Hong Kong—After the Fireworks

July 9 1997 3:30 AM

Hong Kong—After the Fireworks

Democracy goes into reverse, but liquidity drives a boom.

42000_42715_byoxfordanalytica

The champagne has been drunk and the fireworks exploded. Now Hong Kong's real test as a special administrative region of China begins.

Politically, the façade of the old colonial government structure--a strong executive, a weak legislature, and an efficient but politically neutral civil service--will continue. Economically, the stock market and property booms will continue in the short term if money still flows in from the mainland and elsewhere. The road ahead, though, is bumpy. Hong Kong needs to control rising costs and create jobs quickly for a large number of unskilled immigrants.

More clues about post-1997 Hong Kong will become evident at the 15th Congress of the Communist Party of China this autumn. If the Chinese leadership under President Jiang Zemin emerges more confident of its power, this will give Hong Kong more leeway to run its own affairs. If not, the territory's autonomy will suffer. More than ever, Hong Kong's fate will be intertwined with that of China, because the buffer provided by the United Kingdom for 150 years has been removed.

Some rollback of democracy is inevitable, as Beijing will not tolerate an independent legislature run by outspoken lawyers and longtime human-rights activists like those in the last Legislative Council ("Legco") elected in 1995. That is the main reason Beijing disbanded the 1995 council and formed the so-called provisional Legco, which is dominated by appointed pro-China politicians.

Beijing has already ensured that it will have the final say in important matters by appointing those with proven loyalty to top administrative positions. Next, it wants to make sure that it can influence the outcome of the Legislative Council election, promised by May 1998. It could do so by arranging voters into small, industry-based electoral groups. This would amount to a de facto shrinking of the franchise. However, it would be justified internationally as being akin to the electoral system that existed in Hong Kong prior to the democratic reforms introduced by the territory's last British governor, Chris Patten, in the face of Chinese objections.

Beijing will further sideline independent-minded politicians such as Democratic Party leader Martin Lee and opposition activist Szeto Wah. The danger is that the voice of lower-income groups will not be heard in a government machinery dominated by big business and mainland elites, but Beijing will calculate that the historically shallow roots of popular political movements in Hong Kong will limit the magnitude of this risk.

Overall, Hong Kong will still enjoy more political autonomy than the average Chinese city. There will be open, public debate of issues, as well as civil disobedience by political activists. Chief Executive Tung Chee-hwa will also be able to negotiate with Beijing for a degree of administrative leeway unthinkable for his counterparts on the mainland.

The judiciary, run by respected judges, should be able to remain independent, except when it is handling highly sensitive, politicized cases in which Beijing's central authority is at stake. For the press, there will be self-censorship, but heavy-handed interference from Beijing seems unlikely.

One important check against any abuse of power by Beijing toward Hong Kong is international attention. Western countries have urged China to conduct fair, competitive elections next year. There will also be annual reviews of Hong Kong's political and human-rights situation in the U.K. Parliament, the U.S. Congress, the United Nations, and other international forums.

For business, Hong Kong is still a good place to make money, an increasing amount of which will come from China. The territory's gross domestic product is expected to grow by 5 percent or 6 percent in 1997 and 1998, up from 4.7 percent in 1996. Unemployment has dropped to 2.6 percent between February and April 1997 from 3.3 percent in the same period a year ago.

Beijing has encouraged more Chinese companies to come to Hong Kong to fill the commercial vacuum left by departing British companies such as the Jardine group. In recent months, Chinese corporations have taken stakes in Hong Kong Telecom, Dragon Air, and China Light & Power. More strategic takeovers are likely; Hong Kong Electric and Hong Kong Bank are two prime targets. Meanwhile, in June alone, big Chinese enterprises affiliated with ministries and local governments raised 17.5 billion Hong Kong dollars (U.S. $2.26 billion) from banks and the stock market. Such large-scale fund raising has confirmed Hong Kong's unique status as the Wall Street of China.

The stock market will continue to prosper in the coming months if more Chinese money rushes into town. One Hong Kong-based brokerage estimates that inflows will grow to $75.94 billion this year, 24 percent more than in 1996. Part of the torrent has moved into the local property market, raising prices by as much as 50 percent for prime residential blocks in the first half of this year.

Tung has vowed to crack down on property speculators, but many think his bark will be worse than his bite. The government itself relies on revenue from land sales to finance its budget, while banks are too heavily exposed in property lending to allow any property downturn. Still, Tung is likely to impose some short-term measures, such as a capital gains tax, to show that he is serious about tackling Hong Kong's housing shortage, which is its most visible economic problem. In his first policy speech following the handover, Tung promised to accelerate government land sales, with the ambitious aim of raising the proportion of homeowners to 70 percent within 10 years.

Hong Kong's long-term prospects are mixed. Critics say the territory has not invested enough in technology and developing human resources to meet the needs of its increasingly service-based economy. Instead, capital has gone to property investment, inflating asset prices and making the city the most expensive in the world. The issue will become more pressing as an estimated 40,000 to 50,000 Chinese, mostly unskilled, come to settle each year. Others say Hong Kong has enough vitality to adjust itself to the needs of the future and that the government does not need to intervene. Tung, however, has indicated that he wishes to support manufacturing, even though the sector accounts for a mere 10 percent to 20 percent of the city's GDP (depending on what definition is used). Tung's first salvo as the territory's leader is likely to include the introduction of policies to help develop long-term, high-tech industries, a special challenge in a place where short-term financial operations and property businesses have helped many to become millionaires overnight.

© July 1997, Oxford Analytica Ltd., 5 Alfred St., Oxford OX1 4EH, U.K. Any reproduction in whole or in part without the written consent of Oxford Analytica Ltd. is strictly forbidden.

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