FIRST DRAFT The Political Economy of Hong Kong’s Transformation after the Chinese Resumption of Sovereignty since 1997 By Ting Wai Department of Government and International Studies Hong Kong Baptist University ([email protected]) Paper presented to International Symposium on “Ten Years after Asian Financial Crisis: Changes and Continuity” Organised by University of California, Berkeley and Thammasat University, Bangkok, 23‐24 February 2007 Bangkok, Thailand 1
Transcript
FIRST DRAFT The Political Economy of Hong Kong’s Transformation after the Chinese Resumption of Sovereignty since 1997 By Ting Wai Department of Government and International Studies Hong Kong Baptist University ([email protected]) Paper presented to International Symposium on “Ten Years after Asian Financial Crisis: Changes and Continuity” Organised by University of California, Berkeley and Thammasat University, Bangkok, 23‐24 February 2007 Bangkok, Thailand
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Introduction Though a high degree of autonomy is guaranteed by the famous principle of “One country, Two systems” proposed by the past Chinese paramount leader Deng Xiaoping, Hong Kong after the Chinese resumption of sovereignty after 1997 could not evade from various forces that call for better coordination or even integration with the Mainland. The theory of “One country, Two systems” maintains that while China continues to develop its capitalism, Hong Kong as a capitalist enclave could still keep its capitalist socio‐economic system intact. But in practice, when Hong Kong is part of China, it is inevitable to have multiple exchanges at all levels among all sectors between the Mainland and Hong Kong. Putting aside the question of the real meaning of socialism, it is crystal clear that Hong Kong’s capitalism after becoming part of China is subject to influence from China in various aspects; at the same time the socialist Mainland has a lot to learn from Hong Kong when establishing its economic, fiscal, financial and legal institutions corresponding to its rapid development of market economy. So the coexistence of two systems within the same country and their mutual non‐interference only exist in rhetoric. While the Mainland has been undergoing an enormous transformation in the past decade, can the same be said about Hong Kong, albeit to a less extent? The political‐economic transformation of Hong Kong since it becomes part of China can be analyzed from different angles. What we are particularly interested is the basic structure that underpins that transformation, namely the relationship between the state and the market. Here the state does not mean the Chinese state, though it is interesting and meaningful to analyze the relationship between the Chinese state, still controlled by the Chinese Communist Party (CCP), and the vibrant civil society of Hong Kong, or how the state is trying to manage or even “control” the Hong Kong civil society since it becomes part of the “Chinese society”. The state simply means the Hong Kong Special Administrative Region (HKSAR) government in political‐theoretical sense. Traditionally, under the British colonial rule, the government administration adopts the principle and practice of small and minimum government. The colonial administration is obviously authoritarian by nature and is directly responsible to the central government in London. But its size is small and its functions are limited. Thus what it could do remains relatively little within the colony. The traditional British philosophy
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of governance can be epitomized by the famous words of John Cowperthwaite, Hong Kong’s Financial Secretary from 1961 to 1971, as “laissez faire”. While the government provides infrastructure, basic education and medical facilities for the livelihood of Hong Kong people, it would not intervene in the functioning of the market. The state should enact the rules and regulations, as well as well scrutinize the law enforcement, to ensure that the “rules of the games” of the capitalist market could be well understood and properly respected by all the economic actors, including individuals and entrepreneurs. In other words, theoretically, the state has minimum interference towards the proper functioning of the society and the market. So contrary to the Stalinist socialist model of planned economy, the policy of “laissez faire” is just at the other extreme of the spectrum on state’s role in economic development. When Sir Philip Hadden‐Cave became the Financial Secretary in late 1970s, he changed the catchword to “Positive Non‐interventionism”. The basic spirit remains unchanged: non‐interference in the market is the norm. But he knew that Hong Kong had been becoming a more complex and cosmopolitan society. The government should do more in facilitating the development of Hong Kong as a modern capitalist enclave and international city. “Flexibility should be provided for the government to take positive measures to intervene when necessary and as justified by social needs.”1 That was the period when MacLehose was the Governor of Hong Kong. Substantial public housing programs, free education, improved public medical services, cheap rent for industrial lands, developments in infrastructure were provided during that period which really denotes the “fly‐off” of Hong Kong. While the government is doing more, it remains pretty “small” with a low tax rate. But this does not necessary mean little income for the government. Its logic is simple. Through the government efforts in producing more talents and providing excellent infrastructure, Hong Kong is able to attract more foreign investments. If the economy flourishes, a bigger GDP would render more funds for the government despite the same tax rates. It was also during Hadden‐Cave’s tenure as Financial Secretary that the government expenditure should not exceed 20% of Hong Kong’s GDP. Whether the government could spend more depends solely on GDP growth, thus limiting the growth in size as well as the areas that the government needs to take care of. Despite the fact that the government is doing more to buttress Hong Kong as a multi‐functional international city which can cater for the needs of Western
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nations as well as China, it remains a limited government with minimum interference towards the functioning of the market. With a continual growth and large government surpluses, Hong Kong government in the 1990s was tempted to spend more, especially under Governor Patten’s administration which determined to improve the social security scheme, the Comprehensive Social Security Assistance. The then Financial Secretary Hamish Macleod even proposed the concept “Selective Interventionism”, which means that though the basic norm should remain unchanged (small government and minimum interference), the government should spend more if it has the means (increasing revenue) to do so. After 1997, the Financial Secretary Donald Tsang (who was the first Chinese to do this job in the colonial history sine 1996) continued with the “Positive Non‐Interventionism” philosophy, even though in August 1998 he did use billions of tax‐payers money to fight back the speculators who attacked the Hong Kong financial market since the Asian Financial crisis. Though almost everybody was astonished by Tsang’s bold move, and people started to query whether the SAR government began to steer away from the traditional philosophy which stresses on the need to cautiously managing the government funding which is also stipulated in the Basic Law, Tsang insisted that the government intervention during the critical moment was crucially needed for the people’s interest. The catchword for Tsang’s philosophy in financial management is “minimum intervention, maximum support”. In the early part of the new century when Hong Kong was in deep crisis, the Financial Secretary Antony Leung advocated a new catchword in characterizing his “new” thinking: the government should be a “pro‐active market‐enabler”. In other words, the government should help to develop a perfect market. Following his resignation in summer 2003, the new Financial Secretary Henry Tang proposes the principle of “market leads and government facilitates.” Though shadow of “positive non‐interventionism” or minimum interference still lingers around, apparently the three consecutive Chinese Financial Secretaries have been querying about the validity of this traditional philosophy in the context of rapid economic development in China and the fast emergence of a globalized world from which the Mainland largely benefits, while the economic future of Hong Kong in this rapidly changing international and Chinese contexts remains unclear. Though in principle market remains fundamental and the government should not
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intervene in the market economy, it seems that in the minds of Hong Kong high officials the state should do as much as possible to help the market to function properly. However, what these government officials in charge of economic and financial affairs have in mind is whether the SAR state should become a more pro‐active locomotive in economic development. Under the principle of non‐intervention, the government only interfered when the market could not function properly or when crises happened, such as injecting the tax‐payers money into the three local banks to save them from collapse in the mid‐1980s,2 or Donald Tsang’s bold action to buy the stocks in August 1998. But what about the peaceful and prosperous period as we witness today, when the economy is booming, while the business sector as well as the government are worrying about the problems in economic restructuring, or difficulties in raising the performance of Hong Kong to an even higher level, thus causing the eventual “marginalization” of Hong Kong as its functions could be taken over gradually by other Chinese cities? In reality, the Hong Kong SAR government is pressed by many, including various sectors (represented by their functional constituencies within the Legislative Council), professional groups, as well as municipal and provincial governments within the Mainland, to be more pro‐active in leading Hong Kong’s economic growth. They all want the government to play a leading role, and not hiding behind the principle of minimum interference. Some even argue that the colonial government did always intervene in the market, such as massive construction of public housing which accommodates more than three millions people today. This is large‐scale intervention with socialist nature that truly assists the lower class people to survive in Hong Kong while the others have to bear with an extremely expensive yet lucrative capitalist property market. So why couldn’t the SAR government think and do more for the benefits of all? In response to the rising expectation of these citizens, Donald Tsang did explicitly clarified in September 2006 that government officials had not talked about “Positive Non‐interventionism” anymore. Instead, he stressed that Hong Kong practices the principle of “small government, big society”, a slogan borrowed from the former Chinese Prime Minister Zhu Rongji, who attempted to trim down the size of the vast Chinese government at all levels. In fact, Zhu appreciated the small government model of Hong Kong: not only its size is small; the government should
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remove itself from many functions and leave them to the society or private citizens. While Zhu wished to learn from the Hong Kong model, ironically, now Tsang uses the same slogan proposed by Zhu and abandons the sacrosanct principle of Hadden‐Cave. In terms of political correctness, this is considered as a right and safe move. But there is one issue that Donald Tsang did not specify: the so‐called small government in China is still in the making, restructuring and trimming down the size is still being done with enormous difficulties, and yet it is still an omnipotent government with enormous power and working on or intervening in a lot of issues and problems. The small government in Hong Kong in the past was limited in its scope and activities. The critical issue is that would it be induced by different forces to do more in “leading” economy development, mastering economic restructuring, and re‐orientating Hong Kong’s economy to a new path, thus deviating from the past philosophy of colonial government which refrained from market intervention and maintained the need for a limited and minimum government?
Another crucial problem in the political‐economic transformation of Hong Kong during the last decade is the dilemma faced by the SAR in between the need to maintain a high degree of autonomy and the push for further economic integration with the Mainland especially with the provinces in Southern China. This dilemma is reflected in a common “dual fear” among the Hong Kong people and elites; that is, fear of being “Sinicized” by the Mainland (Tonghua in Chinese) thus losing the primary characters of Hong Kong which are determinants to make it the most advanced city of China with the safeguard of human rights and rule of law, and fear of being “marginalized” by the Mainland during the rapid rise of China. A strong Hong Kong identity would give an impetus to the people to think more about the “two systems” rather than “one country”, but then they are worrying that Hong Kong would be “excluded” or marginalized and could not largely benefit from the vibrant economy of China. People who opt for closer relationship or even integration with Chinese economy obviously put “one country” on the first priority, but then they may worry about the fading away of Hong Kong’s identity and many characteristics as a result of this integration. Facing this dilemma, what should the Hong Kong SAR government do? Even if government intervention is inevitable, how and to what extent should the government do for the social good, and safeguarding Hong Kong’s institutions, characters and autonomy while at the same time
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providing much assistance to as well as deriving benefits from the modernization of China? Though it is inevitable that the “Chineseness” or Chinese characters of Hong Kong is increased after it becomes part of China since 1997, this is not inconsistent with the general Chinese and Hong Kong wish to maintain or even increase its “internationalness” or international characters. Further integration of Hong Kong’s economy with the Mainland may not necessarily mean the diminishing of the SAR’s plentiful exchanges with the international community. However, if Hong Kong’s middleman role is diminishing due to further opening up of the Mainland, what path should the SAR pursue, or how should Hong Kong position itself within China as well in the world? This question can be demonstrated by the fact that while Hong Kong always aspires to become the third international financial center after New York and London, it has in reality become the most important Chinese financial center after so many Mainland companies are listed in the Hong Kong stock exchange, while it is unable to attract companies from outside China to use Hong Kong’s financial market to raise funds. This paper aims to investigate, from the perspective of political economy, the transformation of Hong Kong after the Chinese resumption of sovereignty. Our focus will be on whether government intervention in the market and society will be the best solution to tackle the dilemma that Hong Kong is facing. To intervene or not to intervene is not a question in the colonial past, because Hadden‐Cave’s dogma is very clear concerning when to intervene. Governmental actions are needed when there is a crisis in market mechanism, and the government only strives to work on the areas that the market could not provide (such as infrastructure, education and medicine). Minimum interference and limited government was always a norm. But now it seems that Donald Tsang wants to have a strong and powerful government that could pave the way for a better development of the city. The government should be pro‐active, visionary, and capable to lead the way. Though the government needs to remain small (its size has been reduced from 190000 civil servants a few year ago to about 160000 today), strong voices are increasingly heard in Hong Kong that request the government to “intervene” more for the sake of economic growth. On the other hand, the government has followed the latest trend in capitalist development, like downsizing and outsourcing, to make it more efficient and cost‐effective. In the areas where
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market mechanism was never exercised but the SAR government has done enormously such as medicine and education, cost‐benefit analysis is being applied, thus resulting in less financial burden for the government by all means, but much harder work and different working conditions for the civil servants. So an interesting scenario happens in Hong Kong: while the government is tempted to become more and more interventionist in the market, the government itself has already been becoming more “market‐oriented”. In the past there was a somewhat clear division of labour between the public and private sector. The government did what the private sector could not provide: infrastructure, education, medicine and public housing schemes, while all the rest was left to the private sector. Now the government is injecting more “market values” to the functioning of public sectors, or even adopting “market mechanism”3 in providing services, but at the same time it envisions to be pro‐active and omnipotent in directing the future developmental path of Hong Kong. Intervention against Crisis instigated from outside Hong Kong: the SAR Government’s Actions during the Asian Financial Crisis The slogan qiangzheng lizhi (strong government and competent ruling), which is used by Donald Tsang to characterize his style of governance since he became the Chief Executive of Hong Kong SAR in 2005, reflects his wish of not only to revitalize the civil service as a competent and efficient government, but also unveils his idea of having a powerful government that could pave the way for the future of Hong Kong people. This arouses numerous rebukes from critics who emphasize that instead of having a “strong government” which is so deeply imbedded in Tsang’s vision, “strong people” is much more important: “Government can’t create competitiveness, it can only facilitate its development by the people………The key to any pro‐competitiveness strategy is the development, attraction and motivation of hardworking talent.”4
This idea of “strong government and competent ruling” was already demonstrated by the strong and bold actions of Tsang in leading the
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campaign to fight against the so‐called “big crocodiles”, metaphor used by Hong Kong people in describing those fund managers that speculated in the international financial market and expropriated from the weaknesses of economic and financial systems in developing or newly developed nations that have just opened up their border. In fact, the Asian financial crisis, first exploded in Thailand on 2 July 1997, should not cause too much detrimental effects to Hong Kong due to its robust economy and very well‐scrutinized legal, financial and fiscal institutions. The crisis of “financial fragility was due to a toxic mix of deteriorating macroeconomic fundamentals, inadequate financial supervision in a context of financial liberalization and rapid capital flows, inadequate disclosure that allowed problems to build up undetected (in terms of both non‐performing loans and uncommitted foreign exchange reserves), and over‐reliance on bank financing rather than capital markets, together with implicit government guarantees to financial institutions that invited reckless lending. This set the stage for a twin banking/balance of payments crisis that only awaited a trigger, such as an economic slowdown or weakening of exports, or indeed contagion from other economies, to be set in motion.”5 However, with a solid framework, including sound institutions and well‐established rules and regulations as well as supervisory mechanism, plus an enormous foreign currencies reserve and fixed exchange rate pegged to the US dollar, Hong Kong in any case should not be included in the Asian financial crisis story. One of the major weaknesses in almost all Asian countries is the poor performance of banks. “The banks were subject to poor regulation, coupled with poor compliance to international standards, weak supervision and low capital adequacy requirements…..The banks used inadequate credit scoring mechanisms and were themselves subject to political manipulation in their lending criteria, which resulted in credit being extended to firms without any proper regard to profitability. This resulted in non‐performing loans…….In addition, governments were heavily
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enmeshed in the corporate culture with political favouritism, a history of government ‘bailouts’ of failing firms and little real concern for profitability.”6
What is more, the Asian banking system suffered from many defects, which include “lax supervision and management control, weak regulation, the shortage of skills in the regulatory bodies, low capital adequacy ratios, poor project selections schemes and even corruption in lending practices.”7 Though these characteristics could be largely found in the Mainland banking system, Hong Kong’s financial and banking systems are much stronger and “mature”. Indeed, it is true that the banking sector in Hong Kong did possess some of these weaknesses in the past, thus resulting in the collapse of some local banks in mid‐1980s as we mentioned before, the rules and regulations as well as supervisory mechanism had been much improved thereafter. For the same token, after the crisis of stock exchanges in October 1987, Hong Kong’s regulations and institutions were reformed to comply with international standards, as this was definitely crucial in order to promote Hong Kong’s status as an international financial center. So when the Asian financial crisis came immediately after the Chinese resumption of sovereignty, nobody in Hong Kong were scared of the repercussions of the financial crises originated from other neighbours such as Thailand, Indonesia and South Korea. Besides, as a sophisticated and mature market economy, Hong Kong’s market is well integrated into the global capitalist system, and the clear delineation of public and private sector makes it a model for the development of capitalist state. The government and its related public bodies are there to provide services to everyone, plus the fundamentals that could not be well provided by the private sector, including most notably infrastructure, education, medicine, public housing and lately, social welfare. Apart from these, the government is there to establish the rules of the games of market competition and to be the adjudicator as well. By making use of law enforcement institutions (such as Independent Commission against Corruption (ICAC)) and regulatory bodies for the banks, property agencies, insurance and stock exchanges, the government is there to make sure that every actor that participates in the competition follows the rules of the games so that perfect competition and a level playing field could prevail. Due to these well established mechanisms,
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the catchword that was always heard during the Asian financial crisis, “crony capitalism”, which characterizes the intricate relationship between the government and the capitalist, or between the public and private sector, can hardly be applied to Hong Kong. Despite the fact that all the fundamental factors of Asian banking system could scarcely be found in Hong Kong, the SAR could not isolate itself from the repercussions caused by the collapse of banking system and stock markets among the neighbours, simply because it is an open and free market situated in an increasingly globalized world. In October 1997, the wind of crisis eventually was blown to Hong Kong. Since all the currencies of the neigbouring countries had largely been devaluated, while Hong Kong dollar remained strictly pegged to the US dollar, the speculators betted on the devaluation of the Hong Kong currency. They largely sold the Hong Kong dollars. This “attack” immediately led to a vigorous increase of interest rate in Hong Kong. On the one hand, there was a massive withdrawal of funds from Hong Kong afterwards; on the other hand, due to the increase in interest rates, the property market collapsed. The panic extended to the stock market which witnessed a sharp decline. This resulted in a loss of confidence of the local investors, and what is more important was the implosion of Hong Kong’s bubble economy which was created during the 1990s. The collapse of the property market resulted in a famous phenomenon in Hong Kong: negative equity. As the price of property was reduced 66% from 1997 to 2003, the value of many properties was less than the mortgage loan. However, since 2003 to 2004, the price bounced back for about 40%.8
So Hong Kong did not suffer directly from the fundamental problems in banking and financial sectors that were so prominent in other countries, but the so‐called “three‐dimensional” actions launched by the “big crocodiles” (speculators), which caused the implosion of Hong Kong’s bubble economy. The bullish stock and property markets in the 1990s were largely a result of the negative real interest rate, which in turn was consequential to the fixed exchange rate linked to the US dollar. Interest rate could not be used as an instrument to regulate Hong Kong’s economy. It ought to be raised in order to cool down the inflation in Hong Kong, but it had to go down instead in order to follow the US interest rate, a result of the sluggish American economy in late 1980s and early 1990s. In the period 1982‐1997 period, the annual average negative interest rate was ‐3.44%.9 Funds were thus pooled into the property
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and stock market, and the price was boosted up accordingly. During the so‐called transitional period of Hong Kong, that is, from 1985 when it was decided that the capitalist enclave would be returned to China and the year of handover, 1997, the annual average price index of private domestic premises reached 20.91%! This largely benefits the government, owners of properties, as well as commercial banks, but Hong Kong competitiveness was sacrificed to a great extent due to the rapid rise of costs in doing business.10 When the SAR government was in place in July 1997, the Chief Executive Tung Chee‐hwa announced the housing scheme of building 85000 units per year. Though the plan was obviously unrealistic, as usually only around 30000 units can be finished per year, Tung thinks that by increasing the land sales as well as the number of housing units built, the property market would achieve a “soft landing”: increasing supply would lower the price. But the storm of Asian financial crisis came at the same moment of launching his plan. Though his plans of building 85000 units could never be achieved, Tung was always blamed for the numerous cases of negative equity and bankruptcy. The essence of the problem is the rise of interest rates which caused a rapid downturn in the property and stock markets, and a rigorous credit contraction. In June 1998, the SAR government decided to have a suspension of land sale in order to boost up the market. A massive plan including the return of land rates as well as a freeze of salary of senior civil servants was launched to save the confidence of Hong Kong people, but the depression continued. The most dramatic moment happened in August 1998, when speculators tried to attack the stock market by selling massive amount of shares and by “short‐selling of index futures by the same speculators‐‐‐what the Hong Kong Monetary Authority referred to as ‘double play’”. 11 The then Financial Secretary, Donald Tsang, decided to intervene by deploying HK$80 billion to buy a wide range of equity so as to reduce the supplies, thus preventing the Hang Seng Index to continue falling beyond 7000 points. This astonishing move shocked many investors who always believed that Hong Kong government is the strongest defender of free market economy. Now 7% of the 33 stocks that constituted the Hang Seng Index was “nationalized”.12 In 1999 when the stock market became healthier and the share price of these “nationalized assets” went up, the SAR government decided to set up the Tracker Fund managed by a government body called Exchange Fund
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Investment Ltd. Through this Fund the government gradually sold its shares to investors. The short period 1997 to 1999 demonstrated that the young SAR government was not hesitant to steer away from the traditional philosophy of minimum interference and limited government left over by the British colonial administration. The government became a warrior in fighting against the speculative and irrational property market by launching the so‐called 85000 plan, something reminiscent of the socialist planned economy in order to balance supply and demand. But before the plan was realized, the property market collapsed as a result of high interest rate and credit contraction. The bold move of Donald Tsang in fighting against the “big crocodiles” was an intriguing action as it involved using taxpayers’ money to fight back the detrimental actions of the speculators. Though this was launched on behalf of Hong Kong interests, who gave these high officials in charge of financial matters the power to make use of this enormous amount of fund? What would happen to Hong Kong if the actions did not turn out to be positive? Donald Tsang, in his recent campaign to run for the next term of Chief Executive, said he prayed every hour during those summer days in 1998 in his duel against the speculators, and he disclosed the fact that if his action failed, he together with other high officials including the Director of Hong Kogn Monetary Authority, Joseph Yam, would resign. The question is not on resignation, but a more deep‐level problem: who gave him the power to fight against certain actors in the market? Should he be in a position to defend the free market, or did he really think that the market was manipulated by the big speculators, thus government intervention was crucially needed in order to “save” and restore the market? In the first case, he could only be the adjudicator or jury. In the second case, he has become a player, while maintaining his role as jury at the same time. Though the governmental intervention resulted in stabilizing the stock market, people started to worry about whether further interventions would be launched and the long‐term implications to Hong Kong if the government used to play such “dual role”. Government Intervention in Developing High Technology: the Case of Cyberport
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Amidst the radical downturn of the economy, the SAR government under Tung Chee‐hwa decided to establish large projects to boost the economy and to restore the confidence of Hong Kong people. The following table with key economic indicators demonstrates that Hong Kong economy was in a very volatile situation after 1997. The SAR witnessed negative growth in 1998, a phenomenon that it has not experienced since long time ago. Unemployment was always on a rise after 1997 until 2003, reaching a historical record of 7.9%, while Hong Kong in the last few decades seldom had an unemployment rate of more than 3%. What is worse, the government started to suffer from large deficits since 1998, and obtained surplus again only in 2004 after stringent efforts to cut down the government expenditure, bringing the expenditure back to the original limit, that is, less than 20% of Hong Kong’s GDP.
Key Economic Indicators of Hong Kong 1996‐2006 Year GDP Growth Unemployment Government Surplus/ Rate (Deficit) in HK$Bn 1996 4.5% 2.9% 25.7 1997 5.0% 2.9% 86.9 1998 ‐5.1% 4.7% (23.2) 1999 2.9% 6.2% 10.0 2000 10.5% 5.0% (7.8) 2001 0.1% 5.1% (63.3) 2002 2.3% 7.3% (61.7) 2003 3.3% 7.9% (40.1) 2004 8.1% 6.8% 21.4 2005 7.3% 5.6% 4.1 2006 6.8%* 4.4%* 30.0* *Estimate
Source: Hong Kong Annual Reports, various issues
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Tung Chee‐hwa after becoming the Chief Executive was anxious to become a powerful and competent leader. He wanted to “do more” in the areas that are deemed to be ignored by the British administration, such as education, and tried to invest in selected areas in order to raise the status and profile of Hong Kong. In the mid‐1980s, when the governments of all the other three “tigers”, South Korea, Taiwan and Singapore, were keen to invest more in key industries with promising future for the sake of helping the country to better positioning herself and raising her profile, Hong Kong government was reluctant to do the same, despite the strong voices from prominent economists such as Edward Chen. It was unable and unwilling to share the burden of Research and Development (R & D), which was considered to be the sole responsibility of the enterprises. The enterprises which are labour‐intensive and equipped with low technology were not interested in investing in R & D. Fortunately the opening up of China facilitates the development of these enterprises which simply moved their factories to the Mainland. The city of Hong Kong underwent a process of “industry hollowing” but was transforming into a major service hub. The government before 1997 did not think that it was in the best position to direct the future path of development of Hong Kong and felt comfortable to let the market to determine. However, Tung thought that the British simply had no commitment to do more for Hong Kong’s future. The new SAR government should do pro‐actively for a better Hong Kong. The recession started in 1998 incurred upon Tung an urgent need to think of new projects to “save” Hong Kong from the deep economic crisis that people in the territory had not experienced for so long. Decisions were made in 1999 to start two projects. One is catered for the “high end”, in other words, the development of high technology: the construction of Cyberport for the nurturing of the promising IT industry. The other project aims at the other end of the spectrum in constructing economic infrastructure. It should help to produce numerous jobs for unskilled labour and boosting Hong Kong’s tourism industry: the Hong Kong Disneyland. Right from the beginning when the project of Cyberport was announced, critics already queried about the nature of the business, whether the property tycoon Li Ka Shing and his son Richard Li simply disguised their plan as a high technology project so as to ask for special privilege in the construction of basically a property development, and whether Tung Chee‐hwa simply wished to benefit his friend in the business sector. The alleged complaint of
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Guanshang Goujie (secret deal between officials and merchants, or connection between public and private sector) was expressed not only among the general public, but also from the other most prominent property tycoons in Hong Kong, who asked why the Li family did not need to go through the normal process of bidding for the land. A comprehensive analysis of the whole project unveils the fact that the critics were right in pointing out that Cyberport is basically a property development project. Definitely it could attract the IT and related companies to move from their premises in Quarry Bay to the Cyberport, but this could only be done because of subsidized rent. The office buildings in Cyberport, though equipped with the state‐of‐the‐art technology, are not necessary more advanced than the other office buildings elsewhere. The computer and telecommunication companies moving there did not create a strategic network of strong IT companies. R & D, innovation and creative designs were still not made in Hong Kong despite the moving of their Hong Kong offices to Cyberport. In short, Cyberport has not become another Silicon Valley. The bursting of the short‐lived IT bubble economy that started in 2000 not only brought the rapid decline of the share price of the telecommunication company of Richard Li, PCCW, from the maximum of HK$28 to less than HK$1 dollar, it also “means that the real estate component of Cyberport became increasingly important.”13 While the construction of office space is a loss since it could not attract sufficient companies to move in, the residential property development, Bel‐Air, was a success. Though it was always boasted that Bel‐Air could attract the high‐tech talents working in Cyberport to live there, in fact most of the residents are not working in Cyberport. In reality, Bel‐Air is developing into a very luxurious residential area that only a few in Hong Kong could afford. The surplus generated from the sales of these residences would reach HK$17.6 billion, and the government could have a share of HK$11.4 billion. 14 However, it must be pointed out that the government as part of the deal was responsible to do the reclamation work and the developer was not asked to pay for the land, which is the most scarce resource in Hong Kong and so the most expensive item for any developers. As a conclusion of our discussion on Cyberport, it can be said that Tung’s idea of having the government as the locomotive in pushing for the development of high technology in order to restructure the economy of Hong Kong has failed entirely. It paid the land in exchange for the developer’s efforts in constructing the buildings (offices and residences), but the creation of a cluster of companies so as to nurture a stimulating and inspiring
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environment for the development of high technology was not realized. It is simply an amalgam of IT companies, except that in the past the same amalgam was found in Quarry Bay. However, again it is a highly successful residential development project, as newly developed luxurious apartments at the sea coast are still greatly in need among the few in the upper class. While it can be deduced that the SAR government’s capability of mastering the development of economy is in doubt, its further involvement in economy or more intervention into the society or the market would simply cost more to the taxpayers, without really lifting Hong Kong to a higher level.
Government Intervention in Promoting Tourism: the Case of Disneyland Hong Kong is very attractive to tourists, as it is a place that sees the collusion of West and East, tradition and modernity. But in the state of deep depression, the SAR government was desperate to find the way out. This time it was thinking of “creating” a major tourist attraction: Disneyland. The negotiation started in 1998 and when the final plan was disclosed in November 1999, Hong Kong people found that it was really an “unequal treaty”. The Disneyland is a joint venture with the Hong Kong SAR government holding the majority of the equity (57%), which costs HK$3.25 billion, while the remaining 43% belongs to the Disney Company, which costs it only HK$2.45 billion. 15 The most important part of the construction is the reclamation of the sea bay and then the infrastructure, which costs HK$13.6 billion. This is totally financed by the Hong Kong government. In other words, the scarcest resource, land, is again provided for free, and this piece of 126 hectares of land has to be built by reclamation. It is true that “the cost of land reclamation and site formation will be repaid by the issue of subordinated shares to the government, which can be converted into equity”16 But still most people thought that the SAR government was too generous to Disney. Hong Kong was too desperate to have the theme park and Disney in the upper hand during the negotiation sought to maximize its benefits. Besides, the SAR government agreed to provide “soft loan to the company totaling HK$2.3 billion at 1.75% below local prime rates during the construction and for the first eight years of operation. For the next eight years the interest rate will be
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0.875 percent below prime and thereafter at prime rates.”17 So for the total investment of HK$22.45 billion, Hong Kong bears the bulk of it, namely HK$20 billion. For the government officials, the project is worthwhile for the short and long term. During the construction, 6000 jobs were provided, and additional 10000 jobs were needed in the reclamation and infrastructure development. After the park was opened in 2005, 18000 jobs would be created, most of them low‐skill jobs for high school graduates.18 However, the balance sheet given by Disneyland after one year of operation did not give a rosy picture. The number of visitors, which reached 5.0 million, was less than the originally planned figure of 5.6 million, while the theme part also registered a loss of HK$117 million. Probably the cumulative loss would reach HK$530 million after the second year of operation ended in September 2007.19 So what does this “nationalized” Disneyland give to Hong Kong? The arguments defending government intervention in economic activities stress that the existence of such a theme park will certainly enhance Hong Kong as a major tourist spot, especially among the people living in Southeast Asia and southern China, thus further promoting Hong Kong’s image as “Asia’s World City”. On the contrary, critics against government intervention simply think that it is unwise for the government to use the taxpayers’ money to invest in such a large project. If there is a loss it will incur upon the budget of the government. The investment in reclamation and infrastructure could be used in other large scale projects in infrastructure which might generate more benefits for Hong Kong even if we adopt a Keynesian approach. There exist even voices that call the government to sell its shares to the private sector by issuing bonds, thus removing it from participating in ventures that do not correspond to its role as adjudicator of market economy, rather than as a player at the same time.20 The Significance of CEPA and further Integration of Hong Kong into the Mainland Tung Chee‐hwa did propose other projects as well, like flower port, red wine port, Chinese medicine port etc. but all resulted in nothing. He also
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proposed to set funds to help developing high technology and a knowledge‐based economy. The Chief Executive created a Commission on Innovation and Technology, and set up the Innovation and Technology Fund with a total endowment of HK$5 billion.21 Most of the projects are related to R & D in IT. About 60% of the funding has been undertaken by the Applied Science and Technology Research Institute that is located in the Science Park.22 What these government efforts have resulted in nurturing the growth of IT or high tech in Hong Kong remain limited, let alone modifying the culture of Hong Kong to make it more receptive to innovation and creative works. Long term vision and better policy‐making as well as improved coordination in government departments are even more crucial than directly investing in R & D. Nevertheless, the conclusion of the Closer Economic Partnership Agreement (CEPA) between the SAR government and Beijing authorities, an attempt originally conceived to have early harvest from the further opening up of Chinese market after China became a member of WTO, denotes the emergence of another important issue in the relationship between the SAR state and Hong Kong society: whether there is any contradiction between maintaining a high degree of autonomy within the SAR and the call for further economic integration into the Mainland. Almost immediately after China officially acceded to WTO in 2001, business sector in Hong Kong especially the Hong Kong Chamber of Commerce lobbied for the establishment of a free trade area between the Mainland and Hong Kong. There is a period of transition before China fully opens up its market, but the Hong Kong businesses sector hopes that local companies from Hong Kong could enter the vast Chinese market during the period of transition and earn “early harvest” before companies of other countries could enjoy the same benefits after China is fully open. This idea was voiced out in 2001, during the most difficult period of Hong Kong in deep recession after the Chinese resumption of sovereignty. Beijing was very receptive to this idea of giving “early free trade” benefits to Hong Kong. Eventually the agreement was signed immediately after the SARS crisis was over in June 2003. The name of the agreement was changed to “closer economic partnership” though it is basically a free trade agreement. The name change reflects the special relationship between the Mainland and the SAR. They belong to the same country, and yet they are two distinct customs territories. The agreement does not lie within the realm of international law, but it is also not an administrative agreement within a state. It is a regional
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agreement that has restrictive power in international law.23 Starting from 1 January 2004, zero tariffs were applied to 1087 Hong Kong products and there was improved market access for 26 service areas.24 In the second stage, 1370 products enjoyed zero tariffs. During the visit of Chinese leader Jia Qinglin in Hong Kong in June 2006, the number of products that enjoy zero tariffs further reaches 1407, and within the 10 service areas among 27 which are open to Hong Kong, 15 additional measures are taken so that more services could be provided by Hong Kong professionals.25 These measures facilitate the entry of Hong Kong products and services in the Mainland, thus pave the way for expanding the economic influence of Hong Kong in China. According to the statistics of Hong Kong government, since 2004, CEPA has already generated HK$5.4 billion of earnings for Hong Kong service industry; facilitated HK$5.5 billion of capital investments; HK$4.6 billion value of Hong Kong products have entered the Chinese market under zero tariff; and altogether 29000 jobs were created.26 The Beijing authorities deliberately wish to help the SAR by lowering the threshold of market access for the small and medium enterprises of Hong Kong. For instance, for foreign banks which seek to enter China, they need to have at least a capital of US$20 billion, but for Hong Kong banks, this is lowered to US$6 billion.27 The CEPA is boasted as a regional agreement that really produces a “win‐win” situation. On the one hand, it could facilitates the Mainland economy to further opening up, to be more integrated into the world economy and institutionalized. On the other hand, Hong Kong becomes a “creative intermediary” between China and the world, thus consolidates even further its role as the gateway for the rest of the world to enter China. Hong Kong’s service industries would be upgraded and expanded as they have to serve a bigger market. Hong Kong’s industries which have most of their factories in the Mainland could expand their market into the vast China, while in the past they need to export the products to the outside world. Some high‐ended manufacturing and industrial control procedure could also be moved back to Hong Kong. CEPA definitely also facilitates the free circulation of human resources, capital and commodities. It is also emphasized that CEPA could be the turning point for the economic restructuring of Hong Kong: transforming from service economy to knowledge‐based economy.28 While all these advantages cannot be ignored, one major implication of CEPA is that Hong Kong, due to its urgent need to expand its economic opportunities during the period of recession, or for the sake of its economic
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restructuring as well as long term benefits, has no choice except to integrate even further its economy with the Mainland. Integration can be considered as a kind of “bandwagoning” so that not only the SAR is not excluded from the rise of China, it is even the first to benefit from China rapidly growing market. Up until now the benefits obtained from CEPA are still rather limited, as some people in Hong Kong are still quite hesitant about whether we should look to the North, or try to do better in the outside world. This is always a concern as Hong Kong in the past relied solely on the Western market as well as in the developing world, but not China. Moreover, there are still limits in China particularly on the further expansion of service industries on Hong Kong, which are much more significant then the zero tariff offered to Hong Kong products, as domestic production in Hong Kong is very limited. By all means, it is also stressed that zero tariff would encourage Hong Kong entrepreneurs to start their production in Hong Kong or attract investors in those areas that are offered zero tariff. Some of the “benefits” provided to Hong Kong are not and will not be provided to other members of WTO, such as lawsuit in civil cases and the Renminbi business. These are considered to be closely related to national sovereignty. If there is a further deepening of CEPA, Hong Kong will eventually enjoy the privileges equal to other Chinese nationals.29 Even if eventually, the “One country, Two systems” will not exist, as the two systems are not different from each other, there is still a question that lingers in the mind of Hong Kong people. Would the Mainland become more and more developed just like Hong Kong, thus local professionals could have a lot to contribute as Hong Kong’s influence will have been enlarged to the Mainland? Or would Hong Kong be “Sinicized” or “homogenized” which means losing its uniqueness and many characteristics? It seems that the SAR government only had immediate concern when negotiating about the CEPA: asking Beijing for assistance to save the territory from depression. It has no long term vision about the positioning of Hong Kong in China and in the world. The accomplishment of CEPA definitely brings Hong Kong closer to the Mainland through the efforts of the Central government and SAR government, but what the economy and society could benefit remains limited and small‐scale. If the Hong Kong government wishes to intervene into the market, how and to what extent should it do in order to maximize the effects? The crucial question is: does it have the capability and
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legitimacy to do so, given the fact that it has not yet obtained a democratically elected mandate. A powerful and strong government could only be created based on people’s mandate and people’s support. A strong and powerful government that gets its blessing from Beijing but not from the people would lack the state capacity, autonomy and legitimacy to successfully master the intervention. In such case, just similar to the British colonial administration, limited government and minimum interference may be the better choice. Conclusion It can be said that former Chinese Premier Zhu Rongji was inspired by the Hong Kong model when he decided to create “small government, big society” for China by trimming the size of the Chinese governments at all levels and relieving the government of many of its original functions. However, on the contrary, it seems that Hong Kong SAR government, though accepts the slogan of Zhu by trimming down its civil service too, is in a move to perform more functions then before. It wants to become a somewhat omnipotent government that could lead Hong Kong to a better path of development and uplift it to a world class city. This kind of thinking is not dissimilar to many provincial and municipal leaders within the Mainland, who always pay attention to their merits and accomplishments during their limited tenure, and are eager to “do” more, especially those “conspicuous” achievements like buildings and monuments. What is in reality more important is how to raise the profile and status of the city, and this is definitely related not only to the infrastructure development, but the “soft power” of the city, which include institutions, culture, ideas and values that could have an appeal to the others. In terms of “soft power”, Hong Kong is in a much better position than the other Chinese cities, especially that in this open society human rights, rule of law, rules of the games of market economy are all well defended. What is lacking is a democratically‐elected government, thus making the government depriving of the necessary state capacity and legitimacy to carry on fundamental reform like economic restructuring. The colonial government in the past was in the same situation, so it adopted the minimum interference model with a limited government which constrained itself to work only on
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the fundamentals. The new SAR government under Tung Chee‐hwa thought that as it was now Hong Kong people ruling Hong Kong, we should do more, especially on those areas that were allegedly ignored by the British. However, judging from the cases that we have elaborated, the governmental interventions were not very successful. In fact, the SAR government also lacks the mandate from the people to proceed on the great reformation. Despite this lack of necessary condition, the SAR government is under pressure from various sectors to do more. Donald Tsang’s formal announcement that we have not talked about positive non‐interventionism since long time ago may be a signal that the government is planning to do more, that is, to lead the way in economic growth by more intervention. This aroused serious rebuke immediately from Milton Friedman, long time advocate of the “Hong Kong model” of economic freedom, who did not hesitate to publish an article entitling “Hong Kong Wrong”, just one month before his death.30 He insisted, “the ultimate fate of China depends, I believe, on whether it continues to move in Hong Kong’s direction faster than Hong Kong moves in China’s.”31
For the market economy to function properly, government’s actions are by all means necessary. But the government as the jury or adjudicator is there to ensure that market mechanism works and that every actor follows clear rules of the games, not to interfere in market mechanism. Since the government officials are not players in the market, they should not be decision‐makers to decide what the government should do or invest in the market. The government cannot afford to make wrong decisions as they are putting in public money.32 The government should only invest in the projects that the private entrepreneurs are not able to do. What the Hong Kong SAR government needs to have are strategic visions and well‐thought policies, but currently the Hong Kong leaders, who were trained as civil servants, do not process this kind of qualities. Chinese leaders are well aware of this problem: “Before the handover, when encountering major problems, usually it was London that made the decisions and Hong Kong government executed the policy. Democracy and independent decision‐making power did not exist. After the handover, according to the “One country, Two Systems” principle, Hong Kong has to independently select and formulate its own decision‐making power, democratic institutions and management system. But this is a learning process that takes time, and one needs to accumulate experiences, train expertise, and master the technique in the
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practice. However, in reality Hong Kong does not enough time to learn.”33
This is a major characteristic of Hong Kong: lack of political leaders that could formulate long term policy with strategic visions, as observed by another source, “in a full‐fledged democracy, there is political machinery which prepares visions for election manifestos. But Hong Kong is unique in that it has always relied on its public service to develop public policies……Hong Kong civil service is about public administration. It exists to deliver municipal level services. The overarching notion of Government is not understood, let alone practiced.”34
In brief, lack of legitimacy, short of a mandate from people, and inexperience in policy‐making make it even more inappropriate for the SAR government to intervene in the market. Though positive non‐interventionism will not be mentioned anymore, the SAR government should still be cautious in any interference into the society and market. 1 See Anthony Cheung, “To Intervene or Not to Intervene?” Newsletter 10 of Executive Councillor Anthony Cheung’s Virtual Office, from [email protected]. 2 The collapse of four banks, Overseas Trust Bank, Hang Lung Bank, Union Bank and Ka Wah Bank in mid-80s were due to mismanagement or criminal frauds. According to market principle in the strictest sense, the government is not in a position to help the customers who put savings in these banks. However, confidence is crucially important in Hong Kong in maintaining stability. So the Hong Kong government interfered by taking over the first three banks and then revitalized them by injecting government funds. After they became healthy some years later, the government sold them in the market. The fourth bank, Ka Wah, was taken over by the Bank of China group upon the request of Hong Kong government, which politically and economically speaking would like Beijing to share the burden. This is definitely state interference in the market, but it was deemed necessary to safeguard the interests of the ordinary people who deposited their money in these banks. It helped to promote confidence and stability of Hong Kong which could not afford to suffer from major crises during the period of transition from a British Crown colony to a Special Administrative Region of China. Thus, political and economic considerations prevail over the governmental philosophy of non-interference. 3 Primary schools that are unable to recruit at least 23 students in primary one are forced to close. This is how market mechanism affects the educational sector. The immediate consequence is the closing down of many village schools or small schools in more remote areas, though they have been existing for many years.
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4 See Andrew Pak-Man Shuen, “Hong Kong Forgets How to Compete”, Far Eastern Economic Review, 168:9, October 2005, pp. 38-39. 5 See Dan Ciuriak, “The Economies of China, Taiwan and Hong Kong since the Asian Crisis”, American Asian Review, XVIII: 3, Fall 2000, p. 128. 6 See K. Pilbeam, “The East Asian Financial Crisis: Getting to the Heart of the Issues”, Managerial Finance, 27:1/2, 2001, p. 120. 7 Ibid. 8 See Background Note: Hong Kong, Bureau of East Asian and Pacific Affairs, US Department of State, December 2004, p. 3. http://www.state.gov/r/pa/ei/bgn/2747.htm 9 See Li Kui-Wai, “The Political Economy of Pre- and Post-1997 Hong Kong”, Asian Affairs: An American Review, 28:2, Summer 2001, p. 71. 10 Ibid. p. 69, 72. 11 See Philip Wyatt, “Hong Kong Three Years Later”, The International Economy, 14:5, Sep/Oct 2000, p. 54. 12 Bruce Einhorn & Susan Berfield, “Too Much of a Good Thing? The Territory has to unload shares without killing the Market”, Business Week, 25 October 1999, p. 60. 13 See Erik Baark & Alvin Y. So, “The Political Economy of Hong Kong’s Quest for High Technology Innovation”, Journal of Contemporary Asia, 36:1, 2006, p. 110. 14 Ibid. p. 111. 15 See the speech of Tung Chee-hwa on the conclusion of the negotiation on the construction of Disneyland on 2 November 1999, http://www.info.gov.hk/gia/general/199911/02/1102112.htm 16 See Stephen Vines, “Disney can laugh at us”, The Standard, 16 September 2005, http://www.thestandard.com.hk/news_detail.asp?we_cat=5&art_id=1408&sid=4573705&con_type=2&d_str=2005091617 Ibid. See also report by China Review News, http://www.chinareviewnews.com, 3 November 2005 18 See the speech of Tung Chee-hwa on the conclusion of the negotiation on the construction of Disneyland on 2 November 1999, http://www.info.gov.hk/gia/general/199911/02/1102112.htm 19 Studies done by Deutche Bank and reported in Ming Pao, 11 November 2006. 20 Opinion given by Chinese University economists, see Apple Daily, 10 September 2006, http://appledaily.atnext.com/template/apple/art_main.cfm?iss_id=20060910&sec_id=4104&subsec_id=11867&art_id=630002921 See Peter Kwong, & Dusanka Miscevic, “Globalization and Hong Kong’s Future”, Journal of Contemporary Asia, 32:3, 2002, p. 328. 22 Erik Baark & Alvin Y. So, “The Political Economy of Hong Kong’s Quest for High Technology Innovation”, Journal of Contemporary Asia, 36:1, 2006, p. 114. 23 Xiang Ling, “My Opinion on the Nature of CEPA”, Changsha Daxue Xuebao (Journal of Changsha University), 20:1, January 2006, pp. 47-49. 24 See Background Note: Hong Kong, Bureau of East Asian and Pacific Affairs, US Department of State, December 2004, p. 3. http://www.state.gov/r/pa/ei/bgn/2747.htm 25 See the report in Ta Kung Pao, 30 June 2006, pp. 1-2. 26 Ta Kung Pao, 30 June 2006, p. 2. 27 See the article written by the Director of Center for External Economies, State Development and Reform Committee, State Council, Zhang Yensheng, “Influence of CEPA to the Prospect of Hong Kong Economy is Large and Deep’, Guoji Jinrong Yanjiu (Studies on International Finance), No. 10, 2003, pp. 4-8.
28 Ibid. p. 6. 29 “Hong Kong Chamber of Commerce hopes Hong Kong businessmen enjoy National Treatment”, Ta Kung Pao, 3 July 2006, p. A9. 30 See Milton Friedman, “Hong Kong Wrong”, The Wall Street Journal, 6 October 2006, p. A. 14. 31 Ibid. 32 See Zhao Lingbin, “Hong Kong should learn how to intervene in economy”, Ta Kung Pao, 4 October 2006, p. A19. 33 Zhang Yensheng, “Influence of CEPA to the Prospect of Hong Kong Economy is Large and Deep’, Guoji Jinrong Yanjiu (Studies on International Finance), No. 10, 2003, p. 5. 34 See Florence Chong, “Jekyll or Hyde? Hong Kong’s mirror crack’d”, Asia Today International, 20:3, June/July 2002, p. 5.
