U.S. and Hong Kong

THE THIRD QUARTERLY REPORT OF THE SPEAKER'S TASK FORCE ON THE HONG KONG TRANSITION

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HON. DOUG BEREUTER

OF NEBRASKA

IN THE HOUSE OF REPRESENTATIVES

Wednesday, June 3, 1998

Mr. BEREUTER. Mr. Speaker, this Member rises today to submit the Third Quarterly Report of the Speaker's Task Force on the Hong Kong Transition. It has been nearly one year since Hong Kong reverted to Chinese sovereignty on July 1, 1997. Prior to that historic event, and at your request, Mr. Speaker, this Member formed the House Task Force on Hong Kong's Transition. In addition to myself as Chairman, the Task Force is bipartisanly balanced and includes Representative Howard Berman (D-CA), Representative Sherrod Brown (D-OH,), Represenative Eni Faleomavaega (D-AS), Representative Alcee Hastings (D-FL), Representative Jay Kim (R-CA), Representative Donald Manzullo R-IL) and Representative Matt Salmon (R-AZ).

Mr. Speaker, as you requested, the Task Force expects to travel to Hong Kong, and other relevant destinations at least every six months for the foreseeable future to examine how the reversion has affected Hong Kong. The first such visit took place in December, 1997. The second is tentatively scheduled for early July of this year--one year after reversion. To day, the task force has prepared three quarterly reports accessing how the reversion has affected Hong Kong. The third report, which I submit today, covers the alternating quarter--January through March, 1998--in which there was no actual visit to Hong Kong by the Task Force. Despite a number of concerns in the areas of freedom of expression, the independence of the judiciary, the development of democratic institutions and the protection of intellectual property rights, we continue to describe the situation as "so far so good." Mr. Speaker, this Member submits the Task Force report to be printed in the Congressional Record.

The Speaker's Task Force on the Hong Kong Transition

THIRD REPORT

(Presented by the Hon. Doug Bereuter, Chairman)

The following is the third quarterly report of the Task Force on the Hong Kong Transition. If follows the first report dated October 1, 1997, and the second report dated February 25, 1998. This report focuses on events and developments relevant to United States interests in Hong Kong between January 1, 1998 and March 31, 1998--the third quarter following Hong Kong's reversion to China. (This is the alternating quarter in which there was no actual visit to Hong Kong by the Task Force since the mandate given to the Task Force by the Speaker is to visit Hong Kong only every six months. Therefore, the finding of this report are based upon indirect sources.)

BEIJING COMMITMENTS

The Hong Kong Special Administrative Region (HKSAR) has now been under Chinese sovereignty for over nine months. Concerned observes both inside and outside Hong Kong continue to scrutinize the decisions and behavior of Chinese and Hong Kong authorities for evidence that China is maintaining its commitment to the "one-country, two systems" formula spelled out in the Joint Declaration of 1984 which allows Hong Kong full autonomy in matters other than foreign policy and defense. As a dynamic regional financial and economic center, Hong Kong's continued autonomy is viewed as vital to the continuing economic health of the entire region.

The people of Hong Kong continue to maintain a high degree of confidence in the Hong Kong government. Confidence in Chief Executive C.H. Tung ebbed somewhat in January, as the effects of the Asian financial crisis rippled into Hong Kong and the public voiced its dissatisfaction with the government's handling of the "avian flu" problem. By late February, however, opinion polls showed a bounce back. Tung's overall approval rating rose to 63 percent--a four percent increase over the late-January figure. The polls also continue to show strong popular support for the "democratic" political parties, which are expected to do well in the May election in the seats open to universal suffrage.

Following Hong Kong's reversion to Chinese rule, we find that Chinese authorities continue to refrain from direct involvement in Hong Kong affairs. To date, there is no evidence of explicit Chinese interference in Hong Kong affairs. Our First Quarterly Report on Hong Kong described the situation in this regard as "so far, so good." The Second Quarterly Report echoed this judgment, with a slightly stronger caveat that the areas of concern--freedom of expression, rule of law, and protection of intellectual property rights, among others--warranted closer attention. In this report, we reaffirm or continue this assessment.

We see no clear threat to Hong Kong's autonomy. Chinese officials, both in Beijing and Hong Kong, scrupulously refrain from interference--at least in public. For example, five members of China's world-class swim team were unable to wangle their way into Hong Kong for an important meet after they neglected to apply for visas in time. Separately, the small People's Liberation Army garrison also continues to maintain a low-profile. However, several relatively isolated decisions and statements by Hong Kong officials, described below, have heightened anxieties concerning the apparent spread of a new concept of "political correctness." There is a small but growing concern that some Hong Kong authorities are giving undue consideration to Beijing's possible reaction before making decisions affecting Chinese interests in Hong Kong.

RULE OF LAW CONCERNS--FREEDOM OF EXPRESSION

International confidence in Hong Kong is based on the commitment of the Hong Kong authorities to the rule of law which it inherited from the British. An integral part of this is the "check" on abuse of authority provided by the free expression of opinion. We find that political protesters and demonstrators continue to carry out their activities without restraint. One minor exception during the first three months of 1998 occurred during the January visit to Hong Kong of Chinese President Jiang Zemin. Hong Kong police kept anti-Jiang demonstrators at a considerable distance from the Chinese leader, thus drawing criticism for pandering to Chinese sensitivities. In response, Hong Kong authorities argued that it was important to demonstrate to the Chinese that they were capable of providing adequate security, lest the Chinese feel compelled to provide their own.

Hong Kong has traditionally enjoyed a free and vibrant press. The Hong Kong media continues to operate freely. There are no taboo subjects. Newspapers that appear to tread lightly on issues of concern to China or Hong Kong authorities one day may harshly criticize them the next. There have been no reports of interference with the press by Chinese officials based in Hong Kong, nor by Hong Kong authorities. Nonetheless, self-censorship is widely perceived to exist. A February 1998 survey conducted by the Social Science Research Center of the University of Hong Kong showed that about 43 percent of those interviewed thought the media practiced self-censorship (down from 50.3 percent in December 1997), while 54 percent praised the media for fully exercising freedom of speech (slightly down from 57.5 percent in December).

Self-censorship is a subtle and insidious influence which is difficult to document and impossible to quantify. Official interference in or guidance of the media is a separate and more disturbing matter. The specter of official interference arose on March 4 when Hong Kong media magnate, Xu Simin, while in Beijing as a delegate to the Chinese People's Political Consultative Conference meeting, criticized the Hong Kong government-funded Radio- Television Hong Kong (RTHK) for airing shows critical of Hong Kong policies. Rather than refute Xu's remarks, Hong Kong Chief Executive Tung Chee-hwa, also on March 4 remarked that "while freedom of speech is important, it is also important for government policies to be positively presented."

Tung's statement sent shudders through many concerned observers in Hong Kong. However, Hong Kong Chief Secretary Anson Chan, who heads Hong Kong's bureaucracy, immediately expressed "deep regret" at Xu's remarks, which she branded as "improper." Tung subsequently reassured the public, saying on March 6, "Of course RTHK has editorial independence. The government and I welcome criticism from the news media, and I think the news media has played a very important role in monitoring the activities of the government." We hope that Chief Secretary Chan's defense of RTHK prevails. [In a statement clearly intended to reassure the Hong Kong public, Chinese President Jiang Zemin followed with remarks to the effect that discussion of Hong Kong- related issues should take place in Hong Kong, not Beijing.]

RULE OF LAW CONCERNS--INDEPENDENCE OF THE JUDICIARY

A fair and independent judiciary is another critical element of international confidence in Hong Kong's commitment to the rule of law and to its ability to maintain a high degree of autonomy. In general, the Hong Kong judiciary continues to operate independently and without taint of political influence. Judges continue to rule against the new HKSAR government. For example, in a highly publicized case, the courts ruled that the Hong Kong law denying right of abode to illegitimate children of Hong Kong resident fathers (but not mothers) violated Article 24 of the Basic Law, which grants rights of abode without reference to legitimacy or the sex of either parent.

Within the past three months, however, several incidents have focused attention on the possibility that Hong Kong's highly regarded legal institutions may be vulnerable to Chinese influence. In one case, the government's top legal officer decided not to prosecute a newspaper publisher who was politically well-connected to the mainland, despite the fact that three of the publisher's deputies were charged with fraud and that the publisher herself had been named in a report by Hong Kong's anti-corruption commission. Separately, the Hong Kong government decided not to prosecute the New China News Agency, or Xinhua, for violating Hong Kong's privacy statute, when it failed to respond by the legal deadline to a request under Hong Kong's privacy law by a politician for a copy of Xinhua's file on her. Xinhua subsequently asserted that it had no information on the politician, a claim that left most observers incredulous, in view of the intelligence-gathering role widely attributed to Xinhua. Chief Executive Tung justified the government's decision not to prosecute Xinhua by saying that Xinhua's actions were only a "technical breach" of the statute. [Note: In early April, the Beijing-appointed Provisional Legislature, in one of its last acts before being dissolved, passed a law which classified Xinhua as a body of the "state" and thus exempt from certain Hong Kong laws. The implications of this action will be discussed in the Fourth Quarterly Report.]

THE DEVELOPMENT OF DEMOCRATIC INSTITUTIONS

Hong Kong authorities and political parties continue their preparations for the May 24 election of a new Legislative Council (LegCo). The May elections will be carried out under a new law established under the HKSAR. The new law is controversial because it dismantles key provisions of the electoral reforms put into place by former Governor Patten in 1995. For example, it maintains the original formula of twenty LegCo members to be directly elected by popular vote, thirty to be elected by "functional constituencies" (initiated by the British in 1985), and ten to be chosen by a special Election Committee. However, the "functional constituent" electorate is reduced from approximately 2.7 million votes under the 1995 British reforms to about 180,000 voters. A voter registration campaign to expand the electorate for the 20 seats subject to popular vote was rather disappointing. A door-to-door campaign resulted in 264,000 new voters, but roughly 30 percent of those eligible declined to register. The disappointing response has been attributed to several factors. The complexity of the election system has discouraged many potential voters. Others are simply unfamiliar with or distrust elections. Still others are cynical about their ability to affect the eventual outcome. While others--reflecting Hong Kong's notorious preoccupation with making money--are simply not interested. Despite the widespread dissatisfaction among the political parties with the new election law, none has advocated boycotting the election.

ECONOMIC AND COMMERCIAL DEVELOPMENTS

The United States has significant economic interests in Hong Kong. Hong Kong is the home of over 50,000 U.S. citizens. Over 1,100 resident American firms employ 250,000 Hong Kong workers, or 10 percent of the workforce. The financial crisis which has buffeted Southeast and East Asia starting in mid- 1997 has not left Hong Kong unscathed. Nonetheless, Hong Kong's economy continues to grow, albeit at a slower rate than before. By the end of March 1998, deposits in banking institutions has increased, as has the ratio between the Hong Kong dollar and foreign currency deposits, suggesting that confidence in Hong Kong's dollar and banking system continues to recover unabated. The Hang Seng index remained relatively stable through the first quarter, while inching slowly upward. And, in a further show of c"onfidence in the Hong Kong economy, new residential mortgage loans began to edge back up in January, in both number and value, and positively surged in March.

Nonetheless, most economic indicators have not returned to their pre-Asian financial crisis levels. Most analysts believe Hong Kong's gross domestic product will grow by only two percent in 1998, compared to the 3.5 percent predicted by the government--and the 5.0 percent and 5.2 percent it grew in 1996 and 1997, respectively. Another trend that bears watching is Hong Kong's growing role as a channel for foreign capital to China. The Chinese companies listed on Hong Kong's stock exchange, which now account for roughly nine percent of Hong Kong's market capitalization, seldom meet international corporate-governance standards. This growing segment of the Hong Kong capital market is expected by some to double in the next ten years. The lack of transparency of these Chinese companies is likely to add further volatility to the market.

Jeffrey Lam, Chairman of the Hong Kong Exporters' Association, stated that Hong Kong's manufacturing industry still maintains competitive advantages over Asian countries despite those countries' currency depreciations. The financial turmoil has not changed the volume of orders coming to Hong Kong. Despite this good news, however, the unemployment rate for the period December 1997-February 1998, rose to 2.9 percent, the highest in the last 18 months. The total number of unemployed reached 85,000, with the retail trade, hotel, property, construction and garments sectors the hardest hit. The government is considering setting up a retraining program for those laid off. Tourism, which has traditionally depended to a large extent on the growing Southeast Asian middle- and upper classes, has also suffered from the regional financial crisis. Furthermore, if China should succumb to the temptation to devalue its currency, as some skeptics have darkly predicted, Hong Kong would find it very difficult to maintain its current Hong Kong dollar-U.S. dollar peg.

INTELLECTUAL PROPERTY RIGHTS AND OTHER CONCERNS

The most serious U.S.-Hong Kong bilateral trade issue is the continued wide availability of pirated movie, audio and software compact discs and pirated trademark goods. This situation led the U.S. Trade Representative to place Hong Kong on the Special 301 Watchlist in April 1996. One disturbing development in the past year has been a change in the nature of intellectual property rights (IPR) violations in Hong Kong. While retail sales of pirated goods were the primary problem in the past, in recent months, the manufacturing of pirated compact discs has become a significant problem. (Some people speculate that this development is a result of greater IPR enforcement in mainland China.) Hong Kong officials have reiterated their commitment to combating piracy. In addition to stepping up Custom's raids on retail outlets, on March 25, 1998, they passed a new copyright law which, among other things, gives enforcement officials greater ability to control illicit production. [Note: Despite these efforts, the IPS situation in Hong Kong remained sufficiently troublesome to warrant its designation on May 1, 1998 by USTR on the Special 301 Watch List for the third year in a row.]

The Hong Kong government continues to cooperate fully with U.S. agencies in combating drug trafficking. We note, however, that many of the same favorable factors that make Hong Kong one of Asia's most important financial centers also make it attractive to criminals who wish to conceal the source of their funds through money laundering. Consequently, it is important that the Hong Kong government work with the international community to improve its laws and enforcement in this vital area.

We are pleased to observe that during the first quarter of 1998 we continued to have full cooperation in the area of export control, and no new incidents were reported. The U.S. Commerce Department continued to conduct pre-license and post-shipment checks. And in January, 1998, U.S. and Hong Kong export control officials strengthened their already strong interaction by beginning a new series of consultations on licensing, enforcement and the exchange of information. The latter will include the U.S. sharing information relevant to Hong Kong's new "brokerage legislation," which was passed just prior to reversion. This new legislation will allow Hong Kong's authorities to prosecute people based in Hong Kong who are engaged in proliferation activities outside of Hong Kong.

We also note that serious concerns have been raised in some quarters about the adequacy of Hong Kong's export control regime and its ability to prevent the transfer of sensitive technology to unintended destinations. [Note: See Congressional Record, May 20, 1998, p. H3559.]

MACAO

Macao, a small Portuguese colony with a population of one-half million, will revert to Chinese rule at midnight on December 20, 1999. Like Hong Kong, it will become a Special Administration Region with a "one-country, two systems" formula. But Macao faces very different transition issues. In the political arena, Macao will not face the contentious debate that Hong Kong went through over its legislative body. In contrast to Hong Kong's legislative body, the Macao Legislative Assembly elected in 1996 will remain in place on a "through train" beyond the December 1999 reversion. But in other areas, there are causes for concern. The Portuguese colonial authorities have not trained and groomed local Macanese to replace Portuguese personnel in many key civil service positions. It also appears that a much smaller proportion of foreigners will remain in Macao, compared to the case in Hong Kong. One would hope that the Portuguese authorities will move with greater speed and resolve to put in place a strong professional local bureaucracy and judiciary, without which Macao cannot be expected to provide the functions required as the territory moves into the 21st century.

U.S. interests in Macao are by no means as large as those in Hong Kong, but they are nonetheless important. The largest bilateral problem is unquestionably Macao's role as a manufacturing center for pirated goods. The production of pirated compact discs is a particularly significant problem. According to knowledgeable sources, in 1997 estimates there were between 80- 100 compact disc production lines producing up to 100 million compact discs and movies per year. Although the Macao government maintains that it is committed to tackling the problem, it has been unsuccessful in combating the pirating problem for a variety of reasons. For example, it lacks adequate legislation, enforcement mechanisms and manpower. It was said that the government is drafting legislation for the creation of a full customs service that would take on the anti-piracy function of the economic services department and the maritime police. It is in America's interests that Macanese authorities move forward forcefully. Separately, we note a continuing serious problem with the transshipment of textiles through Macao.

An even more troubling factor affecting bilateral relations, and, indeed, Macao's entire development, is the disturbing influence of organized crime. Macao-based triad societies, which once contained themselves primarily to the colony's lucrative legal gambling industry, have taken on a more public and more violent persona. Several well-publicized street shootings have driven away some of Macao's important tourist clientele. The triads, now in cooperation with crime elements from across the border in China, are believed to be deeply involved in the production of pirated compact discs and other illegal smuggling activities, including the transhipment of drugs and money laundering. Macanese authorities recognize the danger these groups pose to Macao's society and economy and have worked to combat them. The triads have responded with retaliatory attacks against police and other public officials. We applaud the authorities' efforts to combat organized crime. The territory is unlikely to be able to effectively address many of the problems it now faces until it has successfully rooted out this scourge.

CONCLUSION

"So far, so good" continues to be the view of the Hong Kong Transition Task Force. As we noted above, the Asian financial crisis will have a still-to-be determined impact on Hong Kong's economy. As we have also noted, there are continuing concerns within the Special Administrative Region itself, particularly in the areas of freedom of expression, the independence of the judiciary, the development of democratic institutions and the protection of intellectual property rights. Given the complexity of the reversion in Hong Kong, this is, of course, important, but it should not be surprising. Nonetheless, this transition period in Hong Kong warrants the continued scrutiny of the international community and the Congress.

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