U.S. and Hong Kong

Eighth Report on the Hong Kong Transition
August 1, 2000

Presented by
The Honorable Doug Bereuter, Chairman

This is the eighth report of the Task Force on the Hong Kong Transition. It follows the previous seven reports, the latest of which was dated February 7, 2000. The report focuses on events and developments relevant to United States interests in the Hong Kong Special Administrative Region (HKSAR) between January 1, 2000 and July 1, 2000.

Summary and Preface

It has been three years since Hong Kong reverted to Chinese sovereignty on July 1, 1997. Hong Kong remains a vibrant economy that the Heritage Foundation and the Cato Institute recently ranked as the freest in the world. During the past six months, Hong Kong has continued its recovery from the Asian regional financial crisis with projected growth in GDP for the year of 6% or more. It made substantial progress in divesting itself of the large amount of equities acquired during its 1998 intervention in the stock market. Hong Kong welcomed the U.S. House of Representatives' approval of Permanent Normal Trade Relations (PNTR) status for China and its impending entry into the World Trade Organization (WTO) which Hong Kong views as good for its own economy, its role as a facilitator of trade with the mainland, and economic stability of the region. However, some observers questioned whether Hong Kong's intermediary role as a facilitator of trade and investment with the PRC might be damaged to it in the long run. Hong Kong continued to operate independently in economic decision-making and to voice its own views in international fora in which it participates, including the WTO and the Asia-Pacific Economic Conference (APEC).

During the first half of the year, numerous public demonstrations took place on a wide variety of issues. Hong Kong Chief Executive Tung Chee-hwa (C.H. Tung) came under attack on several issues including policy towards the stagnant property market and a scandal related to construction by the Housing Authority. Although the increase in the number or size of public demonstrations was only a matter of degree as compared with the previous years, some critics claimed that Hong Kong had turned into a "city of protests" because of public frustration at the Government's performance and the lack of power of the Legislative Council's (Legco's) elected representatives. In July, a controversy arose when a professor at Hong Kong University alleged that C.H. Tung had indirectly warned of his displeasure at negative poll results that indicated his popularity was declining and the involvement of universities in such polls. The Government and University officials accused of conveying Mr. Tung's alleged message strongly denied the allegation.

The controversy over the "right of abode" case continued to generate debate over the issue of Hong Kong's future judicial autonomy and the rule of law. A number of legal scholars opined that the ruling merely made clear what had been true since reversion, but largely ignored: that under the "One country, two Systems" policy, ultimate authority to interpret the Basic Law (as it applies to matters that China's National People's Congress (NPC) defines as affecting the mainland) rests with the NPC rather than Hong Kong's Court of Final Appeals. Some argued that such a situation necessarily undermined Hong Kong's rule of law and judicial independence, while others argued that rule of law and judicial independence were alive and well and that the "right of abode" case was a unique situation unlikely to be repeated.

Hong Kong's media remained free and freewheeling and continued to comment critically on the PRC. However, concern over freedom of the press and free speech increased when Wang Fengchao, Deputy Director of the Chinese Government's liaison office in Hong Kong, warned journalists in April not to report views considered to favor Taiwan independence. In the same remarks he called on the Hong Kong Government to enact laws under Article 23 of the Basic Law against any act of treason, secession, sedition, or subversion against the Central People's Government. Amidst the immediate and general outpouring of criticism by the press and democratic activists, the Hong Kong Government quickly responded by insisting that press freedom is guaranteed under the Basic Law and that no decision has been made on the timing or content of legislation under Article 23.

In May, He Zhiming, an official of China's Hong Kong liaison office, warned Hong Kong businessmen that they should not engage in trade with Taiwanese partners who support independence. Hong Kong's Chief Executive, Tung Chee-hwa personally sought and received assurances that China's central government would not interfere in Hong Kong's commercial activities. The Hong Kong Government issued a statement saying that it would continue to protect firmly the principles of economic freedom and free trade. Despite the Hong Kong Government's efforts, Wang and He's statements clearly created uncertainty and damaged confidence regarding Beijing's commitments to leave Hong Kong's way of life unchanged for fifty years under the Sino-UK Joint Declaration and the Basic Law.

Another issue that arose during this period was alleged investigations by Chinese security authorities in Hong Kong and possible future rendition of suspected criminals between Hong Kong and China. There were allegations that Public Security Bureau (PSB) officials had undertaken activities in Hong Kong without properly notifying Hong Kong authorities. The Hong Kong Government pursued the matter with mainland officials and reported that the mainland reaffirmed its policy of going through proper channels in seeking investigative assistance. China and Hong Kong also continued discussions on a rendition agreement that would allow for the transfer of suspected criminals between the two. Some expressed concern that a rendition agreement coupled with the enactment of anti-subversion laws could open the way for targeting political dissidents. Government officials have stated that the eventual law would not infringe on the freedoms Hong Kong currently enjoys.

In the area of export controls, Hong Kong continued its excellent record of strict enforcement, seizing five armored personnel carriers in transit to China without a Hong Kong import license. U.S. Customs Commissioner Raymond Kelly visited Hong Kong in May and praised its commitment to implementation of effective and comprehensive strategic export controls. Mr. Kelly also lauded Hong Kong for its efforts to combat alien smuggling and piracy of intellectual property rights. U.S. Immigration and Naturalization Service Commissioner Doris Meissner, who visited Hong Kong in July, also praised Hong Kong for its anti-alien smuggling efforts and cooperation with the United States. U.S.-Hong Kong cooperation in various law enforcement fields was excellent.

Economic Developments

Hong Kong's economy continued its rebound from the Asian regional financial crisis over the past six months. In February 2000, the Cato Institute joined the Heritage Foundation in again ranking Hong Kong as the world's freest economy. The first quarter of 2000 showed Hong Kong with an annual GDP growth rate of 14.3%, and a 8.7% increase in the last quarter of 1999. Unemployment neared a two-year low from April through June, falling to 5.0%. Under-employment during the same period was 3.1%. Creation of jobs in the technology sector were credited with the low figures. Consumer prices (deflation) mostly continued on a downtrend in the first quarter of 2000. The Composite Consumer Price Index decreased by 5.1% from the previous year. Tourism grew by 13% over the previous year, with tourists from the region making up the bulk of the increase due to the economic recovery of the region and appreciation of some of the regional currencies. Despite strong first quarter growth, the relatively high level of unemployment and economic uncertainty continued to dampen consumer spending and domestic investment sentiment.

The economic recovery was led by the growth in exports and especially re-exports from China. The value of domestic exports for May 2000 increased by 12.8% to HK$15.6 billion with re-exports increasing by 23.7% to HK$117.3 billion over the previous year. Imports also showed an increase of 29.2% to HK$140.7 billion with a resultant trade deficit of HK$7.9 billion. The trade deficit for the first five months of 2000 was registered at HK$42.5 billion, compared to the HK$43.7 billion for the whole of 1999.

The Government is committed to making Hong Kong a high technology center. In support of this goal it has dramatically deregulated the telecommunications sector and committed to developing a Science Park and "Cyberport" project. The "Cyberport" project is intended to transform Hong Kong into an informational and technological hub. Fifteen multinational companies, including Microsoft, IBM, Hewlett Packard, Cisco, Sybase, and Yahoo!, have already signed letters of intent to become anchor tenants and another 121 companies have shown interest.

The stock and futures markets were merged with the objective of encouraging openness and transparency and the stock exchange began experimental trading of 7 NASDAQ stocks. The Government continued its efforts to divest itself of equities obtained during its intervention into the stock market in August 1998. The Hong Kong Monetary Authority revealed in June 2000 its intent to sell off another HK$12 billion worth in shares in the third quarter of 2000. The Government has already sold off HK$60 billion in blue-chip shares through the Tracker Fund. The Government's stock fund was valued at HK$218.8 billion in December 1999.

Hong Kong strongly supported the passing of Permanent Normal Trade Relations (PNTR) for China through the U.S. Congress. The Government believes that resulting WTO membership for China will enhance Hong Kong's role as an entrepot for trade and increase Hong Kong's GDP by at least 0.5% annually. The IMF said in a November report that China's membership in the WTO would bring with it a host of new opportunities for Hong Kong, which the IMF noted is well placed to assist in the restructuring of China's financial and enterprise sectors. The Hong Kong SAR in its 1999/2000 report noted that "Hong Kong's historic role as a financial center and trade entreport, and its cultural and language ties, will provide an unmatched advantage to tap the potential of the Mainland market." Some observers believe, however, that the agreement will mean increased competition for Hong Kong firms as the mainland seeks direct international trade and investment. Recent talks between Beijing and Hong Kong have centered around Hong Kong's anticipated trade role following China's accession to the WTO.

U.S. direct investment in Hong Kong is over $20 billion, and bilateral trade grew to $10.7 billion in the first five months of this year, well above the same period in 1999, making Hong Kong our fifteenth largest trading partner. Sectors that have seen the greatest growth include telecommunications where liberalization has opened up new opportunities for U.S. firms in the areas of international telephone and broadcast services. Through two rounds of discussions this year, the U.S. has also encouraged similar liberalization of Hong Kong's civil aviation policies, which could contribute to Hong Kong's efforts to establish itself as a pre-eminent air services hub. Hong Kong, however, has so far resisted aviation rights to U.S. passenger and cargo carriers despite its declared liberal air cargo policy.

Property Market and Housing Scandal Create Woes for Hong Kong Government

The sluggishness of the key property market and a scandal involving public housing constructed by the Housing Authority resulted in protests and the resignation of the Chairman of the Housing Authority, Ms. Rosanna Wong. Several protests over the Government's policy towards the slumping property market took place in the first half of the year. The property market has plunged by about 50% since the Asian financial crisis of 1997, although property prices are still among the highest in the world. The Government equivocated over its policy; first saying that it would not intervene, but later stating that it would shift 16,000 subsidized flats from sale to rental. There was further confusion over Chief Executive Tung's statement that a policy of building 85,000 new residential units annually to address the earlier bubble in the property market and shortage of affordable housing had actually been suspended in 1998. There are differences in the Hong Kong community over the extent and nature of Government involvement and intervention in the housing market.

The weakness in the property market is primarily due to a supply surplus, high interest rates, and weak consumer sentiment. Land sales have long been a significant Government revenue source, but the share of such sales as a percentage of Government income has dropped from 23% to about 12%, which presents a budgetary challenge to the Government. In June the Liberal Party organized a march of 2,000 Hong Kong homeowners to protest lack of Government intervention in the slumping property market.

Another problem involved a scandal at the Housing Authority which resulted in the demolition of two new housing blocks costing HK$250 million after it was discovered that the pilings for the foundations were unsafe. The Chairman of the Housing Authority, Rosanna Wong, announced she was resigning and the Legislative Council (Legco) subsequently passed a motion of no-confidence in her and the Director of Housing, Tony Miller. Government Chief Secretary Anson Chan said it was unfair to hold the two civil servants responsible and warned that the no-confidence vote could have far-reaching damaging effects on Hong Kong's vaunted civil service and the governance of Hong Kong. Miller said that he would not resign since, "civil servants should not be affected by politics."

Intellectual Property Rights

Over the past year, Hong Kong has made substantial progress in the fight against copyright piracy, introducing new legislation to control illicit production, reclassify piracy as a serious crime, and criminalize corporate software license abuse. It has increased raids and seizures against retail outlets and pirate production facilities and implemented tough deterrent sentences for convicted pirates. The 185-member Special Task Force set up by the Customs and Excise Office continued to perform effectively and had its mandate extended to December 2000. As a result of this progress, the U.S. Trade Representative removed Hong Kong from the Special 301 list in 1999. U.S. officials have urged Hong Kong officials to take pro-active action against internet-based piracy. An Anti-internet Piracy Task Force has been set up in the Customs Bureau and in April Customs conducted its first raid against a Hong Kong-based web site offering downloads of pirate material. Despite the progress, piracy of internet and video products in particular remains a problem.

Law Enforcement Cooperation

Since the establishment of the Hong Kong Special Administrative Region (HKSAR) in July 1997, the already excellent law enforcement cooperation between the United States and Hong Kong has continued to improve. The U.S. Government has sought successfully to broaden its cooperative liaison and operational relationships with agencies of the Hong Kong Government, with particular attention to combating alien smuggling, illegal textile trans-shipments, money-laundering, counterfeiting of currency and travel documents, credit card fraud, organized crime, violations of intellectual property rights, illegal high-technology transfer, and international drug-trafficking. In May, U.S. Customs Service Commissioner Raymond Kelly visited Hong Kong and lauded its successful cooperation on alien smuggling, protection of intellectual property copyright and patent rights, textile trans-shipments and controls on strategic commodities. He was quoted as saying, "Both the United States and Hong Kong are committed to the implementation of effective and comprehensive strategic controls that uphold the relevant international regimes and prevent the diversion of strategic commodities." In regard to alien smuggling he said that, "Our partners in Hong Kong have sound mechanisms in place for checking vessels to prevent the smuggling of aliens." Immigration and Naturalization Service (INS) Commissioner Doris Meissner visited Hong Kong in July and similarly praised Hong Kong for its anti-alien smuggling efforts and cooperation with the United States.

The Director of the Office of National Drug Control Policy (ONDCP), General Barry McCaffery, U.S. Army (Ret.), visited Hong Kong in June and praised the outstanding efforts and significant results obtained by narcotics law enforcement officials in making Hong Kong an inhospitable place for drug trafficking. General McCaffery announced at the time that he intended to recommend that Hong Kong be removed from the list of major narcotics producing or transit countries.

Political Developments

Under the Basic Law that serves as Hong Kong's Constitution, directly elected representatives to the Legislative Council (Legco) from geographic constituencies make up only 20 of the 60 members. That number will increase to 24 in the elections scheduled to be held on September 10, 2000, and to 30 in 2004. The Basic Law allows for (but does not mandate) the remaining 30 functional seats to be converted to directly elected positions and would permit the direct election of the Chief Executive after 2007.

On July 9, 2000, just under 20% of roughly 177,000 select members of Hong Kong society representing the business community, professionals and other groups showed up to select members of an 800-person committee which will choose six of the 60 members of Legco in September. The committee may also select the next Chief Executive in 2002. Critics condemned the process as "undemocratic."

Some elected members of Legco, as well as other political activists, for some time have lobbied for a faster transition to a more democratic system. In January, leaders of the three major political parties in Hong Kong joined to urge full democracy by 2008, arguing that the present system is "unsustainable." In fall 1999, the Chief Executive backed away from another senior official's commitment to begin public debate on the issue after the September elections and told the Legislative Council that consultations on post-2007 electoral schemes should begin "at an appropriate time." In July 2000, however, Chief Secretary Anson Chan suggested that debate on the future of Hong Kong's political development might begin after the September elections.

The current political system in Hong Kong is heavily weighted towards concentrating power in the executive rather than the legislature. Legco acts primarily as a monitoring body that can block or amend Government legislation and hold hearings. In this capacity, Legco has performed well, ensuring that views critical of the Government were vigorously voiced and pursued. However, some critics complained that Legco had few positive achievements since the Basic Law leaves the Government with an overwhelming preponderance of power, and Government, Legco members, and community leaders have expressed growing frustration over aspects of Hong Kong's political structure. Recently, Chief Secretary for Administration Chan said changes to the government system should be considered and discussed. She agreed that the system should be more accountable, but acknowledged the lack of a viable alternative in the foreseeable future. Legco's unprecedented action to pass a vote of no-confidence in the Chairman of the Housing Authority and her deputy was seen by some as a welcome sign of a more assertive Legco. However, some observers, including Ms. Chan, saw it as a dangerous political attack on the apolitical civil service.

The abolition of elected municipal councils at the end of 1999 was widely criticized by democracy activists both in Hong Kong and abroad. The UN Human Rights Committee (UNHRC) and the British Government's sixth semi-annual report on Hong Kong criticized the elimination of the Councils. Similarly, last year's decision to increase the number of appointed members to local District Councils was seen as another backward step from promoting democracy at the local level.

Hong Kong's citizens made full use of their rights of assembly and free speech. For example, as usual there was a demonstration to mark the anniversary of the Tiananmen Square crackdown and there were demonstrations on July 1 to mark the third anniversary of Hong Kong's reversion to Chinese control. Media reports suggested substantial increases in the number of street protests and demonstrations and in the numbers of participants, when, in fact, the increase was only a matter of degree. A series of early summer demonstrations did, however, feed growing perceptions that the Government was not being responsive to Hong Kong residents' needs.

Michael DeGolyer, director the Hong Kong Transition Project at Baptist University told the Asia Society in June that, "The bottom line in Hong Kong right now is that there is deep dissatisfaction with the fact that the structures of the government and legislature are not working.... I think things are reaching a critical point." He went on to say that, "It is a very dynamic system now yet Tung is running Hong Kong in an autocratic, patriarchal way... I think many people now realize this has to change." Polling results published by a number of organizations indicated Chief Executive C.H. Tung's falling popularity and increasingly low levels of support for his performance.

In July, Robert Chung, a professor at Hong Kong University, claimed that C.H. Tung had issued warnings "via a special channel" that he disapproved of the involvement of universities in surveys that showed negative results in terms of the Government's popularity. The Government and the University officials accused of conveying the Chief Executive's alleged warnings strongly denied the allegations. An investigation was launched.

Judicial Independence and the Rule of Law

The rule of law is still functioning well in Hong Kong three years after reversion to Chinese control. However, the continuing fallout over the "Right of Abode" case has raised questions about the long-term independence of Hong Kong's judicial system. The issue is a fundamental one that goes to the core of the "one country, two systems" principle and the powers enunciated in the Basic Law.

Last year, the Court of Final Appeal (CFA) issued rulings in three cases known collectively as the "Right of Abode" ruling. The initial ruling declared some Hong Kong immigration regulations (discriminating against children born out of wedlock) inconsistent with the International Covenant on Civil and Political Rights subsumed in the Basic Law and confirmed that all children of Hong Kong residents had right of abode in Hong Kong. The ruling also asserted the Court's right of judicial review over not only the Basic Law, but also over acts of the National People's Congress as they affected Hong Kong.

After releasing reports suggesting that the ruling would result in an influx of 1.6 million new immigrants, the Hong Kong Government asked the Standing Committee of the National People's Congress (NPC) to interpret two sections of the Basic Law relevant to the Right of Abode ruling. Although the NPC interpretation issued in June, did not affect the original litigants in the case, it overturned the prescriptive effect of the CFA judgment and reduced the number of people eligible for right of abode in Hong Kong.

In a judgment on a separate appeal in December, the CFA upheld the NPC interpretation saying it was "valid and binding" on courts in Hong Kong. The decision provoked small-scale clashes between protestors and police and caused a widespread outcry from opposition legislators, academics and newspaper editorials.

In the intervening six months, there has been considerable comment and anguish about this development. Article 158 of the Basic Law gives the National People's Congress authority to interpret the law. Courts in Hong Kong are given authority to adjudicate cases which are "within the limits of the autonomy of the region." However, if Hong Kong courts need to interpret the Basic Law concerning affairs which are the responsibility of the Central People's Government, or which concern the relationship between the Central Authorities and Hong Kong, and if such interpretation will affect judgments on the cases, the courts shall first seek interpretation of the relevant provisions from the NPC Standing Committee (NPCSC). The Hong Kong courts must follow the interpretation of the Standing Committee.

Some legal scholars expressed the view that in making its initial ruling without seeking an interpretation from the NPCSC, the CFA had tried to sidestep its obligations under Article 158. American legal scholar Jerome Cohen said that the CFA precipitated the problem by "unnecessarily and erroneously" asserting it had the power to invalidate legislation enacted by the NPC and by refusing to refer a question to the NPCSC as required by the Basic Law. According to Bryon Weng, former chairman of the Department of Government and Public Administration of the Chinese University of Hong Kong, "the CFA, in its (subsequent) December opinion, ruled that the NPCSC can give an interpretation about the Basic Law at any time, whether there is a court case or not." This interpretation suggests that a judgment as to what cases are "within the limits of the autonomy of the region," is within the power of the NPCSC to determine. Weng went on to state that "The Basic Law has provided a relatively weak basis for judicial independence." The idea that the NPCSC can intervene anytime it chooses to interpret the Basic Law has caused considerable consternation and concern among some about the long-term prospect for judicial independence in Hong Kong.

The Hong Kong Government, in its recently released report entitled "HKSAR: Key Issues for 1999/2000," acknowledged that "There was concern that the Government's actions could be seen as an attempt to undermine the CFA and therefore the rule of law. Others worried that an interpretation of the Basic Law so soon after the handover would lead to more requests for referrals in the future." The report went on to state that:

"While Hong Kong's mini-constitution, the Basic Law, has largely preserved the previous legal system, it also provides for some inevitable changes caused by the establishment of the SAR. The common law system will endure, but some aspects will be adapted to the new constitutional situation set up by the Basic Law. But it is still early days and Basic Law litigation is evolving. As more constitutional cases are decided by the courts, an authoritative body of jurisprudence will develop which will clarify important articles of the Basic Law and give guidance on the proper approach to interpretation."

Some legal experts, such as Justice Barry Mortimer, former Vice President of the Court of Appeals, believe that, "the future of the legal system remains certain, optimistic and bright." While acknowledging that many issues remain to be resolved before these high constitutional issues are finalized, he believes that in time constitutional conventions will be established and that government intervention in the process, such as the request for a NPCSC interpretation in the right of abode case, will be seen as "wholly exceptional."

Freedom of Expression and Individual Liberties

The people of Hong Kong continued to enjoy a tradition of free speech and free press. Political debate is dynamic and raucous. Thousands of demonstrations or petitions have been held since the reversion and recently the number of protests has increased further. A wide and diverse range of opinions, including those critical of the Hong Kong and PRC Governments, are routinely aired in the mass media and public fora. Despite China's crackdown on the Falun Gong spiritual movement, in Hong Kong the organization continued to be legally registered and adherents continued to practice freely and publicly protest against mainland policy. The Hong Kong Government has said that it may continue to operate without restrictions as long as its practitioners observe Hong Kong law. Some Falun Gong adherents were denied entry into Hong Kong in July, but the denials were apparently based on legitimate immigration regulation concerns, not the individuals' connection with Falun Gong.

On April 12, Mr. Wang Fengchao, Deputy Director of the Central Government Liaison Office, warned Hong Kong media not to report remarks advocating independence for Taiwan and went on to say that Hong Kong should pass anti-subversion laws under Article 23 of the Basic Law. His remarks came in response to a Hong Kong media interview carrying statements by Taiwan's Vice President Annette Lu that Taiwan had "independent sovereignty." Mr. Wang's warning provoked outrage among journalists and opposition figures in Hong Kong. The Hong Kong Journalist's Association said it was "shocked and disturbed" by the remarks which it described as inappropriate and "seriously damaging to press freedom....If the media follows what Mr. Wang has said, they will become a tool to uphold state policies. Independence and credibility will be totally lost."

Hong Kong's Acting Chief Executive quickly issued a public statement stressing that press freedom and freedom of speech and the press are guaranteed by the Basic Law. "This means that the Hong Kong media is free to comment and report on all matters of current interest," stated the Acting Chief Executive.

Wang's comments came against the background of last year's criticism of Radio Television Hong Kong (RTHK) by a senior PRC official for airing the views of Taiwan's unofficial representative on the same issue. The subsequent transfer of a widely respected, long-time director of broadcasting for RTHK had raised concern that the Government might have acted to assuage Beijing.

In August 1999, a recommendation by a subcommittee of Hong Kong's Law Commission proposed establishing an independent "Press Council" to deal with media excesses. The Council would be empowered to hear complaints about unwarranted or offensive media intrusions into peoples' personal lives (acknowledged even by the media to be a serious problem), to make decisions about the merits of those complaints, and to award compensation for damages. After an outpouring of concern that such a measure would damage press freedom, the proposal seems to have been quietly shelved, while the media itself has begun to address self-regulation of possible abuses.

Anti-Subversion Laws

Article 23 of the Basic Law states that, "the Hong Kong SAR shall enact laws on its own to prohibit any act of treason, secession, sedition, subversion against the Central People's Government, or theft of state secrets, to prohibit foreign political organizations or bodies from conducting political activities in the Region, and to prohibit political organizations or bodies of the Region from establishing ties with foreign political organizations or bodies."

As noted, Wang Fengchao, in his remarks urging press self-censorship on the issue of Taiwan, also said that Hong Kong should enact laws under Article 23 of the Basic Law against subversion, treason, secession, etc. Another Chinese Government official, Deputy Director of the NPC's Standing Committee on Legislative Affairs Qiao Xiaoyang, said on March 11 that Hong Kong was obliged under the Basic Law to pass such laws. While noting that "legislation takes time and it is up to the Hong Kong SAR to decide when to enact the laws, it won't do not to legislate," he said.

The Hong Kong Government has moved cautiously in this regard and no such legislation appears to be on the horizon. In April, Justice Secretary Elise Leung told reporters that Hong Kong "will not hurry" in legislating laws under Article 23 and would consider "all points of view" before compiling a draft. Security Secretary Regina Ip told Legco members that Hong Kong would "exchange views" with China on the matter. Numerous politicians, academics, journalists and activists have expressed concern that legislation under Article 23 would almost inevitably impinge on fundamental rights. A prominent legislator, lawyer and activist Margaret Ng wrote that, "a law which aims at inhibiting speech and the free flow of information is incompatible with Hong Kong's values and system."

Chinese official's warning to business community sparks outrage

At a meeting of the Chinese Chamber of Commerce on May 31, He Zhiming, an official of the Central Government Liaison Office responsible for Taiwan, warned businesses that those engaged in trade with companies that supported Taiwan independence were taking a risk. He said that state policy "absolutely prohibited" trade with Taiwanese firms which "on one side openly support an independence for the island but on the other hand take advantage of the economic activities on the motherland."

This extraordinary warning prompted Hong Kong Chief Executive C.H. Tung to seek and receive assurance from Chinese authorities that the central Government would not interfere with Hong Kong's commercial activities. The Hong Kong Government subsequently issued a statement saying that:

"Investors and businessmen operating in Hong Kong are free to choose their business partners. The HKSAR Government will continue to protect firmly the principles of economic freedom and free trade. This is a pillar of our success and will not change."

Despite the Hong Kong Government's efforts at damage control, the remarks by Chinese government officials on press and business related to Taiwan issues raised serious concerns. Democratic Party leader Martin Lee said that, "my fears are that more and more people's freedom in Hong Kong will be restricted, starting with the press and now business people... what about teachers?" To date, there have been no reports of any concrete negative consequences resulting from these statements.

Rendition

Discussions between China and the Hong Kong SAR on rendition arrangements for the transfer of criminal suspects were criticized by some who expressed fear that it could be used as a tool for political persecution in conjunction with anti-subversion laws. Democratic Party Martin Lee said that, "once anti-subversion laws were enacted, it would turn all so-called political offenses into criminal offences and make them both offences on the mainland and in Hong Kong." Currently, Hong Kong does not send suspects to another jurisdiction for trial if the offense is not a crime in Hong Kong and prohibits the return of "political offenders."

In March, three Hong Kong deputies to the NPC called for accelerating negotiations on a judicial mutual aid mechanism to resolve disputes over the detention of Hong Kong residents in Chinese jails. Some Hong Kong residents involved in essentially commercial disputes have been detained for lengthy periods by the Public Security Bureau in China. As of June this year, six Hong Kong residents detained in the mainland have been released and allowed to return to Hong Kong. Last year's controversial transfer of a Hong Kong resident from Thailand to China also raised concern that Hong Kong residents could be apprehended by PRC authorities while overseas.

In its "key issues" report, the HKSAR noted the following:

"The detention of Hong Kong people in the Mainland has attracted media and public attention. As a result of community concerns, Hong Kong and Mainland authorities have agreed in principle to establish a notification arrangement for Hong Kong residents detained in the Mainland. The notification arrangement will be put in place once operational details have been worked out. Talks between security and legal officials are continuing on an arrangement for the rendition of criminal suspects which would take into account the differences between the legal and judicial systems in the HKSAR and the Mainland."

Public Security Bureau Investigations

Another issue has been reports that Chinese Public Security Bureau (PSB) officials have come to Hong Kong to investigate cases without notifying local authorities. Chinese officials said that it was "improbable" that such a thing would happen. A Hong Kong resident alleged, however, that she was escorted back to Hong Kong by PSB officials who raided her parents home and seized documents after they were arrested in 1995 on corruption charges. According to the Hong Kong Government, in 1999 there were 109 joint working meetings on criminal investigations and there had been 74 meetings up to May 2000.

Freedom of Travel

The denial of visas for Hong Kong democracy activists to visit China and for Chinese dissidents to visit Hong Kong was another issue of continuing concern. There was a positive development in May when Democratic Party Legco member Lau Chin-shek, who is also a member of the Hong Kong Alliance in Support of the Patriotic Democratic Movement in China, was allowed to visit his elderly mother on the mainland for the first time in 11 years. This visit was arranged with the assistance of Hong Kong Chief Executive C.H. Tung. However, other members of the organization remain unable to visit China. A number of prominent Chinese dissidents including Labor Rights activists Han Dongfang and Information Center for Human Rights and Democracy Movements in China Director Lu Siqing continue to operate freely in Hong Kong.

Export Controls

Hong Kong is recognized as possessing one of the world's best systems of export controls. Disappointing some outspoken critics of Hong Kong and the People's Republic of China, the reversion appears to have had no major impact on the exercise of export controls. U.S. Government agencies report no evidence of Chinese interference in Hong Kong's export control system. Chinese officials have recognized that export control matters fall within the trade, rather than foreign policy area, thereby placing export controls within the Hong Kong Government's exclusive purview. Hong Kong requires both import as well as export licenses, enabling authorities to track controlled commodities as they enter or leave the HKSAR. Hong Kong also refuses to issue re-export licenses for products unless it is sure that the original exporting country would export the product to the ultimate end user. The Hong Kong Government is extremely transparent regarding export controls and cooperates closely with many countries to ensure compliance with multilateral and country specific export control regimes.

Continued cooperation between HKSAR and U.S. officials have only helped strengthen Hong Kong's export controls. Semi-annual meetings between U.S. and HKSAR have resulted in U.S. briefing of current trends and issues as well as relevant U.S. legislation. Hong Kong adheres fully to international control regimes such as the Nuclear Non-proliferation Treaty, the Missile Technology Control Regime, the Nuclear Suppliers Group, the Australia Group and the Wassenaar Agreement. U.S. Department of Commerce officials continue to conduct regular pre-license and post-shipment inspections as part of dual-use licensing process. U.S. Department of State and U.S. Customs officials also carry out pre-license and post-shipment checks of munitions items under the "Blue Lantern" program. Hong Kong has not imposed any limitations on pre- or post shipment verification by U.S. agencies and in some instances U.S. investigators have conducted several inspections to ensure that the end user remains in compliance with its license.

In May 1999 the Cox Commission Report flagged the possibility of transshipment of sensitive technology through Hong Kong, highlighting the lack of Customs inspection of PLA vehicles when they cross the border. This resulted in Hong Kong reaffirming its commitment to maintain control over all cross-boundary movements, including the PLA. The commitment was clearly shown this March, when customs officers discovered and held five armored vehicles on a vessel bound for China. The armored cars had been assembled in the Ukraine and loaded into a container in Naples abroad a ship bound for the northern Chinese port of Tianjin. The vehicles had no import licences. They were seized by Hong Kong Customs and three crew members including the captain were held for questioning.

In May on a visit to Hong Kong, U.S. Customs Service Commissioner Mr. Raymond Kelly said he found Hong Kong committed to preventing the diversion of strategic goods. Mr. Kelly praised HK Customs for its efforts to detect the smuggling of human cargo aboard container ships and that Hong Kong had succeeded in curbing intellectual property rights piracy and the manufacturing of counterfeit goods.

Although continued vigilance is required, there appears to be no real threat to Hong Kong's export control autonomy in the foreseeable future. Hong Kong has continually confirmed its resolve to keep up one of the world's strongest and most respected export control system.

U.S. Military Ship and Aircraft Visits

Following the accidental bombing of the Chinese Embassy in Belgrade in May 1999, PRC authorities denied U.S. military ship and aircraft stopovers and visits to Hong Kong. After more than a two month ban, the Chinese Government again began granting permission for such visits. No requests during the first half of this year were denied and the number of visits returned to their pre-bombing levels. In March, U.S. Secretary of Defence William Cohen visited Hong Kong. Hong Kong Government spokesman Stephen Lam noted that Hong Kong welcomes the contribution that ship visits make to Hong Kong's tourist industry.

Last Vietnamese Refugee Camp Closes

After 25 years of operation the last Vietnamese refugee camp in Hong Kong was closed on May 30. In February, Hong Kong gave almost 2,000 remaining refugees the right to become Hong Kong residents and provided some basic assistance.

Macau

Like Hong Kong before it, Macau reverted to Chinese sovereignty on December 20, 1999, under the "One Country, Two Systems" model. Macau's high degree of autonomy and way of life are protected for fifty years under the 1987 Sino-Portuguese Joint Declaration and Macau's 1993 Basic Law. With a much smaller population and economy than Hong Kong, there has been considerably less controversy and commentary over Macau's situation. Crime, particularly organized crime syndicates (triads) fighting for control of the gambling and vice trade, had been a major problem in Macau. The reversion of Macau to Chinese sovereignty has apparently reduced the magnitude of the crime problem in Macau. The new Government has continued to respect fundamental human rights and the judiciary remains independent.

Unemployment remains a concern in Macau and demonstrations over the level of unemployment turned violent in July with protestors hurling stones and police responding with tear gas.

A total of 80% of Macau's exports consist of textiles, and the illegal transshipment of textiles produced elsewhere through Macau has been a major concern. Macau has made major improvements in its IPR anti-piracy regime and was moved from USTR's priority watch list to the watch list in April 2000. Enforcement, however, needs to be further strengthened. Chief Executive Edmund Ho has pledged to work closely with the U.S. to deal with the issue. Money laundering through Macau's banks and casinos also remains a concern. In addition, reports have surfaced indicating that the Government of North Korea has used Macau as a transshipment point for counterfeit U.S. currency.

Conclusion

Three years after Hong Kong's reversion to Chinese sovereignty, the unprecedented "One Country, Two Systems" experiment thus far has been a success, although it continues to face many challenges. Hong Kong remains a bastion of free-market capitalism, as shown by its ranking as the world's freest economy in the Heritage and Cato reports. It has made a spectacular recovery from the Asian financial crisis of 1997/98. It continues to formulate an independent economic policy and maintains its own membership in international economic organizations. Hong Kong's excellent system of export controls remains intact. Hong Kong has made substantial progress in protecting intellectual property rights, although more could be done and trade-related issues always require continued close attention, especially the liberalization of its civil aviation policies.

Hong Kong's political system continues to evolve. The Hong Kong media remains free and continues to comment critically on the Government and the PRC. However, concerns about self-censorship and possible interference with the business sector in response to remarks by some PRC officials have grown. Demonstrators have taken to the streets increasingly in recent months, where they have freely exercised their rights to freedom of speech and assembly. The legislature and free press have used their roles to increase government accountability and transparency. Vigorous debate over judicial independence in the context of the "Right of Abode" case has continued. If the National People's Congress intervenes in decisions primarily affecting Hong Kong, confidence in Hong Kong's future could be seriously undermined.

Perhaps the most telling indication of the success of the transition has been its lack of impact on the way of life of the vast majority of Hong Kong citizens. Emigration dropped to its lowest level in 20 years in 1999, with only 12,900 people emigrating, down 33% from the previous year. According to Channel News Asia, some 200,000 people who had emigrated before the handover have returned to live in Hong Kong. These people have voted with their feet: a vote of confidence in the territory's future.