Mainland Affairs Council

Analysis on Hong Kong Two Years after the Transfer of Jurisdiction

Summary

■ Hong Kong's general situation remains stable, but uncertainties and controversies are rising.

■ "One country" prevails over "two systems;" the HKSAR government always second-guesses Beijing's preferences in its governance.

■ As its judicial independence has been under fire more often than not, Hong Kong's people are expressing growing concern about "one country, two systems."

■ "Hong Kong remaining unchanged for 50 years" has been challenged by 58 disputes, as reported by the media.

■ Hong Kong's economic downturn has abated, but it is unlikely to have a major rebound in the near future.

■ Taiwan's relations with Hong Kong continues; major breakthroughs , however ,are less possible.

■ The "one country, two systems" formula for Hong Kong and Macao is not applicable to Taiwan. A democratic Taiwan will contribute to the implementation of "two systems" in Hong Kong and Macao.

Since Hong Kong reverted to Mainland China in 1997, the United States, Britain, Japan, and the European Union have issued 16 reports to comment on developments in Hong Kong. The Mainland Affairs Council of the Republic of China has prepared this 1999 report on Hong Kong with five chapters -- overview, the establishment of win-win Taiwan-Hong Kong relations, the non-applicability of "one country, two systems" on Taiwan, analysis of the Hong Kong situation, and appendices (post-1997 disputes and major events.)

I. Overview

Hong Kong, described as "a window on China's future" by U.S. President Bill Clinton, has returned to normal operations after the fanfare generated by the handover ceremony in 1997. Hong Kong fared rather smoothly from July 1998 to June 1999, but uncertainties and controversies kept arising. For instance, the launch of the new Chek Lap Kok Airport was chaotic, the economic downturn persisted, the Hong Kong Special Administrative Region (HKSAR) government intervened in the foreign exchange market, unemployment rates hit record highs, the right of the Court of Final Appeal was under siege, and the Legislative Council introduced non-confidence votes against ranking HKSAR government officials. These all tested Hong Kong's wisdom to function as the window for China's future, and its success remains to be seen.

Hong Kong's developments from July 1998 to June 1999 are summarized as follows:

1. Politically, Hong Kong acts in line with the Basic Law.

The HKSAR government, led by a strong administration, has exercised its autonomy and operated generally in line with the Basic Law. Hong Kong's slow democratic development, its high-profile administration, the establishment of a representative office in Beijing, and the renewal of appointed seats to the District Councils, though heavily criticized by the media, have been in progress or put in place in accordance with the Basic Law.

2. Hong Kong residents are showing dissatisfaction with the administration.

Because of an economic downturn, Hong Kong has been confronted with unprecedented political, economic, and social challenges and changes. Though operating smoothly, the HKSAR administration has shown declining efficiency and capability in crisis management, as exemplified by the turmoil in the launch of the new Chek Lap Kok Airport. Its inability to control economic recession and subsequent problems (such as unemployment) have led to growing dissatisfaction with the administration's performance among the general public. The non-confidence bill introduced in the Legislative Council against Secretary of Justice Elsie Leung further undermined the general public's confidence in the government. According to various opinion polls, Hong Kong residents have shown a lack of confidence in the government's support for the rule of law. A survey by the University of Hong Kong indicates that those who are dissatisfied with the government's overall performance climbed to 34.5%, compared to 22% last year. Those who are not happy with the government's economic policies jumped from 33% in 1998 to 51% this year.

3. Poor system of checks-and-balances unfavorable to Hong Kong's democratic development.

Given the high-profile administration and the limitations under the Basic Law, the Legislative Council has been hamstrung to introduce bills and to play an effective role of checks-and-balances, which is very unfavorable to Hong Kong's democratic development. The government's strong determination to dissolve Urban Councils and to resume appointed seats in District Boards, which could not be stopped by the Legislative Council, has been criticized as a retreat in democratic development. An opinion survey by the Social Science Research Center of the University of Hong Kong in April 1999 showed that more than half of Hong Kong's residents believe the first Legislative Council failed to monitor and check the government effectively.

4. Hong Kong residents worried about the future of "one country, two systems."

According to various public opinion surveys, people's confidence in the PRC's Hong Kong policy has sagged to a record low since Beijing criticized the ruling by the Hong Kong Court of Final Appeal on the right of abode of Mainland-born children of Hong Kong Chinese. An increasing number of Hong Kong people are showing a lack of confidence in the implementation of "one country, two systems" and "Hong Kong being governed by Hong Kong people." These all demonstrate the sensitivity and fragility of Hong Kong-PRC relations. If handled improperly, these disputes could explode and make these relations even worse, possibly destroying the people's confidence in "one country, two systems" and "a high degree of autonomy in Hong Kong."

5. "One country" prevails over "two systems," failing Hong Kong's judicial independence.

Over the past 12 months, Hong Kong has politically been run as "one country" while the economic sphere has developed under "two systems." Beijing criticized the Hong Kong Court of Final Appeal's ruling on the right of abode as an overt violation of the PRC Constitution and Basic Law. Beijing called it a serious challenge to the National People's Congress. This completely violated the ideals of "one country, two systems." The HKSAR government's attempt to modify the ruling was believed to have further undermined Hong Kong's judicial independence. Many have expressed concern about the rule of law in Hong Kong.

6. There is no evidence of Beijing's overt interference in Hong Kong's domestic affairs, but the HKSAR government often tries to second-guess Beijing's preferences.

To prevent local residents and other countries from worrying about Hong Kong's future, Mainland authorities have refrained from clear interference in Hong Kong's domestic affairs. PRC President Jiang Zemin, during his visit to Hong Kong for the anniversary marking the one-year transfer of jurisdiction on July 1, 1998, vowed to bolster Hong Kong's economic prosperity and boosted public support for HKSAR Chief Executive Tung Chee-hwa. Jiang even publicly discouraged Hong Kong delegates to the PRC National People's Congress from interfering in the HKSAR government's operation. These moves were all aimed at facilitating the smooth operation of "one country, two systems" in Hong Kong. However, the Chief Executive's inclination to second-guess preferences to Beijing before making decisions, and ranking officials' habits of taking orders -- a legacy from British colonial rule -- have crippled the HKSAR government, making it less pro-active and responsive. This is disadvantageous to the implementation of "Hong Kong being governed by Hong Kong residents with a high degree of autonomy."

7. Hong Kong and Mainland China develop greater interdependence.

Mainland China and Hong Kong have developed closer economic and trade relations, and the exchange of visits of officials and residents have been surging. With 2.6 million tourists visiting Hong Kong last year, Mainland China has become the No. 1 source of tourist revenues for Hong Kong. On March 4, Hong Kong opened its Representative Office in Beijing, which serves as a coordinator between Hong Kong and the central, provincial and municipal governments on the Mainland. The office has overlapping functions with the Hong Kong and Macao Office under the PRC State Council and the Xinhua News Agency Hong Kong Branch. How the responsibilities among the three will be separated remains to be seen.

8. Economic downturn slows down, but unlikely to have a major rebound in the near future.

Affected by the Asian financial turmoil and as a result of its currency peg to the U.S. dollar, Hong Kong has been mired in a sluggish economy. Its unemployment rate hit a record high, and its economic growth reached a record low. Growing deflation, worsening investment, and scant consumption resulted in increasing closures, wage reductions, and labor-management disputes. The HKSAR government's intervention in the foreign exchange market has successfully thwarted international speculators. The government's several economic and fiscal measures have restored confidence in the market, attracted foreign capital and stopped the economic downturn. However, the government's insistence on the peg system might delay an economic recovery. While all of Asia is gradually moving out of recession, Hong Kong's economy is unlikely to have a major rebound in the near future.

9. Press freedom remains intact, but the Mainland media are making inroads.

Over the past year, the Hong Kong media have remained active and vigorous, and press freedom has been generally respected. However, increasing reports indicate growing Mainland influence over the media. Some Mainland-registered magazines are making inroads into the Hong Kong market, indicating a widening influence from the PRC in the Hong Kong media. Mainland capital has gradually monopolized the publication, marketing, and sales of printed materials. The Hong Kong media without Mainland capital have shown growing self-censorship in their reporting and commenting on Mainland affairs.

10. The world has reacted positively to Hong Kong's situation, but is showing increasing concern over Hong Kong's rule of law.

For various concerns, the United States, Britain, the EU, and other major territories release regular reports on Hong Kong's situation. In general, most countries reacted positively to post-1997 developments in Hong Kong. They showed particularly strong concerns over a few cases: the dropping of charges against Sally Aw of Sing Tao Holdings, the suit against the Xinhua News Agency Hong Kong Branch for violation of the Personal (Data) Privacy Ordinance, and the ruling on the right of abode of Mainland-born children of Hong Kong Chinese, to name just a few. Most countries consider these landmark cases on Hong Kong's judicial independence and rule of law.

11. Taiwan's relations with Hong Kong progress along a normal track, but a major breakthrough is less possible.

Over the past two years, Taiwan and Hong Kong have had closer exchanges in economic, trade, and cultural areas. The frequency and level of visits by ROC government officials to Hong Kong increased, as evidenced by the visit of (former) MAC Chairman Chang King-yuh, Taipei Mayor Ma Ying-jeou, and five vice ministers. The government has maintained a communication channel with Paul Yip, special advisor to the HKSAR Chief Executive, and some forms of communications with a few Hong Kong officials. However, in view of cross-strait factors, the HKSAR government has been lukewarm in establishing formal and official channels with the ROC government. For one, the ROC government completed with Hong Kong bilateral consultations for acceding to World Trade Organization (WTO) long before its transfer of jurisdiction, but the HKSAR has dragged its feet on signing the bilateral agreement. Also, no Hong Kong officials have visited Taiwan. Compared to the number and level of Taiwan visits by Mainland officials, the HKSAR government has been over-conservative and rather unfair to the ROC government. Nevertheless, Taiwan's relations with Hong Kong have progressed positively compared to the time just before and after its transfer of jurisdiction in 1997. There lacks, however, a major breakthrough.

12. The media reported 58 cases testing Beijing's promise that "Hong Kong will remain unchanged for 50 years."

There have been 58 disputes involving individual freedom, human rights, and rule of law, as reported in the media, since the transfer of jurisdiction that are testing Beijing's promise that "Hong Kong will remain unchanged for 50 years." These cases include the ruling on the right of abode of Mainland-born children of Hong Kong Chinese, the appointed and ex officio seats in District boards, and the disputed jurisdiction over kidnapper Zhang Ziqiang, all of which challenge Beijing's promise of "one country, two systems" and that "Hong Kong will remain unchanged for 50 years." (see appendix I).

II. Construct a win-win situation in the Taiwan-Hong Kong relationship

President Lee Teng-hui introduced the concept of a "peaceful and stable cross-strait mechanism" at the National Unification Council meeting on April 8 1999, with a hope that the two sides can proceed through dialogue and consultations to build up peaceful, stable and constructive relations. In line with the president's idea, the ROC government has formulated its policy on Taiwan-Hong Kong relations as follows:

1. We are pleased to see Hong Kong's stability and development

In the post-1997 period, Hong Kong remained stable in general, but faced unprecedented challenges on the economic front. Its economic growth rates were adjusted downwards, unemployment kept rising, and the outflow of foreign capital expanded, all met with countermeasures by the HKSAR government. We hope the economic situation in Hong Kong can stabilize in order to resume its status as an international financial and trade center as well as to maintain its liberty, democracy, stability and prosperity. As a transit hub, Hong Kong can help promote the development of cross-strait relations, which can give rise to economic benefits for the Mainland, Taiwan, Hong Kong ad Macao.

2. Hopes for an institutionalized channel for Taiwan-Hong Kong relations

Taiwan's relations with Hong Kong kept their momentum in the post-1997 period. However, given limitations in cross-strait relations and over-conservatism in the HKSAR government, Taiwan-Hong Kong ties cannot progress to reflect growing exchanges. The communication channel in place through Paul Yip, special advisor to the HKSAR Chief Executive, fell short of the need to establish a normalized and institutionalized mechanism. While receiving a delegation of the Tsung Tsin Association and Hong Kong Center for Studies on Relations Across the Taiwan Strait on May 24, ROC Vice President Lien Chan said, "We hope Taiwan-Hong Kong relations are not maintained by individuals only. An institutionalized communication channel will contribute positively to the development of bilateral relations." The future development of Taiwan-Hong Kong relations will require a more institutionalized communication framework and a more swift exchange mechanism to point Taiwan-Hong Kong relations toward normalization.

III. "One country, two systems" not applicable to Taiwan

Regarding the transfer of Hong Kong's jurisdiction and the upcoming transfer of the jurisdiction of Macao to the PRC, the "one country, two systems" and "the Hong Kong and Macao formulas" have been going through a trial run in the two areas. Apparently, Beijing will use the unification models for Hong Kong and Macao to build up the sense of urgency for handling cross-strait relations as well as create a unification sequence of Hong Kong, Macao, and Taiwan. Neither "peaceful unification and one country, two systems" or "one country, two systems for Hong Kong and Macao" can be applied to the unification of the two sides of the Taiwan Straits for the following reasons:

1. "One country, two systems" is paradoxical, transitional, and repressive in design.

"One country, two systems" is paradoxical in logic, with clear conflicts between "one country" and "two systems". In terms of transition, the model indicates an eventual outcome of one-party authoritarian socialism. In practice, the model is repressive in that it coerces Taiwan, Hong Kong, and Macao under the People's Republic of China before being granted a "high degree of autonomy."

2. Taiwan is not Hong Kong, and there is no timetable for unification.

Mainland authorities have tried their best to apply the "one country, two systems" model for Hong Kong to Taiwan. Hong Kong, however, used to be a British colony, and the Republic of China is a sovereign state, having foreign relations and a defense capability, which Hong Kong does not have, and a direct election system. Hong Kong's people could not determine their future, and the territory's transfer of jurisdiction has been a historical conclusion. The unification of the two sides across Taiwan Strait has no timetable.

3. The existence of democratic Taiwan contributes to the implementation of "two systems" in Hong Kong

"One country, two systems" was originally designed by the mainland authorities for cross-strait relations, but nevertheless was used first in Hong Kong. The mainland authorities are trying their best to transplant what has been in place in Hong Kong and Macao to Taiwan to seek eventual unification, in which Beijing is the central government. Therefore, it is self-explanatory why the mainland authorities have endeavored to maintain the smooth operation of "one country, two systems" in Hong Kong so that there is a paradigm for unification with Taiwan. Without the existence of a democratic Taiwan, Hong Kong and Macao will not enjoy freedom under "two systems." This also illustrates that unification by means of the "one country, two systems" model might leave out the chances for pushing democracy, liberty, and prosperity for all of China.

IV. Developments in Hong Kong

■ Political situation

While celebrating the second anniversary of its transfer of jurisdiction to the PRC, Hong Kong's general development remained stable, other than occasional declines in public support for the HKSAR Chief Executive. However, economic pessimism has led to growing dissatisfaction with the Chief Executive's decision-making capability. In the past 12 months, a few cases erupted and continued to test the implementation of "one country, two systems" and the capability of the HKSAR government. In a political framework, the design of the vote-counting system of the Legislative Council has thwarted the introduction of bills. Hong Kong's political parties are facing splits and reorganization. The civil servant reform bill has pitted the government in a dilemma between how to carry out reform and to keep up morale. The HKSAR government also has to clarify why its moves to revoke the Urban Council and resurrect the appointed seats in the District Boards were not retreats in the development of democracy. A further explanation should be provided to the people of Hong Kong and the world on how the government is acting to preserve the judicial independence in the right-of-abode, Sally Aw, and Zhang Zijiang cases in order to ameliorate the negative impact from the Legislative Council's no-confidence bill against the secretary of justice.

1. Hong Kong people show declining confidence in the Chief Executive's and the HKSAR government's administration, and growing uncertainty about "one country, two systems."

According to monthly surveys on the popularity of the HKSAR Chief Executive by the Chinese University of Hong Kong, Tung's popularity has ranged between 56% to 60% since late last year. One of the recent surveys alarmingly showed for the first time that only one of the ten indices on the Chief Executive's performance -- cleanness and fairness -- rated above 60%. The pollsters said the results might have been caused by the sluggish economy and surging unemployment rates, for which Hong Kong residents vented their dissatisfaction with the Chief Executive (Apple Daily, May 31, 1999). Other surveys also showed that after Beijing's strong criticism of the Hong Kong Court of Final Appeal's right-of-abode decision, the Hong Kong residents' satisfaction with Beijing's Hong Kong policy plummeted to record lows. An increasing number of people say they have little confidence in the implementation of "one country, two systems," and the concept that "Hong Kong is governed by Hong Kong residents." (Poll by Hong Kong Policy Research Institute, Ta Kung Po, Feb. 10, 1999; Poll by Institute of Asia-Pacific Studies, Chinese University of Hong Kong, Apple Daily, March 1, 1999; Social Sciences Research Centre, University of Hong Kong, Public Opinion Express News, March 1999) This could mean that Hong Kong resident's worries about PRC-Hong Kong relations could explode at any time.

2. Dispute involving the reform of the civil servant system

Since the second half of last year, the Chief Executive has carried out a series of high-level personnel reshuffles. This speaks for the Chief Executive's growing personnel power. At the beginning of this year, Mainland authorities sent an urgent document to the HKSAR government, stressing that the top priority for the administration is stability and that there should be no major personnel reshuffles among ranking government officials. Chief Executive Tung then made a decision in March on the highly speculated issue of the retention of the Chief Secretary for Administration. Tung said that for the stability of the HKSAR government and society, Chief Secretary for Administration Anson Chan Fang would be retained for two and a half years, coinciding with Tung's entire term. An opinion poll showed that 70% of the people supported the decision, which would contribute to the reform of the government's civil servant system. Speaking at the Legislative Council meeting on January 14, Tung said that the permanent employment system for civil servants would be revised to become a modern, flexible, pro-active, cost-efficient, and service-oriented system.

The HKSAR Civil Service Bureau made public an advisory paper on the reforming of the civil service system on March 8. Suggestions included the employment of clerical workers based upon contract, recruitment of those at supervisor levels based upon a competition mechanism, the introduction of a provident fund, simplification of the dismissal procedure, use of voluntary or mandatory retirement, and the revocation of the existing promotion system. The HKSAR government announced on March 16 that all those employed or recruited after April 1, 1999, would be put on "non-civil servant short-term contracts." Supporters welcomed this change, saying this move could reform government culture, reduce the fiscal burden, and add flexibility to the entire system. Those who opposed the change said the move violated Articles 100 and 103 of the Basic Law, which does not allow for changes in the civil service system. They said that this change could dampen the morale of civil servants, and that contracting work could give rise to favoritism and corruption. The Union Association of Civil Services held a massive demonstration with more than 10,000 participants in May to protest the planned contracting system. Four other major unions -- the Hong Kong Chinese Civil Servants Association, the Senior Non-Expatriate Officers Association, the Government Employees Association, and the Hong Kong Civil Servants General Union -- remained non-involved or considered individual action. The results of the reforms remain to be seen.

3. Judicial independence suffers from the right-of-abode and the Sally Aw cases.

On March 17, 1998, the Independent Commission against Corruption (ICAC) decided to indict three staff members of the Hong Kong Standard on charges of exaggerating circulation figures to deceive advertisers. But Sally Aw, chairwoman of Sing Tao Holdings, who was listed in the indictment paper as a collaborator, was pardoned by Secretary for Justice Elsie Leung for lack of evidence and that it was in the public's interest. To define "in the public interest" in her decision, Leung said that a charge against Aw would affect the financial restructuring of the group and if the group collapsed, more than 2,000 people would loose their jobs. A few Legislative Councilors criticized the treatment of Aw as a betrayal of the principle that all persons are equal before the court. Legislative Councilor Margaret Ng then introduced a non-confidence bill against the Secretary of Justice. The Hong Kong Bar Association expressed its shock in a statement at the Department of Justice's decision to drop the suit against Aw for the reason that it was in the public interest, saying this would violate the department's policy guidelines on criminal prosecutions and call into question Leung's capability in safeguarding the rule of law.

The right-of-abode issue also triggered disputes over the judicial independence of Hong Kong. Mainland Chinese legal experts believe that the ruling by the Hong Kong Court of Final Appeal violated the PRC constitution and the Basic Law, seriously challenged the status of the National People's Congress (NPC), and betrayed the "one country, two systems" principle, thus requiring correction. The HKSAR government, after asking the Court of Final Appeal to make a clarification, presented the case to the NPC Standing Committee for an interpretation of the Basic Law. The HKSAR government announced that based upon the ruling of the Court of Final Appeal, about 1.67 million Mainland-born children of Hong Kong Chinese would be entitled to immigrate to Hong Kong. This would cause additional political, economic, and social problems. The huge number of 1.67 million would-be eligible immigrants helped change the people of Hong Kong's support for the ruling. However, the number was criticized as "inaccurate" and the release of the information as "misleading to public opinion." (Apple Daily, April 29, 1999; Min Pao, May 1, 1999) The Democratic Party and Frontier issued statements that the HKSAR government's decision to request an interpretation of the right-of-abode decision had seriously hurt the Hong Kong judicial system and proved to be a failed implementation of the "one country, two systems." (Apple Daily, May 19, 1999)

4. Dissolving Urban Councils and resuming appointed seats in District Boards invites criticism as backward steps in democratic development.

In an administrative report in October last year, the HKSAR government announced plans to dissolve Urban Councils and Regional Councils but to maintain the 18 District Boards. In December, HKSAR presented the District Councils Ordinance draft to the Legislative Council, which was adopted by the Legislative Council in three readings on March 11, 1999. The ordinance established a mechanism for the first District Council election in November and revived the appointment system, which was revoked five years ago. According to the ordinance, there will be 519 seats in the 18 District Councils, of which 390 seats are publicly elected, with 27 seats for ex officio councilors, and 102 seats for appointed members. The Democratic Party, Frontier, and independent councilors against the revival of the appointed seats charged that this was a major step back in democracy. Members of the Democratic Party and Frontier walked en masse to protest the revival of the appointment system. In the future, the District Councils will function as advisory bodies.

5. Legislative Council introduces a no-confidence bill against the Secretary for Justice, damaging the credibility of the HKSAR government.

After a four-hour debate on March 11, the Legislative Council voted on a no-confidence bill introduced against Secretary for Justice Elsie Leung. The votes in the group for directly elected members, the Election Committee, and the functionary constituency were counted separately in three groups, and each group failed to adopt the bill due to insufficient support. Margaret Ng, who introduced the bill, said, "Those who considered themselves winners are in effect losers." Before walking out to protest the vote, Deputy Chairman of the Liberal Party Ronald Arculli said, "Regardless of the outcome, the only loser of the game is Hong Kong."

Ng introduced the bill for the following reasons：(1) Leung's decision not to indict Sally Aw of Sing Tao Holdings in the circulation figure case brought into question the legal principle that all persons are equal before the court. (2) Before asking the Court of Final Appeal to clarify the ruling on the right of abode of Mainland-born children of Hong Kong residents, Leung improperly made private contact with the chief justice, adversely affecting Hong Kong's judicial independence.

After the Legislative Council vote, all the major newspapers in Hong Kong commented on the decision in editorials. The Hong Kong Economic Journal, Min Pao, Sing Tao Daily, Oriental Daily News, and Sing Pao Daily News all printed negative editorials. A survey by the Hong Kong Policy Research Institute, chaired by the Chief Executive's Advisor Paul Yip, showed that 51% of the interviewees supported the rational behind the no-confidence bill, compared to only 22% who did not and 27% who had no comment. Though the no-confidence bill failed to be adopted, the case fully exemplified the lack of confidence in the government among legal experts and elected representatives, which caused irrevocable damage to Hong Kong's international image, according to Kenneth Lau, deputy director of the Institute of Asia-Pacific Studies at the Chinese University of Hong Kong.

6. Legislative Council meeting regulations thwart bills to be introduced by legislative councilors, policies unfavorable to democratic development.

As stipulated under the Basic Law, a bill introduced to the Legislative Council will be adopted only when it wins majority support in two of three groups -- a group representing functional constituency, a group of directly elected members, and the Election Committee. However, since the Legislative Council began to operate in July 1998, almost all of the motions revising the political framework introduced by members of the Democratic Party -- the largest party in the assembly -- were aborted. (Min Pao, Dec. 28, 1998) Legislative Councilor Y. C. Leung once introduced a bill to revise the provisions on the vote-counting system under the Basic Law, calling voting-counting by groups "a grand joke." (Apple Daily, Jan. 8, 1999) Legislative Council House Committee Chairman Leung Che-hung and Scholar C. K. Choy said such a design would deter government bills as well as thwart members' motions related to political systems or people's livelihood. (Apple Daily, Jan. 8, 1999)

7. Political parties threatened by splits, reorganization, transformation

The election for District Councils will be held later this year. The District Councils, though only playing an advisory role, are the only channels for political parties to groom young members as well as effective networks for voter mobilization in higher-level Legislative Council elections. It is for these reasons major political parties in Hong Kong are devoted to the election of District Council.

However, a few political parties have been threatened by splits due to fighting over party lines, and others have been challenged by emerging forces due to weak leadership. In the Democratic Party's leadership reshuffle in late 1998, Martin Lee was re-elected the chairman but the election for vice chairman was mired in struggle among different party lines. Struggles and fights have continued even after the new leaders assumed their posts. The Democratic Party soon convened a review session on internal affairs and held a representative congress to harmonize differences. Nevertheless, different opinions over minimum wages rekindled factional fights, indicating that a struggle over party line still exists.

In Frontier, a major political group in Hong Kong, members once argued about whether or not to reorganize into a political party but eventually decided to keep their current status. (Min Pao, Jan. 18, 1999) The Association for Democracy and People's Livelihood, describing the District Council election as "the final battle," decided to nominate strong candidates in various districts. (Apple Daily, May 24, 1999) The Democratic Alliance for the Betterment of Hong Kong also vowed to fight to become the ruling party. (Zhengming Monthly, June 1999) The Hong Kong Progressive Alliance said it would establish a committee to focus on the campaign for the District Council this year and for the Legislative Council elections next year. (Apple Daily, Dec. 18, 1999) The Liberal Party has been actively using the election for District Councils as a chance to boost its sagging morale, which resulted from setbacks in the Legislative Council election. (Apple Daily, Dec. 28, 1998, April 30, 1999) However, the Liberal Party has been threatened by an internal split due to Chairman Lee Pang-fei's intention to quit and different positions of members in the no-confidence vote against the secretary of justice.

A group of professionals, scholars, and middle-class representatives are planning to form another political group to represent the interests of the middle class, pursuing moderate lines and non-mercantilism. The group hopes to balance Hong Kong with political parties oriented toward grassroots interests and welfare. (Hong Kong Economic Journal, Jan. 11, 1999) Newspapers also reported that many people of the business community, dissatisfied with the poor performance of the Liberal Party and the Hong Kong Progressive Alliance in the representation of its interests, are thinking about organizing a new political party. (Apple Daily, Jan. 13, 1999) These all foretell the likely changes in Hong Kong's political arena.

■ Economic Situation

Since its outbreak in 1997, the Asian financial turmoil has caused different degrees of damage to the stock and foreign exchange markets in Asian countries, and Hong Kong was no exception. In addition to shrinking financial markets, Hong Kong has witnessed serious declines in many major economic indices. The economy showed negative growth for the first time, with record high unemployment rates, worsening deflation, and the consumer price index sagging to negative 4%. In view of rising operation costs, an increasing number of foreign enterprises are moving their operations. Hong Kong's economic structure might have to undergo an imminent transition, but this is subject to the Mainland and the general environment.

1. Fluctuating HK financial markets amid the Asian financial turmoil

By the end of 1998, the ranking of Hong Kong's stock market capitalization slid from the world's ninth largest to 11th. The Hang Seng Index tumbled from a peak of 16,820 in 1997 to 6,544 in August last year, a 61% drop. According to an analysis by INC Barings, the 1998 profits of Hong Kong banks shrank 45% from a year ago. The bankruptcy of Guangdong International Trust & Investment Corp., the major financial distress of Guangdong Enterprise (Holding) Ltd., and Southern Guangdong Group have all pinched the already afflicted Hong Kong banking system. Many Hong Kong banks are reportedly tightening their lending to Mainland-invested enterprises and are stepping up debt collection.

2. Major economic indices slide

The Lausanne-based International Institute for Management in its annual report on international competitiveness said Hong Kong has been receding in three categories -- domestic economic strength, business management, and scientific research and development. Hong Kong's scientific R&D capability even dropped to 25th in the world, lagging behind Singapore and showing a reduced edge over Taiwan. According to most recent Standard and Poor's 500 credit rating of Asia-Pacific countries, Taiwan ranks higher than Hong Kong and Mainland China, with AA + in local currency and foreign exchange. Mainland China's foreign currency credit rating was rated an inferior BBB +, and Hong Kong was A +. (Central Daily News, May 19, 1999)

3. Increasing withdrawal of foreign capital

Since the spring of 1998, many Japanese banks have been reportedly withdrawing from Hong Kong. The Fukui, Hokuriku, and Suruga banks have terminated their banking licenses there, and the Sumitomo Bank, Dai-Ichi Kangyo Bank, Fuji Bank, and the Industrial Bank of Japan are planning to follow suit. (Independence Morning Post, April 16, 1998) The Bank of Fukuoka announced early this year that it would close its branches in Hong Kong, New York and London, and terminate its savings operations in Hong Kong, which has been operated under Fukuoka Financial International Ltd.

In an investigation report of foreign branches in Hong Kong, the HKSAR Department of Industry said the number of foreign firms using Hong Kong as a regional headquarter dropped to 819 from 903 a year ago, down 9.3%. These withdrawals were attributed to rising operation costs in Hong Kong, gloomy predictions for all of Asia due to the sweeping financial turmoil, and global downsizing by parent companies. It is predicted that at least 20 foreign companies are planning to relocate. (Hong Kong Economic Journal, Jan. 9, 1999)

4. Mainland-invested companies in Hong Kong require an overhaul

In view of the sluggish Mainland economy and the liquidation of Guangdong International Trust & Investment Corp., many Hong Kong banks have tightened lending to Mainland-invested enterprises and have beefed up debt collection. This has pushed the operation of many Hong Kong-based Mainland enterprises to the verge of closure. Meanwhile, share prices of red-chip listed companies with Mainland investment have dropped in the Hong Kong market, dampening the confidence of investors. This has also cast a shadow on many Mainland-invested companies in Hong Kong which were planning to be come listed.

PRC Premier Zhu Rongji announced pervasive reform plans for Mainland-invested enterprises in Hong Kong. So far, three Mainland-invested enterprises in Hong Kong have slowed down the pace of their planned listing in the stock market. The banking community is worried that the plan to reform Hong Kong-based Mainland enterprises might trigger another financial panic and accelerate their financial degradation. (Commercial Times, Feb. 22, 1999)

5. Hong Kong retaining its status as regional hub

Although many foreign companies are pulling out of the Hong Kong market, a survey by the American Chamber of Commerce in Hong Kong showed that 66% of their members still prefer to maintain their offices in Hong Kong as regional headquarters. According to the survey, more than half say they will expand their operations in Hong Kong. American (Asia) Bank even announced the closure of its retail business in Taiwan, Singapore, and Indonesia to focus on the Hong Kong market.

6. Confidence about the future of the economy weaker among the Hong Kong residents

A survey by the Social Sciences Research Center of the University of Hong Kong in October 1998 indicated that 46.2% of those polled were not confident in the HKSAR government's ability to boost economic development and employment, 15 percentage points more than those who responded that they had confidence. Those who had no confidence in the government's crisis management capability amounted to 63.8%, compared to 30.1% expressing confidence. In a separate survey by the Institute of Asia-Pacific Studies at the Chinese University of Hong Kong in October 1998, 45% of the respondents said they are not optimistic about Hong Kong's economic future, compared to 31% who said they are. Compared to a survey in April, the October survey showed persistent pessimism about the economy. A survey by the Association for Democracy and People's Livelihood, released on April 29 this year, indicated that more than 80% of those polled have no confidence in the government's ability to reduce unemployment. More than half of the respondents are worried that they could be dismissed or have their salary reduced within the next six months. They said the likely massive immigration of 1.67 million Mainland-born children of Hong Kong residents could further aggravate Hong Kong's jobless situation. (Taiwan Times, April 30, 1999)

7. HKSAR gives incentives to stimulate high-tech development

After establishing the Commission on Innovation and Technology last year, HKSAR Chief Executive Tung announced in October the establishment of an institute for applied science and a fund to promote innovation and technology. In March this year, Financial Secretary Donald Tsang announced in his second fiscal report that the government will build a cyber port aimed at attracting information service companies to Hong Kong.

8. Growing interaction among Taiwan, Hong Kong and the Mainland; Mainland still steering Hong Kong's economy

Since Mainland China's economic liberalization in 1978, Hong Kong has developed increasingly closer trade and economic ties with its closest neighbor. Since 1985, Mainland China has been Hong Kong's No. 1 trading partner. Hong Kong-Mainland trade represented 37.6% of Hong Kong's total foreign trade in 1998. According to the HKSAR Census and Statistic Department, Hong Kong's imports from Taiwan in 1998 reached US$13.343 billion, with 62.9%, or US$8.364 billion, transshipped to the Mainland. The 1998 transshipment figure from the 60.84% recorded in 1997. Hong Kong's 1998 exports (including transfer trade) to Taiwan accounted for US$4.343 billion for total bilateral Hong Kong-Taiwan trade of US$17.686 billion. Unofficial statistics show that Taiwan firms in Hong Kong total 3,600 with a combined investment of US$6 billion. The Hong Kong Policy Research Institution made public a free market index on August 31, 1998, showing that the HKSAR government's interference in various markets rose by 10 percentage points following the 1997 handover.

■ Social Situation

Although remaining fairly stable for the past year, Hong Kong has witnessed an erosion of labor and human rights. While the unemployment rate remained at a record high for months, Hong Kong's residents lack collective bargaining powers and representation rights for employees. The HKSAR government has presented three human rights reports, which, however, received serious criticism from groups and legislators of the Democratic Party. The right-of-abode issue involving Mainland-born children is not only related to children's rights, but also triggered a major constitutional dispute and affected Hong Kong's judicial independence and international image.

1. Rising unemployment rates to affect social stability:

◆ Unemployment rates might go higher

Hong Kong's unemployment rates, though slowing down in growth, remained considerably high. The unadjusted unemployment rate for March through May this year climbed to 6.3%. (Apple Daily, June 16, 1999) The percentage can be translated into a jobless population of 216,000, primarily in the repair and maintenance, wholesale and retailing sectors. (Min Pao, May 18, 1999)

According to K. W. Li, associate professor of finance at Hong Kong City University, the entrance of university graduates into the job market this summer could push the unemployment rate to a new plateau. The Hong Kong Confederation of Trade Unions said the HKSAR government's plan to corporatize and introduce contract systems into the government civil servant system might further give rise to massive layoffs. (Apple Daily, May 18, 1999) Hong Kong's sluggish economy could result in deflation and wage controls for both the public and private sectors. (Apple Daily, May 15, 1999) According to a report by the Organization of Economic Cooperation and Development (OECD), Hong Kong, witnessing serious unemployment rates and lacking unemployment relief systems, now has the longest working hours in the world. (Apple Daily, April 30, 1999)

◆ Rising unemployment rates：crime rate and corruption

The Hong Kong University Grants Committee survey indicated that the unemployment rate for graduates in the 1997-1998 term from seven universities and colleges soared to 7.8% from 3.4% one year ago. (Apple Daily, May 19, 1999) On another front, teenage unemployment has been on the rise as well. HKSAR government statistics showed that the employment rate for 15-19-year-olds rose to 23% in the first quarter this year from 13.4% in the corresponding period one year ago. (Apple Daily, May 29, 1999) An investigation by the HKSAR Home Affairs Department showed that employment topped the list of major concerns among Hong Kong residents, who named their most worrisome issues as finding jobs, dismissals, and irregular job assignments. (Apple Daily, June 1, 1999) Secretary for Security Regina Ip said that because of the worsening economy and rising unemployment, robbery and crime in the first four months this year rose 30% from the same period last year. The overall crime and violent crime rates increased by 10% respectively from the same period one year ago. (Min Pao, May 30, 1999) The criminal prosecution section of the HKSAR Justice Department said that the number of criminal cases in 1998 rose 6.5% from 1997, and persons indicted for corruption surged 20%. (Apple Daily, April 1, 1999) ICAC filed 3,500 charges in 1998, a record high and a rise of 16% from 1997. More than half of these cases were filed against private institutions, while about 40% were related to government agencies, of which about 40% were related to the Hong Kong Police Force. (Apple Daily, Jan. 27, 1999)

◆ Large infrastructure projects to create job opportunities

To tackle the increasingly thorny issue of employment, Chief Secretary for Administration Anson Chan Fang said the HKSAR government has carried out a series of measures to reduce unemployment rates, including launching major infrastructure projects and providing job training. (Apple Daily, May 2, 1999) Secretary for Education and Manpower W.P. Wong estimated that the construction of a digital harbor would create 12,000 jobs. (Min Pao, March 20, 1999) The HKSAR government said that the entire plan to build a digital harbor and reduce port registration fees could generate 32,000 new jobs in the next eight years. (Min Pao, March 19, 1999)

2. Shadow over human rights development

◆ Three human rights reports presented by the Hong Kong government invite criticism

The HKSAR government presented the following three human rights reports during the past year:

● The First Human Rights Report was sent on January 12, 1999 to the UN Secretariat through Mainland China.

● A report, made pursuant to the Convention against Torture and other Cruel, Inhuman or Degrading Treatment or Punishment, was sent on May 5 to the United Nations.

● The first report pursuant to the International Covenant on Economic, Social and Cultural Rights (ICESCR) was forwarded to the UN Office of the Higher Commissioner on Human Rights on June 4.

These reports gave a positive view of the human rights situation in Hong Kong and rebutted criticism related to highly-disputed human rights issues, including moves by the Provisional Legislature to abolish human rights regulations and amend the Public Order and Societies Ordinances. The reports also rebutted accusations that the abolishment of the right of collective bargaining and employee representation rights was a major setback for labor rights. But human rights organizations and legislators of the Democratic Party charged the reports were an attempt to cover up the reality. The right-of-abode issue also gave rise to family separations and affected the rights of children. (Apple Daily, June 9, 1999)

◆ Home visit permit of pro-democracy advocate confiscated

Szeto Wah, chairman of the Hong Kong Alliance in Support of the Patriotic Democratic Movement in China, said on July 26, 1998, that the home visit permit of one board member of the association was confiscated during a trip to Mainland China on grounds of "engaging in anti-government activities." Also, board member Lai Lai-har was denied entry by Mainland border officials while travelling from the special Shenzhen region to Mainland China for customery tomb sweeping on April 3, also for "engaging in anti-government activities outside China territory." Furthermore, her home visit permit was confiscated. The alliance accused Mainland authorities of being inhumane and violating the International Human Rights Convention, which Beijing signed last year.

HKSAR Government Information Coordinator Stephen Lam said the Secretary for Constitutional Affairs Michael Suen met several times with representatives of the alliance regarding its request to meet with the Chief Executive over the issue of home visit permits. Suen had relayed the alliance's position to Mainland authorities, Lam said. However, Suen said that under the principles of "one country, two systems," the HKSAR government should not interfere in the issuance of home visit permits by Mainland authorities. (Apple Daily, April 9, 1999)

◆ HKSAR's entry policy criticized

The Hong Kong Alliance in Support of the Patriotic Democratic Movement in China applied for visas from the Immigration Department in early April on behalf of 11 overseas Chinese pro-democracy dissidents, who planned to take part in the International Conference to Commemorate the 80th Anniversary of the May Fourth Movement and the 10th Anniversary of the June Fourth Incident. The HKSAR government rejected the visa applications without giving any reasons.

Secretary for Security Regina Ip said on May 5 that the entry of these people would not serve the interests of Hong Kong, and the rejection of the applications was not made out of concern over the impact of their presence on Hong Kong society. Legislative Councilor Lee Wing-tat (Democratic Party) said some of the dissidents had been approved for entry before the transfer of jurisdiction and criticized the government for an inconsistent immigration policy. (Hong Kong Economic Journal, May 6, 1999)

3. Right of abode of Mainland-born children of Hong Kong people causes major dispute.

◆ HKSAR government asks Court of Final Appeal to clarify right-of-abode ruling

Five judges, led by Judge Andrew Li Kwok-nang of the Court of Final Appeal, ruled unanimously on January 29 that Mainland-born children of Hong Kong Chinese could obtain the right of abode in Hong Kong automatically without review by Mainland public security officers. Mainland authorities believed that the ruling violated the PRC Constitution and the Basic Law and that this ruling should be corrected. The HKSAR government then requested on February 24 the Court of Final Appeal to clarify whether the ruling implies that it has the power over the legislation of the National People's Congress and the NPC Standing Committee. The Court of Final Appeal made a clarification on February 26. Five judges unanimously said that they did not intend to challenge the fact that the NPC Standing Committee has the power to interpret the Basic Law and exercise rights pursuant to the provisions and procedures of the Basic Law.

The Hong Kong Bar Association said that the HKSAR government's request for the court to make a clarification would trigger a serious constitutional crisis, which would affect the judicial independence and "one country, two systems" system in Hong Kong. The Commission of Legislation Affairs of the NPC Standing Committee said on February 27 that the clarification by the Court of Final Appeal was necessary. The NPC's and the NPC Standing Committee's exercise of power through due process under the Basic Law should not be disputed. (Apple Daily, Feb. 28, 1999)

◆ Secretary for Justice the first official to face no-confidence vote

Legislative Councilor Margaret Ng, dissatisfied with Secretary of Justice Elsie Leung's handling of the Sally Aw case and the right-of-abode issue, introduced a no-confidence motion to the Legislative Council in February. The Legislative Council, in a meeting on March 11, vetoed the motion by a 21-29 vote with 8 abstentions. Kenneth S. K. Lau, associate director for the Hong Kong Institute of Asia-Pacific Studies, said the no-confidence motion illustrated the lack of confidence in the government and the rule of law among legal experts and elected councilors, and caused irrevocable damage to Hong Kong's international image. (Hong Kong Economic Daily, March 12, 1999)

◆ HKSAR government: the ruling may put a huge burden on HK

Secretary for Security Regina Ip said on April 28 that the number of Mainland-born children of Hong Kong Chinese, who became entitled to live in Hong Kong due to a recent ruling by the Court of Final Appeal, could amount to 1.67 million based on initial estimates. She denied releasing the number to create fear among the general public in order to overthrow the ruling. The HKSAR government made public on May 6 an evaluation of the infrastructure for the accommodation of 1.67 million Mainland-born children of Hong Kong Chinese. According to an official evaluation, additional housing, education and medical expenses would total HK$710 billion. Chief Executive Tung Chee-hwa said the sudden influx of such a large number would destroy overnight the progress Hong Kong has made over the years. (Min Pao, May 7, 1999)

◆ Chief Executive's request for NPC Standing Committee's interpretation triggers disputes

Despite a strong protest from the Hong Kong legal community, the HKSAR Executive Council made a decision on May 18 to allow the Chief Executive to make a request to the State Council for the NPC Standing Committee to interpret the Basic law. The HKSAR government estimated that after the legal interpretation, the number of Mainland-born children of Hong Kong residents who will be entitled to the right of abode in Hong Kong will be reduced from 1.67 million to less than 200,000. Tung presented a report to the State Council through the Hong Kong and Macao Affairs Office on May 21, seeking an interpretation from the NPC Standing Committee. The State Council, at a regular meeting on June 8, adopted the HKSAR Chief Executive's request after a brief discussion. The Hong Kong Bar Association expressed deep regret over the HKSAR government's decision to do so. Hong Kong Court of Appeal Judge Justice Godfrey said that although the NPC Standing Committee would give its interpretation, Hong Kong judges could disregard any interpretation inconsistent with the Basic Law. He said judges still have discretionary power in applying the law, irrespective of political implications. (Min Pao, May 20, 1999)

◆ International community closely watching the right-of-abode issue in Hong Kong

On March 2, U.S. Secretary of State Madeline Albright said that the United States has been closely watching the dispute involving the Court of Final Appeal and its decision on the right of abode for Mainland-born children of Hong Kong Chinese. She said the United States government would continue to monitor developments. The Consulate Generals of Britain, the United States and Canada all said they supported judicial independence and the rule of law in Hong Kong.

U.S. House Representative William Thomas, chairman of the Asia-Pacific Subcommittee under the International Relations Committee, and a group of House representatives wrote separate letters to the HKSAR Chief Executive, expressing their concerns about the decision to seek legal interpretation from the NPC Standing Committee. They argued that the move would discredit the Hong Kong court system's independence and credibility and urged the Chief Executive to reconsider. The Hong Kong Office of the PRC Ministry of Foreign Affairs issued a public statement that such affairs are the PRC's domestic affairs, and that no other country should interfere. (Hong Kong Daily News, May 21, 1999)

■ International Relations

Many countries publish regular reports on Hong Kong's development. In general, most countries reacted with cautious optimism to the implementation of "one country, two systems" in Hong Kong. A few reports expressed concerns about the Provisional Legislature's revisions of some human rights laws and the legislation pursuant to Article 23 of the Basic Law. Many reports include negative views about Hong Kong's rule of law and judicial independence. Washington-Beijing relations remained strained in the wake of NATO's mistaken bombing of the PRC embassy in Belgrade and the release of the "Cox Report," which implied Mainland China used Hong Kong as a conduit to transport stolen U.S. military technology. The PRC rejected port calls by U.S. ships, and Washington called off a few academic exchange programs with Hong Kong. This all caused U.S.-Hong Kong relations to suffer a major blow.

1. Britain, U.S., and Canada release reports on Hong Kong, giving favorable overview but considering judicial independence in jeopardy.

Many countries have long-term interests in Hong Kong and have closely watched Hong its developments. U.S. President Bill Clinton visited Hong Kong in July 1998 and British Prime Minister Tony Blair visited four months later. Britain, the United States, and the EU publish regular reports on Hong Kong's situation, and their most recent reports gave a favorable overview of Hong Kong's development. The expected massive corruption did not happen, and Hong Kong has remained a significant and crucial regional economic center.

However, these reports noted the improper election mechanism of the Legislative Council, a worrisome increase of censorship in the media, and the government's financial intervention that could impair market mechanisms. Other reports also expressed worries about the legal case involving Sally Aw, the alleged violation of the Xinhua News Agency Hong Kong Branch over the Personal Data (Privacy) Ordinance, and the right-of-abode issue, all landmark cases for Hong Kong's judicial independence.

2. Right-of-abode case puts Hong Kong in the international spotlight

The right-of-abode issue has tarnished the international image of Hong Kong's rule of law. Britain, the U.S. and Canada have all issued statements, showing their concerns over Hong Kong's rule of law and judicial independence. (Hong Kong Economic Journal, Feb. 11, 1999; Min Pao, Feb. 10, 1999) U.S. congressmen also wrote to the HKSAR Chief Executive, noting that the HKSAR government's move to seek the NPC's interpretation of the Basic Law could shake confidence in the rule of law in Hong Kong. They said they hoped Chief Executive Tung would reconsider this move. (Hong Kong Daily News, May 21, 1999) The chairman of the Hong Kong Affairs Subcommittee of the U.S. Senate said he would discuss with visiting HKSAR Chief Secretary for Administration Anson Chan Fang about her government's position on the right-of-abode issue. The U.S. State Department reiterated its strong concern about any attempt that could discredit the Hong Kong Court of Final Appeal. (Min Pao, May 20, 1999) The Washington Post in an editorial titled "A Deep Self-inflicted Wound," said the HKSAR government's decision to seek an interpretation from the NPC of Mainland China had damaged the credit of Hong Kong's rule of law. Business Week said the government's decision has even affected the business environment. (Apple Daily, May 22, 1999) In response to these negative reactions, the HKSAR government escalated its publicity campaign for foreign enterprises and the international community by vowing to safeguard its judicial independence and guarantee a high degree of autonomy. The effect of these efforts remains to be seen.

3. Beijing-Washington conflict affects Hong Kong-U.S. relations

More than 1,000 Hong Kong residents representing some 10 organizations in Hong Kong staged protests in front of the U.S. Consulate General in Hong Kong in the wake of NATO's accidental bombing of the PRC's embassy in Belgrade, forcing the office to close down for a few days. Mainland authorities for the first time rejected permission for port calls by U.S. military ships for maintenance and supply. In late May, the U.S. House of Representatives issued a report, accusing the PRC of stealing secret military technology from the U.S. (the Cox Report). The report said the PRC used Hong Kong as a conduit to transfer sensitive military technology by using Mainland-invested enterprises in Hong Kong as camouflage and taking advantage of the right of the People's Liberalization Army (PLA) Garrison Force in Hong Kong to travel between Hong Kong and the Mainland free of inspection.

Consequently to these implications, one U.S. national laboratory cancelled two academic exchange programs with Hong Kong. (Min Pao, June 5, 1999) Legislative Councilors expressed worry about the impact from these events on Hong Kong's development of a digital harbor and investment in high-tech industries. (Min Pao, June 8, 1999) They suggested that the members of Legislative Council write official letters to the U.S. Congress and explain the situation. (Apple Daily, June 8, 1999) The HKSAR government said on June 11 that Hong Kong's supervision over strategic materials met international standards. However, the government admitted that no PLA vehicles were suspected and therefore inspected. (Wen Wei Po, June 12, 1999)

■ PRC-Hong Kong relations

Hong Kong has traditionally been a major trade partner with Mainland China. After its transfer of jurisdiction in 1997, Hong Kong developed closer relations with the Mainland. Exchanges of visits at both private and official levels between the two areas have been on the rise. The HKSAR government established a representative office in Beijing to act as the coordination window with the central, provincial and municipal governments on the Mainland. However, would the PRC's accession into the World Trade Organization (WTO) benefit Hong Kong's economic interests or reduce the function of Hong Kong as a transit hub for trade? What will be the separation of duties between the HKSAR representative office in Beijing and other PRC representative agencies in Hong Kong? These issues deserve close observation.

1. Growing bilateral trade

Though still in an economic adjustment stage because of the Asian financial turmoil, Hong Kong has enjoyed growing trade, exchanges and cooperation with the Mainland. Hong Kong has been the No. 1 foreign investor in Mainland China, with its 1998 investments there reaching US$134 billion, accounting for about 53% of the Mainland's total foreign investment. Bilateral trade accounted for 38% of Hong Kong's entire trade volume. More than 90% of Hong Kong's transit trade moves to or from the Mainland. (HKSAR government statistics, June 1999) Since Beijing initiated economic reforms, Hong Kong has become the primary source of financial, insurance and other business services for Mainland China. In recent years, Hong Kong has had a growing significance as Mainland China's transit hub. But whether this position will be enhanced (Ta Kung Po, June 10, 1999; Hong Kong Economic Journal, May 4, 1999) or impaired (Hong Kong Economic Journal, May 5, June 3, 1999) by Beijing's accession to the WTO remains to be seen.

2. Increasing exchanges at the private and official levels

PRC-Hong Kong exchanges of visits between government officials have been increasing. The PRC's Tsinghua University and the National Administration Academy are sponsoring a Chinese Affairs Program for Hong Kong officials. The HKSAR government also arranged lectures for Mainland officials to introduce common laws. These are all aimed at promoting communication and contact between the two sides. Exchanges between the private sectors have been thriving to a greater extent. In 1998, Mainland tourists made 2.6 million visits to Hong Kong, generating revenues that are the highest among all tourist sources. About 1,600 Hong Kong tour groups traveled to the Mainland in 1998, totaling 30,000 people/trips. Groups from the Mainland to Hong Kong totaled 1,100, bringing about 15,000 people/trips to Hong Kong. More and more Hong Kong students are studying in Mainland schools. The HKSAR government is planning to recruit 450 Mainland Chinese students in the next three years.

3. Representative Office in Beijing

Hong Kong's representative office in Beijing began operations on March 4, serving as a coordination window with Mainland agencies at the central, provincial and municipal levels. Under the office are the Economic and Trade Affairs, Entry Affairs, Information and Administrative Sections. But the office's functions overlap with those of the State Council Hong Kong and Macao Affairs Office and the Xinhua News Agency's Hong Kong Branch. How the three will divide their duties remains to be seen.

4. Some dissidents refused entry into the Mainland and Hong Kong

Many members of the Hong Kong Alliance in Support of the Patriotic Democratic Movement in China, the Democratic Party, or the Diaoyutai movement, and some journalists critical of Mainland developments are more than often denied entry into Mainland China, even when holding valid home visit permits. (Apple Daily, April 4, 1999) The authorities have failed to give any reason for their rejection. It is generally believed that the denial of entry of these persons is linked to their politically critical attitude toward the Beijing government. The HKSAR government refused to allow Wang Dan and 10 other overseas Chinese pro-democracy activists attend an international seminar in Hong Kong to mark the 10th anniversary of the Tiananmen Incident. Members of the Legislative Council criticized the rejection, saying it was the government's guess of Beijing's intentions. (Hong Kong Economic Journal, May 6, 1999) The government's decision invited criticism in that the move "tarnished Hong Kong's international image as a free city" and "dampened confidence regarding 'one country, two systems.'" (Hong Kong Economic Journal, April 22, 1999) A public opinion survey showed that 56% of those polled objected to the government's boycott of these pro-democracy activists. (Poll conducted by the Institute of Asia Pacific Studies, the Chinese University of Hong Kong; Apple Daily April 30, 1999)

5. Zhang Ziqiang case triggers disputes over legal jurisdiction

This case touches upon disputes over the application of laws and exercise of legal jurisdiction, which indirectly tested Mainland China's attitude toward the Basic Law and faith to live up to its commitments of "one country, two systems," and that "Hong Kong is governed by the Hong Kong people." Hong Kong Chinese Zhang Ziqiang had kidnapped a group of businessmen in Hong Kong. He and his collaborators were arrested in the Mainland while trying to pass through the Hong Kong border with illegal explosives. He was put on trial in Guangzhou. HKSAR Chief Executive Tung said Zhang was arrested for violating Mainland Chinese laws and therefore Hong Kong should respect the PRC's criminal proceedings under the principle of "one country, two systems." Secretary for Justice Elsie Leung said that after consulting with legal experts in the PRC central government, the Mainland Chinese court has the right to put Mainland Chinese citizens on trial for crimes committed extraterritorially. (Hong Kong Economic Journal, Nov. 19, 1998) Secretary for Security Regina Ip said no one filed a suit against Zhang in Hong Kong and that there was no basis for filing an indictment against him. Given the absence of any formal agreement between Hong Kong and Mainland China over the transfer of criminals, the HKSAR government did not request Zhang be extradited to Hong Kong to face trial there. Ip stressed that Zhang was arrested in Mainland China for crimes committed there, and that the Mainland court should have absolute jurisdiction to try Zhang.

Chan Wang-ngai, dean of the law school of Hong Kong University, said Zhang committed crimes in both Hong Kong and Mainland China. He said Hong Kong and Mainland China should establish a mutual legal assistance system. (Sing Tao Daily, Nov. 9, 1998) Assistant Professor Tai Yiu-ting of the law school of the same university said that prosecuting Zhang in Mainland China violated the Basic Law. Tai urged Hong Kong and Mainland China seek a solution for the conflicting legal jurisdiction. (Sing Tao Daily, Nov. 1, 1998) The Financial Times reported that Zhang was sentenced to death by a Mainland court, which cast doubt on whether Hong Kong would gradually lose its judicial autonomy. The International Herald Tribune said that Zhang's sentence triggered a controversy over whether Mainland China had infringed upon Hong Kong's legal jurisdiction. (Hong Kong Economic Daily, Nov. 14, 1999)

6. Mainland investments gaining greater control of Hong Kong media

Over the past year, Mainland funds have been increasingly finding their way into the Hong Kong media. Mainland investors have become the largest shareholders in Asia Television Service Co. and the Tin Tin Daily News. The Mainland-published China Review and Sun Times began circulating in Hong Kong as well. These all indicate increasing Mainland influence in the Hong Kong media. Mainland capital has also developed an oligopoly in the publishing, marketing and sales of printed matter. More and more reports indicate growing censorship in the few media not having shares held by Mainland investors.

■ Garrison

Since arriving in Hong Kong, the PLA Garrison has maintained a low profile and tried to open up to the general public. However, some worries about its role remain. In the wake of NATO's accidental bombing of the PRC embassy in Belgrade and the U.S. Congress report that the Garrison used Hong Kong as a conduit to transfer secret U.S. military technology to the Mainland, Beijing has halted military exchanges with the United States. These incidents also call into question the PLA Garrison's role in Hong Kong.

1. Legislative Council criticizes privileges of the PLA HK Garrison

Since a change of shift in November 1998, the PLA Hong Kong Garrison has remained at about 4,000. It has maintained a low profile since the transfer of jurisdiction, establishing an information section to serve as a window to the general public and opening its compounds for visitors in order to dispel mysteries about its presence. However, a few policemen have complained that the garrison asked for police motorcades to lead military vehicles. Some citizens have complained about noise from night drills. Also, traffic violations by PLA soldiers are not subject to court hearings. All these invited criticism from the Legislative Council that the garrison enjoys special privileges. (Apple Daily, Feb. 23, 1998)

2. U.S. Navy port call rejected

Since Washington and Beijing reached an agreement on April 29, 1997 to allow U.S. military ships to visit Hong Kong ports for maintenance and supply, U.S. ships have done so many times. (Sing Tao Daily, May 21, 1999) The PLA Hong Kong Garrison has joined U.S. forces to conduct maritime distress rescue exercises through arrangements by the Hong Kong Civil Aviation Department. The PLA has maintained cordial relations with the U.S. military. After the PRC Embassy in Belgrade was bombed by U.S. airplanes, the Beijing refused permission for five port calls by U.S. military ships. The spokesman for the PRC Ministry of Foreign Affairs Office in Hong Kong said, "Under the current situation, it is normal to refuse port calls by U.S. military ships." (Sing Tao Daily, May 21, 1999) The U.S. Consulate General in Hong Kong refrained from making any comment on these refusals.

3. PLA Garrison accused of transporting secret U.S. technology

A report released by the U.S. House Select Committee (generally referred to as the Cox Report) indicated that the PRC transported Hong Kong-imported U.S. military technology and materials to the Mainland by taking advantages of the Garrison Law that exempts garrison vehicles from inspections while crossing Hong Kong-Mainland borders. In the post-1997 period, Hong Kong still enjoys more relaxed U.S. export control regulations than Mainland China. Many types of U.S. products and technology can be exported to Hong Kong with exemptions from licensing systems. The Cox Report implied that the PRC used Hong Kong's special status as a transport conduit. The report suggested that the Clinton administration study the appropriateness of different treatment for Hong Kong and Mainland China in export controls.

■ Taiwan-Hong Kong relations

Over the past 12 months, personal exchanges between Hong Kong and Taiwan have kept their momentum. Despite a moderate decrease in Taiwan's investments in Hong Kong, trade and economic ties between the two continue to thrive. Some barriers still exist in the exchange of official visits, but exchanges in the private sector have been expanding in both category and magnitude. The ROC government has strengthened its coordination with and services for Hong Kong and Macao students. The Xinhua News Agency's Hong Kong Branch, however, has also escalated its propaganda war against pro-Taiwan associations in Hong Kong.

1. Thriving trade and economic relations

◆ Transport trade via Hong Kong showing moderate decline

Hong Kong customs statistics showed that transshipments between Taiwan and Mainland China via Hong Kong totaled US$10.19 billion in 1998 (excluding re-export, transfer trade, and other illegal direct trade), down 12.57% from a year ago. Taiwan's 1998 exports to Mainland China through Hong Kong reached US$8.364 billion, down 13.91%, while Mainland China's exports to Taiwan by way of Hong Kong amounted to US$1.655 billion, down 5.1%. These declines were attributed to the Asian financial crisis, which engulfed many Asian countries, including the two sides of the Taiwan Strait. In the absence of more incentives for using Hong Kong as a transshipment center, Hong Kong will witness decreasing significance in indirect cross-strait trade.

◆ Hong Kong still the No. 1 source of Taiwan's trade surplus

Taiwan-Hong Kong (Macao included) trade in 1998 totaled US$27.154 billion, down 12.5% from a year ago. Taiwan's exports to Hong Kong in 1998 declined 13.4% from 1997 to US$24.841 billion, accounting for 22.5% of Taiwan's total exports. Hong Kong was the second-largest market for Taiwan's exports, next to the United States. Taiwan's imports from Hong Kong dropped a moderate 2.2% from 1997 to US$1.952 billion in 1998, representing 1.9% of Taiwan's entire imports. The slowing exports and imports between Taiwan and Hong Kong were partly attributed to the Asian financial crisis. Taiwan's 1998 trade surplus with Hong Kong reached US$22.889 billion, compared to Taiwan's entire trade surplus of only US$5.9 billion for the whole year. Hong Kong, the hub of Taiwan's indirect trade with the Mainland, was the No. 1 source of Taiwan's trade surplus, and Taiwan's third largest trading partner, following the United States and Japan.

For Hong Kong, Taiwan is the No. 4 source of imports, the No. 6 market, and the fourth largest trading partner, next to Mainland China, the United States, and Japan.

◆ Dropping investment in Hong Kong from Taiwan

According to the Investment Commission of the ROC's Ministry of Economic Affairs, Taiwan's investments in Hong Kong shrank 52% from 1997 to US$68.6 million in 1998. Hong Kong's 1998 investments in Taiwan increased 16% from 1997 to account for US$274.5 million. Combined investments between Taiwan and Hong Kong totaled US$343.1 million.

◆ Taiwan is Hong Kong's second largest tourist resource

In 1998, 2.55 million people travelled between Taiwan and Hong Kong and Macao, down 2.5% from a year ago. Hong Kong and Macao residents paid 229,980 visits to Taiwan in 1998, up 7.7% from a year ago. About 1,330 Hong Kong and Macao residents were allowed to move here, down 13.9% from a year ago. Taiwan residents paid 2.32 million visits to Hong Kong and Macao in 1998, down 3% from a year ago. Taiwan is Hong Kong's second largest tourist source, after Mainland China.

2. Taiwan-Hong Kong exchanges expand in both magnitude and depth

◆ Primarily at personal levels

Taiwan-Hong Kong exchanges in the post-1997 period expanded in both magnitude and depth, and Hong Kong citizens indicated an improved impression of Taiwan. Taiwan-Hong Kong relations have progressed positively compared to the time immediately before and after the transfer of jurisdiction. While Beijing steadfastly upholds the "one China" principle, the HKSAR government has remained very conservative toward Taiwan, making it unlikely there will be any major breakthrough in Taiwan-Hong Kong relations in the near future. Given Hong Kong's importance as a hub and its people's generally favorable attitude toward Taiwan, the ROC government should strive to build on current ties to expand exchanges so as to make a breakthrough, promote Taiwan-Hong Kong exchanges, and improve cross-strait relations.

◆ Major travel-related changes between Hong Kong and Taiwan in the past 12 months

Time	Measures
1998.7.20	The HKSAR government revoked the practice of stamping "reminders" on the Taiwan Visitor Permit, and also removed such "reminders" from the entry permit application form.
1998.12.1	The ROC Ministry of the Interior adopted revisions to the "Measures Governing Hong Kong and Macao People Entering into and Settling in the Taiwan Area." The new measures eased regulations on the stay of Hong Kong and Macao people in Taiwan, allowing visa extensions in Taiwan, and the issuing of resident permits so as to facilitate the traveling of Hong Kong and Macao people in and out of the Taiwan area.
1999.4.15	The Executive Yuan approved a bill presented by the Ministry of the Interior to revise the "Measures Governing Hong Kong and Macao People Entering into and Settling in the Taiwan Area." The new measures eased regulations on the stay of Hong Kong and Macao people in Taiwan, allowing visa extension in Taiwan, and the issuing of residential permits so as to facilitate the traveling of Hong Kong and Macao people in and out of the Taiwan area.

◆ High-level visits between Taiwan and Hong Kong over the past year

Time	Events
1998.10.14	While transiting in Hong Kong on the way to Mainland China, SEF Chairman Koo Chen-fu and his delegation received courtesy treatment from the HKSAR government. The delegation was greeted by Hong Kong Affairs Bureau Director-General Cheng An-kuo, Xinhua News Agency Hong Kong Branch Taiwan Affairs Director Ying Hoo Shaw, and special advisor Paul Yip, at the airport.
1998.11.28	Hong Kong Democratic Party Chairman Martin Lee, leading a 26-member delegation from the Legislative Council and his political party, visited Taiwan to observe the elections.
1998.11.30	Hong Kong Liberal Party Chairman Lee Pang-fei led a delegation to observe the Taiwan elections, which included Andrew Wong Wang-fat , Christine Hon, Lau Chin-Shek and Lee Nam-hung.
1998.12.2	Hong Kong politics columnist Yeung Kang-lun led a "Hong Kong Media Delegation" to report on the elections in Taiwan.
19993.4	Taipei City Mayor Ma Ying-jeou visited Hong Kong to chair the opening ceremony of the representative office of Taipei Bank and observe Hong Kong's municipal developments.
1999.5.6	Paul Yip, advisor to HKSAR Chief Executive, visited Taiwan and called on MAC Chairman Su Chi and Taipei City Mayor Ma Ying-jeou.

◆ Official contacts encounter barriers

● Taiwan-Hong Kong official exchanges require more breakthroughs.

Cheng An-kuo, director-general of the Hong Kong Affairs Bureau, said on July 2, 1998 that Chang Chia-chu, director general of the Civil Aeronautics Administration of the Republic of China, was invited to take part in the July 2 opening ceremony of the new Chek Lap Kok Airport in Hong Kong. However, the HKSAR government failed to issue a visa to Chang, which prevented him from going to Hong Kong. Cheng expressed his regret and the Hong Kong Immigration Department declined to comment on the case, saying it was an individual case.

The Labor Advisory Board was planning to visit Taiwan, Singapore, and other places in August 1998. Jacqueline Willis, chairman of the board, and the Commissioner of Labor, was planning to join the delegation. However, due to political considerations by top HKSAR government officials, Willis did not make the trip to Taiwan. According to the Hong Kong Daily News, F.S.W. Ho, director-general of Industry, was planning to accept an invitation to inspect high-tech industries in Taiwan in April 1998. However, his plan was later vetoed by high-ranking HKSAR officials.

● HK's relations with Taiwan to be handled in line with Qian's seven-point guidelines

Replying to interpellation at the Legislative Council on January 6, Secretary for Constitutional Affairs Michael Suen said that the HKSAR government acts in line with the Seven Articles of Qian Qichen in handling relations with Taiwan, and that it can only maintain functional contacts at the business level. Secretary for Security Regina Ip told the Legislative Council on September 16 last year that the HKSAR government's handling of Taiwan officials' entry applications is on a case-by-case basis without set guidelines. She said Hong Kong has been consistent in supporting Taiwan's WTO bid, but the PRC should accede to the WTO ahead of Taiwan, which is a WTO consensus.

● Hong Kong people support a Taiwan- Hong Kong office exchange

The Social Science Center of the University of Hong Kong published a general poll on February 25 this year regarding Hong Kong's attitude on the exchange of representative offices between Taiwan and Hong Kong, with 78.8% of those interviewed in favor. Another public opinion survey by the Hong Kong Centre for Studies on Relations Across the Taiwan Strait showed that 35% of respondents felt that the gap in the Hong Kong-Taiwan relationship widened one year after Hong Kong's reversion. About 70% of the respondents surveyed support an exchange of representative offices between Taiwan and Hong Kong.

Wong Ka-Ying, chief secretary of the center, said that public opinion, as shown in the survey, is not reflected in the HKSAR government's policy. He added he hopes that the HKSAR government will spend more time to promote Taiwan-Hong Kong ties after the Hong Kong economy stabilizes.

◆ Hong Kong's status in cross-strait relations and PRC's propaganda aimed at the ROC

In early 1999, the HKSAR Chief Executive's special advisor, Paul Yip, mentioned Hong Kong's status in cross-strait relations and international relations in two speeches in Guangzhou and the Student Union of Hong Kong University. Yip said Hong Kong, trusted by the two sides of the Taiwan Strait as a free area, can be compared to a pub where the two sides may talk freely, with Hong Kong not engaged in any substantive talks. Yip said this would be Hong Kong's position in cross-strait relations. In other words, Hong Kong desires to serve as a space for friendly interplay between the two sides. These remarks show that Hong Kong is a place for dialogue between the two sides as well as a post for the PRC to win support among the Taiwan people.

On February 2, the Xinhua News Agency Hong Kong Branch invited Taiwan businessmen in Hong Kong and leaders of pro-ROC overseas Chinese associations to participate in a seminar marking the fourth anniversary of Jiang Zemin's four-point proposal on Taiwan. At the seminar, the officials Xinhua News Agency Hong Kong Branch elaborated on Beijing's policies toward Taiwan and Taiwan-Hong Kong relations. Seven days later, the office again invited people in support of Taiwan to attend the "Chinese Lunar New Year Party for Taiwan Compatriots in Hong Kong." PRC officials have strongly wooed Taiwan investors to Hong Kong. These moves indicate that the PRC has intensified its propaganda voice against the ROC through Hong Kong.