporting” it.

But Chen, running for re-election in March, has kept the rhetorical temperature high with plans for a referendum in March demanding China withdraw the missiles pointed at Taiwan. Face is being lost in Beijing. So China keeps the pressure on.

Its posturing towards Taiwan echoes the arrogant, egocentric empire it was for two millennia until a century ago.

Today China is being carefully internationalist, cooperative and rule-abiding on most matters as it draws from the west to enrich itself. But will it stay a nation among nations when it develops into an economic and strategic superpower? Will it at some point defy a weakening United States and invade Taiwan? Will the present solicitousness towards small countries like New Zealand turn into expectations of a modern version of tribute?

No China watcher I asked in Hong Kong could be definitive, though the weight of opinion was for internationalism. Others in the region are not so sure, as I found in September in Japan, where analysts nervously postulate a tri-polar Asia in which Japan (backed by the United States) and India counterbalance the dragon.

This makes Hong Kong important — not just because it is too economically useful to China to jeopardise just yet but also as to demonstrate the value of “system two”, the democratic system, to the “mainland”. Democracies, which dislike war, are more likely to be internationalist.

Moreover, democracy is capitalism’s soulmate, as the evolution of most Asian tigers has shown. And in China capitalism is straining at — in some places nearly off — the leash.

An exception is Singapore’s guided democracy, which some in Hong Kong think the Chinese leaders see as their model. But Singapore’s capitalism is tamer than Hong Kong’s and returns are lower.

And can Hong Kong be squashed into the Singapore mould. Hugo Restall, editorial page editor for the Asian Wall Street Journal in Hong Kong for many years: “So many things have happened that we thought couldn’t happen. There is some reason to think Hong Kong could go all the way to full democracy.”

And then China to follow — in due course? The next 10 years or so will tell.

Making an economic niche

Second article

Making an economic nicheWhat does a small economy do when in difficulty? At first, retreat into its shell. Then think big. That’s Hong Kong as it emerges from six years in transition and under pressure.

No sooner did Hong Kong rejoin China in 1997, uneasy about economic and other freedoms, than it got hit by the Asian crisis. Then came the dot.com bust in 2000. Then SARS this year.

Property values dropped 60 to 70 per cent. Wages and salaries were cut by up to 40 per cent for some. Unemployment climbed to near 9 per cent. Across the border in what Hongkongers call the “mainland” rival cities began to modernise and internationalise. Hong Kong was in a vice.

The initial reaction was defensive — maintaining what K C Kwok, senior economist at the Standard Chartered Bank, described in an interview as a “goretex border”: much more could go into China than could come out. Cars and trucks joined long queues going through slow-acting checkpoints at each land crossing.

“There was a fear Chinese workers working in Hong Kong would lower wages and drive down property prices,” said Hugo Restall, editorial page editor of the Asian Wall Street Journal, in an interview.

“It took an incredibly long time for Hong Kong to figure it had to develop a partnership with Guangdong [the next-door province]”, Restall said. “Hong Kong was arrogant in thinking China needed Hong Kong more than Hong Kong needed. It was playing a zero-sum game.”

But: the banks didn’t collapse as property owners’ equity went heavily negative, which proved their skill and the financial system’s resilience; the city has rebranded itself “Asia’s world city”; it has committed around $NZ30 billion for capital works over next five years; and it is about to build, jointly with the mainland, a 29-kilometre — repeat, 29-kilometre — bridge across the Pearl River Delta to the former Portuguese colony, Macau.

Contrast that with the incrementalist approach to Auckland’s infrastructure deficit.

But Hong Kong has also had help Auckland can only dream about. Over the past few months China, trying to stem Hongkongers’ democratic demands which owed at least something to the stalled economy, has liberalised tourism, freed much trade in goods and services in a closer economic partnership and agreed to cross-recognise professional qualifications and is about to allow Hong Kong banks to deal in renminbi, the Chinese currency which at present cannot be freely traded.

The tourists have helped fuel a rise in retail sales. Hotels have filled and room rates are up. Property has begun to sell again, though prices haven’t yet lifted.

That doesn’t mean an automatic return to the golden days when Hong Kong was the one gateway into China during the first two decades of its economic liberalisation. Chinese cities, notably Shanghai and Beijing, are fast becoming international centres. Foreign companies increasingly bypass Hong Kong and invest directly in mainland cities and transport links are improving and being liberalised, notably, soon, in air.

“Now Hong Kong must hold its place by being more efficient,” said Elley Mao, principal economist in the government’s Finance Services and Treasury Bureau, in an interview.

How? By supplying high-end skills and services. Hong Kong has experience and skills Chinese companies — many owned by Hong Kong and foreign investors — need. It has long played host to multinational companies, it has skills in research, design, marketing and finance and it has an internationally-respected legal system China lacks.

Hong Kong also provides a mechanism for the cautious central government leaders to test liberalisation before applying it more widely. Hong Kong banks handling renminbi deposits, remittances, exchange and credit cards will be a step towards making the renminbi freely tradeable (convertible).

“For tourism purposes RMB is already a hard currency,” Kwok said. “It could be imagined that companies would in the future do business in renminbi and renminbi bonds might be raised to tap savings. Long term we might get Chinese companies’ shares listed in Hong Kong but traded in renminbi.”

Shiu Sin Por, executive director of the One Country Two Systems Research Institute, agrees: “China is using Hong Kong as a way of managing the process of moving to a convertible currency.”

There has been another shift of perception. “Hong Kong was seen as the engine of growth for China. Now China is seen as the engine of growth for Hong Kong,” said political scientist Michael DeGolyer in an interview. That is to say, China has a huge and rapidly enriching population who are consumers as well as producers.

The Pearl River Delta, at the mouth of which Hong Kong (and Macau) sit, is China’s and one of the world’s fastest growing regional economies and Hong Kong-based companies alone account for 11 million jobs there.

So far most of this development has been on the Hong Kong side of the delta. The bridge to the Macau side — a 10-year project — is expected to stimulate a similar development there — and, via new highways, to the west along China’s south coast — by linking it with Hong Kong’s deep water port (the world’s biggest throughput of containers) and airport (the world’s biggest throughput of air cargo).

How sustainable is China’s expansion?

There are wide income disparities between rich and poor, town and country, coastal and inland provinces and employed and unemployed. The population will become top-heavy over the next decade as decades of low birth rates reduce the proportion of working age people.

The banks are laden with bad loans. There are severe energy shortages. The legal system lacks western rigour and commercial reliability. The communist party is still in charge. Much also still depends on the international trading system remaining stable and the world economy ticking along.

But China is turning itself into a potentially self-sustaining market in which the inland provinces, which have low wages and plentiful resources, might sell to the higher-wage, resource-poor but export-oriented coastal provinces.

A start is being made on fixing the banks — “as long as there are no crises, these problems [in the banks], while serious, are manageable”, said Benny Chiu, China research manager at the Hongkong and Shanghai Banking Corporation, in an interview — and gradually western financial skills are coming in via licences for foreign banks, insurance companies and investment funds.

And the communist party is training up smart younger cadres more attuned to business needs. In some ways it is already more open to the private sector than the government here, partnering with private companies to fund large projects.

So, yes, most agree, China’s growth is sustainable. And, Kwok said, “as the scale of China’s economy grows, economic interaction between China and the outside world only multiplies… which will generate a lot of demand for business and financial services from China’s cities which Hong Kong is in an excellent position to cater for.”

It is still the place for multinationals to locate their regional offices, even if they also have offices in China. Communications by air, sea and telecommunications are excellent (though in my hotel the broadband connection didn’t work). Cultural facilities match those of many of the world’s major cities; a breathtakingly large and modernistic arts and culture complex is being built on the Kowloon waterfront.

Hong Kong is also high-tech. An example: a new smartcard official identity card will soon allow residents to check themselves through immigration in seconds — and, if they wish, double it as a library card, driving licence and bank card, with more to come. Hong Kong manufactures the card itself, in a secure facility that makes the visitor from leaden-footed New Zealand feel as if in a James Bond movie, audited on privacy protection by four separate international private sector organisations.

And Hong Kong can extract more value from its investments in the mainland — for example, by fostering high-end research focused on Chinese manufacturing, an activity singled out by Secretary of Commerce, Industry and Technology John Tsang in an interview, instancing nanotechnology to make shirts wrinkle-free. Hong Kong can provide the protection for intellectual property China cannot yet. A biotechnology park is being developed.

What Hong Kong is not doing is buying investment. Its Trade Development Council and Invest Hong Kong (counterpart to Invest New Zealand) promotes Hong Kong as a place to sell to, not just sell from. It refuses to compete with the likes of Singapore in subsidies, tax breaks and other inducements, relying instead on an attractive operating environment, consistently rated the world’s most economically free. “We just give you Hong Kong,” said Tsang.

Even so, Hong Kong’s advantages as mentor, facilitator, funder and connector are temporary if China’s leaders are serious about modernisation.

Physical transport is likely to feel the pinch early. “Hong Kong is on a no-growth path” as a port operator, Chiu said. Among “plenty of new opportunities” Chiu sees “also new challenges”. For example, the Macau side of the delta may develop partly at the expense of the Hong Kong side because of a one-third cost advantage.

Longer term the challenges might be in setting higher social and environmental standards — which will lift taxes and quasi-taxes. Already there is a mandatory pension which employers and employees must pay into — in effect, adding a payroll tax to the low 15-16 per cent corporate tax rate and 15 per cent maximum income tax rate.

The present government is cutting health and education spending to try and tame a structural budget deficit. But democracy will likely increase demands for those very services, especially much-prized education.

There are also nascent environmental concerns in a city renowned for its crowded living.

But that is well in the future. For the moment Hong Kong looks well placed. New Zealand business eyeing China might well take another look. And business and politicians might contrast New Zealand’s think-small incrementalism with Hong Kong’s big thinking.

[I travelled to Hong Kong at the invitation of the Hong Kong government.]