Speeches and Articles by Former Consul General Michael Klosson

1997 plus 5: U.S. Policy towards Hong Kong Today

Remarks by U.S. Consul General Michael Klosson
To the Hong Kong Association of New York
New York
April 16, 2002

(As prepared for delivery)

I appreciate your invitation to speak today to the Hong Kong Association of New York. Private organizations such as yours promote business and other ties between the United States and other societies and thus play an important role in our overall bilateral relationships by encouraging greater mutual understanding.

In the case of Hong Kong, organizations such as yours are doubly important because, as we'll discuss, there are many misunderstandings about what Hong Kong is and what it isn't today. Mention Hong Kong, and some may think of "Hong Kong -- Fabled City of the Orient." Junks in the harbor. Suzie Wong. Bruce Lee. Or maybe it's "Made in Hong Kong" toys, electronics, suits. Or maybe what sticks in some people's minds is a picture of the troops of the Chinese People's Liberation Army marching across the border on July 1, 1997.

No matter what image people may have, Hong Kong's reality is more complex, and more intriguing. This always-on-the-move city is certainly Chinese, but also quite international. It is modern, but traditions abound. It was a temporary refuge for many fleeing post-war China, but now is regarded as home by most. As a gateway to China and as an Asian hub, it has always put business in the driver's seat, but pluralistic and increasingly democratic politics are now also taking root.

It's hard to believe that nearly five years have passed since the Union Jack was lowered in Hong Kong and China's five-star flag was raised, alongside the bauhinia-flower flag of the Hong Kong Special Administrative Region. What has happened over the course of the past five years is significant, both for what it says about Hong Kong and for what it says about China.

I'd like to review with you today the course of Hong Kong's transition, take a look at some of the factors that will shape its future evolution and discuss continued U.S. interest in what remains a unique "work in progress."

As you all know, five years ago China set out to put into practice something that had never been tried before - to incorporate under its sovereignty an entity with a different political and economic system, a different legal foundation and a different concept of individual rights. The Chinese describe the novel arrangement as "One Country, Two Systems." Five years ago, this arrangement was just a bare-bones outline described in the Sino-British Joint Declaration and the Basic Law, Hong Kong's mini-constitution.

For those of us who live in Hong Kong, it has now become a concrete reality we experience in our daily lives. When I flew out of Hong Kong International Airport a couple of days ago, my passport was stamped by an officer of the Hong Kong Immigration Department, not by the PRC border police. The newsstand at the airport offered a wide variety of Hong Kong publications -newspapers offering uncensored news, along with political commentary and critical opinions. If I bought one of those papers - using Hong Kong dollars and not Chinese renminbi - there could have easily been an article about the latest protest by the Falun Gong, a spiritual movement that is banned on the mainland but still allowed to practice and assemble peacefully in Hong Kong. For Chinese human rights activist Lu Siqing, Hong Kong's special status means he can run his Information Center on Human Rights in China from a tiny office in Hong Kong, his rights protected by Hong Kong's independent legal system. Indeed, politically sensitive activities such as these provide one of the most credible expressions of Hong Kong's distinctiveness and constitute one litmus test of the integrity of its new status.

On the international stage as well, Hong Kong's autonomous personality has been reinforced when it speaks with its own voice in organizations in which it holds separate membership, such as the WTO, APEC and the World Customs Organization. It has even played a leadership role through its chairmanship this year in the international Financial Action Task Force, a key component in the global campaign to combat terrorist financing and money laundering.

On the other hand, some events since 1997 have raised concerns. For example, two years ago a senior PRC official based in Hong Kong publicly exhorted the local news media not to report the views of Taiwan independence advocates as "normal news. " And another said that Hong Kong firms should not trade with certain Taiwan firms that are perceived as supporting Taiwan independence. While the Falun Gong remains legal and free to practice in Hong Kong, the group has been criticized by PRC and Hong Kong officials; it has also found it difficult to rent facilities for public meetings. And in the recent selection process for the second-term Chief Executive, pro-democracy opposition politicians, who decided not to compete, criticized Beijing's early expressions of support for the incumbent as discouraging other candidates from entering the process. More complications are likely to come, for example, as Hong Kong proceeds at some future time to enact legislation against subversion and sedition, which is mandated by its mini-constitution, the Basic Law, but which human rights supporters fear could become a device to limit discussion or activities deemed sensitive to the mainland.

Nevertheless, the overall picture is indeed a positive one. The worst fears of the pessimists -- those who predicted Chinese sovereignty would mean an early end to Hong Kong as an international city -- have not materialized. With some exceptions noted in the State Department's annual reports to Congress, China has generally kept its fundamental promise to respect Hong Kong's autonomy. The Hong Kong people have responded to this experience with more positive attitudes towards China - in some cases giving Chinese leaders higher approval ratings than they give their own leaders in Hong Kong.

Only five years into a fifty-year arrangement, however, the development of Hong Kong's "One Country, Two Systems" arrangement is still very much a work in progress. It bears continued watching, since the United States has a significant stake in Hong Kong's autonomy and distinctiveness. It is important that the balance inherent in the arrangement - "One Country, Two Systems" - be maintained.

While dealing with this political transition, Hong Kong's leaders have also had to navigate two separate economic challenges since 1997. The first came with the Asian financial crisis, which brought a sharp downturn in regional trade, the bursting of Hong Kong's real estate bubble and a plunge in the stock market. Fortunately, Hong Kong's financial stability was never in doubt. Its banks are well regulated, the government's finances are sound, and it could rely on large fiscal and foreign currency reserves. However, because Hong Kong's economy is so dependent on Asian trade, when the region's economy collapsed in 1997-98, Hong Kong was inevitably pulled downward. The result was the first recession in a generation and a sharp blow to confidence.

The Hong Kong economy bounced back in late 1999, and enjoyed one of the world's fastest growth rates during 2000, though the benefits of this recovery were spread unevenly. This past year again proved difficult since Hong Kong's prosperity depends on trade between China and the West - and in particular, the United States. When the U.S. economy ground to a halt last year, it didn't take long for the effect to be felt on Hong Kong's loading docks and on the balance sheets of its trading companies. Those effects aggravated the deflationary pressures Hong Kong has been experiencing for over three years stemming from its growing cross-border interaction with the Pearl River Delta area.

The Hong Kong downturn became even more pronounced after the September 11 terrorist attacks, when nervous buyers started canceling orders, and U.S. tourists and business travelers postponed their plans. Thankfully, the U.S. downturn appears to be behind us, and my friends in the export business are reporting increased orders as the U.S. market comes back. However, 2001 was a tough year for Hong Kong and it only narrowly averted its second round of economic contraction since the hand-over. Financial worries, especially for the government, have extended into this year.

For Hong Kong traders and business people, one of the few real bright spots in 2001 was China's final accession to the WTO. When the China market first started to open in the early 1980s, Hong Kong investors were some of the first through the door. In the process, they helped build China's Pearl River Delta into a powerhouse of assembly and export-oriented manufacturing. Today, Hong Kong's economic influence penetrates deep into southern China, with some 50,000 Hong Kong companies employing some six million mainland workers. Despite the advent of American and European competitors, Hong Kong still accounts for nearly half of outside investment in China and still accounts for more than 40% of China's foreign trade.

The initial announcement of a deal on China's WTO accession sparked concern that Hong Kong would lose its traditional role as the gateway of choice to China. In some ways, it has worsened a confidence problem arising from economic difficulties and compounded by the political transition. There has been considerable hand wringing -- often expressed in terms of fears that Shanghai will soon displace Hong Kong. At this stage, the overwhelming consensus of the forward-thinking Hong Kong business people and analysts I speak with is this: China's WTO accession poses challenges, but ultimately will be good for Hong Kong overall. After all, China's accession does not alter the fundamentals -- the rule of law, free flow of information, level playing field -- that make Hong Kong attractive to the international community.

We thus believe that Hong Kong will remain an important platform for U.S. business operating in the region. An exhaustive study by a Hong Kong University academic that drew on responses from over 1,000 companies, for example, found that Hong Kong has a dominant position as a regional business center. Thirty-five percent of the companies have put their Asian regional headquarters in Hong Kong, more than any other location, and over half of these operations have responsibilities that extend beyond China and Taiwan to Japan and even as far afield as Australia.

Consider also findings from the latest Business Outlook Survey released last December by the American Chamber of Commerce in Hong Kong. It shows a high level of confidence among Chamber members in Hong Kong's medium to long-term economic future. Although survey respondents are somewhat pessimistic regarding the rest of 2002, 78 percent anticipate a "good" or "satisfactory" economic outlook for 2003, and even more - 93 percent - are similarly optimistic about 2004. Among the AmCham member companies with regional headquarters in Hong Kong, 82 percent plan to maintain their operations in the SAR, with 25 percent intending to expand their operations.

Hong Kong's continued attractiveness to U.S. companies is based on the factors that have traditionally made Hong Kong an economic success - its free-market philosophy, entrepreneurial drive, absence of trade barriers, well-established rule of law, respect for civil liberties, low and predictable taxes, transparent regulations, free flow of information, level playing field and complete freedom of capital movement. Five years after the hand-over, these factors remain strong. When coupled with geographic proximity and cultural ties to China, Hong Kong traders and distributors are uniquely positioned to help American businesses - especially small and medium-sized - to access the burgeoning China market.

Although the focus these days is on the China factor, Hong Kong itself remains a place where the United States has important economic interests at stake. The SAR is our 13th largest export market, and our 15th largest trading partner, and the U.S. trade surplus with Hong Kong was $4.2 billion in 2001. Approximately 1,100 American companies have set up shop in Hong Kong. With the second highest per capita income in Asia, Hong Kong offers good opportunities for U.S. exporters and service companies.

Our commercial officers have identified the following areas as especially promising for American businesses: telecommunications products and services, computers and other information technology products, pollution control and monitoring equipment as well as cosmetics, insurance services, medical equipment and franchising. The Consulate thus puts lots of effort into promoting U.S. business in Hong Kong. Last, we arranged business matchmaking services for over 70 American companies, typically providing each company with six to eight meetings - the highest rate of business matchmaking services of any U.S. diplomatic mission in East Asia on a per capita basis. We offer a range of services that include matchmaking, market research, company profiles, business counseling, assistance with trade disputes and detailed market briefings.

But our interests in Hong Kong go far beyond the economic sphere. About 50,000 Americans live in the city, and many Hong Kong residents have personal ties to the United States. Over 8,000 Hong Kong students are studying in the United States. We have had a Fulbright program with Hong Kong for over fifty years that has brought 180 American academics to Hong Kong. Just this year, the U.S. Consulate General teamed with the Hong Kong's Research Grants Council to inaugurate the Fulbright Hong Kong Scholar program, which will ensure a more regular two-way flow by sending 4 local academics to the U.S. this year.

We have long enjoyed close cooperation with Hong Kong's professional law enforcement agencies. The importance of this cooperation was never more evident than in the aftermath of September 11 when Hong Kong readily answered the call of the international campaign against terrorism. Immediately following the attacks, there was a outpouring of sympathy in Hong Kong and widespread recognition that those were attacks not just on Americans but on values we held in common. Hong Kong swiftly took measures to protect the safety of local Americans as Chief Executive Tung affirmed Hong Kong's total opposition to terrorism in any form. Together with 150 other jurisdictions, Hong Kong has directed its own financial regulatory system to ensure that it does not become a platform for terrorist financing. The Government is introducing this week legislation that will implement UN resolutions directed against terrorism financing.

Although the United States and Hong Kong see eye-to-eye on many - perhaps most - major issues, there are some areas where there is plenty to talk about when we get together. In the area of civil aviation, for example, we are working hard for a more liberal air services agreement that would enhance competition, expand cargo and passenger flights, and benefit both business and consumers in Hong Kong and the U.S. Unlike many of our other East Asian partners, however, Hong Kong has so far taken a more restrictive approach. We hope we will be able to achieve the kind of win-win agreement we are looking for that comes from extensive liberalization.

Another area of interest in our bilateral relationship with Hong Kong is the protection of intellectual property rights. Here I'm pleased to report genuine progress over the past five years. Hong Kong has become a regional pacesetter for sound legislation and tough IPR enforcement.

We also keep a close eye on Hong Kong's system to control the export of sensitive technologies, and we hold regular talks with the Hong Kong authorities. Based on the most recent set of talks that took place in March, Hong Kong continues to maintain an effective and transparent export control system.

So that's the look backwards. What lies ahead? The next five years will see more challenges for Hong Kong, both political and economic.

One has to do with governance. Hong Kong's governing structure was established more than a decade ago and served Hong Kong well in ensuring a smooth transition. But in the years since the Sino-British Joint Declaration and Basic Law were drafted, popular expectations have increased, pluralistic politics have emerged and experience has shown the need to look at the issue of governmental accountability. In response, the Chief Executive has pledged strengthened governance in his second term and is proceeding to implement a new political appointment scheme at the top level of government.

This new political appointment scheme could strengthen the government's ability to tap community sentiment, project political leadership and press forward a coherent agenda. At the same time, it is not clear how this institutional reform relates to the gradual expansion of democracy provided by the Basic Law. Neither the Chief Executive nor a majority of the legislature are currently democratically elected in the sense of one man - one vote, but a recent Chinese University poll found that 75.9 percent of the Hong Kong people want to elect the next chief executive through universal suffrage. The Basic Law provides for a gradual expansion of democracy, which we believe should occur at a pace that the Hong Kong people want.

On the economic front, in addition to the Asian financial crisis and more recent cyclical downturn, Hong Kong's economy is also undergoing structural changes. As in the United States, managers are discovering their jobs are no longer secure, and workers are finding they must upgrade their skills. So economic reform and educational reform - to better equip workers for the knowledge-intensive economy of the 21st century - are pressing priorities.

I see a third challenge as well: Hong Kong business, reacting to China's continued economic growth while Hong Kong's economy has stalled, is pressing the government find ways to capitalize on China's openness and growth. It is pressing the government to further streamline traffic across the busy Hong Kong-mainland border, lower other barriers to trade, and better coordinate infrastructure development on both sides of the border. That desire is understandable as Hong Kong seeks to tap even further its hinterland on the mainland as a new source of economic growth. Some of these initiatives, however, will take Hong Kong - and the "One Country, Two Systems" relationship - into new territory. For instance, a proposal to speed border crossings by placing Hong Kong and mainland customs and immigration officials under one roof will raise hard questions about jurisdiction and the relationship between the two separate legal systems. Such issues will require careful handling because they could have a crucial impact on the "One Country, Two Systems" relationship.

Similar issues surround Hong Kong's recent proposal for a free trade pact with mainland China - what they've labeled a Closer Economic Partnership Arrangement, or CEPA. Hong Kong officials hope they can use a CEPA deal to enable Hong Kong companies to enter the China market before the rest of the world, thereby giving them a crucial edge in the race to ride China's growth.

Here too, Hong Kong is venturing onto new ground. The two sides have made it clear that Hong Kong will retain its separate economic identity and that whatever deal they strike will comply with WTO rules for such agreements. But the negotiating process will not be easy. Take for example, the issue of how to define a "Hong Kong company." Some have called for a restrictive definition to ease PRC fears that CEPA would open up a backdoor for companies from around the world to enter China ahead of WTO-agreed transition schedules. Hong Kong officials, however, have made clear that a narrow definition based on residency or nationality of shareholders would be inconsistent with GATS. The issue remains open and we are watching closely.

These two issues - border streamlining and the China free trade negotiations -- point to the fundamental dilemma that Hong Kong now faces: How to strike the proper balance between deeper economic interdependence with China and maintaining Hong Kong's political, cultural and economic distinctiveness. The challenge for Hong Kong is to accomplish this balancing act without diluting its core values and without giving rise to international perceptions that Hong Kong has become just another city in China. All sides agree that whatever form this deeper economic interaction takes must fit within the framework of the "One Country, Two Systems" relationship, but there no clear roadmap about how to do that.

In this regard, it's important to remember what makes Hong Kong special. Hong Kong continues to prosper, not just because it happens to sit at the mouth of the Pearl River Delta, but because it preserves its rule of law, protects its religious freedom, ensures its free flow of information, maintains its level playing field for foreign investment - and hopefully moves towards a more fully democratic system of government. It is those values which give Hong Kong its fundamental comparative advantage as a platform for entering the China market and serving the region. It's those values which make it a model of how free societies and free markets work and a window on China's hopeful future.

Against this background, it's encouraging to see the Hong Kong government's new motto of "Asia's World City." Hong Kong's future, as this slogan reminds us, lies not just in its role as the richest city in China. Hong Kong aspires to be something more - the most globalized city in Asia, and a city where the principles of economic and political freedom are just as much part of life as icons like the Star Ferry and I.M. Pei's soaring Bank of China building. Thank you.