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Situation Analysis: Six Years After Hong Kong's Handover (Feb 2004)

˙National Security Bill triggers disputes, division, and international concern.

˙SARS brings extensive and devastating political, social, and economic impact.

˙Closer Economic Partnership Arrangement nears completion but implementation issues remain.

˙The economic performance is improving but issues of high unemployment rate and financial deficit remain unsolved.

˙Relation between Taiwan and Hong Kong improves, and communication channels are incorporated into official mechanisms.

˙Reports of 149 controversies test Mainland's promise of keeping the system of Hong Kong unchanged for 50 years.

General Analysis

Six years after the handover, the political situation in Hong Kong is considered stable despite uncertainties and challenges to the future of judiciary independence and press freedom. In three years of continuing deflation and economic slowdown since the 1997 financial crisis, HK's sluggish economy rebounded last year relative to the year earlier. The U.S.-Iraq War and the SARS epidemic early this year, however, have apparently affected HK's economy. The government's proper response and relief measures and investors' confidence should be key to economic recovery. The enforcement of the Closer Economic Partnership Arrangements (CEPA) between Hong Kong and the Mainland will help revive HK's economy. Nonetheless, the ability of Hong Kong to maintain an independent customs, financial system, and HK dollar to maintain its competitive edge, and how to overcome the Mainland's lack of transparency in administration, complicated laws, and out-of-step among provincial and city administrations remain to be observed.

The outbreak of SARS caused social apprehension and tension, and undermined Hong Kong's economic growth and international image. The people's dissatisfaction over the government's incompetence in dealing with the epidemic has turned to disaffection for the Chief Executive and the HK government. Although Tung Chee-hwa actively promoted the implementation of the "Accountability System for Principal Officials" after assuming his second term, its effectiveness was below expectations. The HK government's integrity was severely blemished as a result.

The legislation of Article 23 of the Basic Law (National Security Bill) started intense debates and conflicts. It divided the society, affected future economic development, and can possibly affect Taiwan's activities in Hong Kong. The R.O.C. government and the international community will carefully observe the developments, and adhere to President Chen's "spirit of goodwill, proactive cooperation, and permanent peace" principles for cross-Strait relations. We will actively promote the relevant activities based on goodwill, pragmatism, and service. The following are the general analysis of Hong Kong's situations last year.

(1) Enforcement of the accountability system is unsatisfactory as HK government's popularity dips.

The "Accountability System for Principal Officials," which transformed Hong Kong's century-old bureaucratic system and made government officials accountable for their administration, has drawn great public concern. Successive incidents have caused HK residents to question the government's resolve in promoting accountability. First, there was the announcement of consultative papers on delisting stocks with very low share prices, which led to sharp decline in share prices. After the incident, the different government agencies deflected blame on one another. Furthermore, there was a scandal involving the Financial Secretary, who had purchased a new car shortly before a rise in vehicle taxes, thus triggering debates over tax evasion. Although the principals in the two incidents apologized to the public, the "accountability system" failed to live up to public expectations and blemished the government's prestige. A recent survey by the University of Hong Kong showed that the approval ratings of the Chief Executive and the HK government are at a six-year low. The average approval rating for the Chief Executive's policy principles was only 13%, while the average approval rating for the SAR government was only 15%.

(2) Legislation of Article 23 of the Basic Law triggers debates and division.

Article 23 of the Hong Kong Basic Law stipulates that "The Hong Kong Special Administrative Region 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." Although democratic countries in general have, in practice, similar legislation to safeguard national security, there exists in democratic countries a legislation representing the will of the people to oversee and provide a check-and-balance to the legislative process and future law enforcement. Since there are no general elections in Hong Kong, and the legislature does not have enough power to check and balance the administrative department, the legislation's legitimacy is in question.

Moreover, when Tung Chee-hwa took his oath of office for a second term, Jiang Zemin said at the inauguration that "Hong Kong people should consciously safeguard the motherland's security and unity." Not long after, the HK government started to promote the legislation of Article 23 (National Security Bill), which made it seem as if the legislation was in response to Beijing's demand. Disputes thus resulted during the legislative process. Many Hong Kong and international organizations, as well as many countries oppose the bill for fear of violation of freedom and human rights and disruption to the "one country, two systems" principle. For this reason, there were heated debates and conflicts between councilors for and against the legislation. There was likewise an anti-legislation protest march, the largest gathering since the June 4 Tienanmen incident in 1989. The "Society Cohesion Group" of the Central Policy Unit warned that supporters and opposition to the legislation would seriously divide the society. The international community was also very much concerned over the legislation. The U.S. government (including the White House, Department of State, Congress, and U.S. Consulate General in Hong Kong) issued as many as 20 statements or comments on the legislation. The British government also referred to the legislation as the most sensitive since the 1997 handover. Taiwan likewise expressed actively its concerns over provisions that involve Taiwan, such as the impact of "extraterritorial effect" on Taiwan nationals who are also Hong Kong permanent residents, communications between Taiwan and organizations leaning toward Taiwan, and the impact of the police's power of investigation on normal operations of Taiwan representative office in Hong Kong. In addition, international ratings companies worry that the legislation would affect flow of information and damage the business environment, discouraging or chasing away foreign investments and obstructing economic development.

(3) SARS brings extensive and devastating impact.

There were reports on cases of atypical pneumonia in Hong Kong caused by unidentified viral infection since mid-February. On March 12, the HK Department of Health confirmed an outbreak of Severe Acute Respiratory Syndrome (SARS) epidemic in the territory. Due to difficulties in controlling the epidemic, the World Health Organization issued travel warnings and listed Hong Kong among the SARS-affected areas. Hong Kong was removed from the list on June 24. During the intervening three months, the epidemic had far-reaching and devastating impact on Hong Kong's political, social, economic, and international environments, as well as the development of "one country, two systems."

Due to the rapid spread of the viral infection and its unknown origin, treatments were ineffective. As the death toll rose, confusion and restlessness shrouded HK society. Dissatisfactions over the government's incompetence fell on Chief Executive Tung Chee-hwa. As a result, Tung and the government's popularity dipped. A public survey by the Chinese University of Hong Kong showed that 58.3% of the residents were dissatisfied with the Tung's handling of the epidemic, 54.7% considered Tung should resign to show accountability, and 65.3% thought Tung was unsuitable to continue serving as the Chief Executive. In the Legislative Council, councilors also proposed motions demanding Tung to step down. Statistics released by the HK government showed that, due to the SARS epidemic, the volume of HK airport single-day travels dropped by nearly 70% compared with the same period of the previous year, and nearly 30% of the scheduled flights were cancelled. The number of tourists to Hong Kong dropped by more than 70%. Industries extensively affected by the epidemic (food, travel, retail) estimated damages amounting to nearly HK$30 billion within one month. Employees in these industries lost their jobs as businesses closed down, resulting in rising unemployment rate and worrying social problems. Since the SARS virus could spread inside aircrafts and ships, international relations were likewise affected. To prevent the virus from being transmitted by people from Hong Kong, various countries urged their nationals to refrain from traveling to Hong Kong. These countries also implemented preventive measures, such as suspending academic or civilian exchanges with Hong Kong, segregating visiting HK people, prohibiting HK residents from entering their countries, or evacuating their personnel from Hong Kong.

These effects evoked anxiety in the society and damaged Hong Kong's international image. The Mainland's withholding information was the main reason Hong Kong was unable to prevent the epidemic and stop its dreadful spread. This incensed the HK residents, who showed dissatisfaction with the Mainland's bureaucratic system characterized by patriarchate, backwardness, and ambiguity. The HK residents felt helpless and disappointed toward the SAR government's "submissive and ingratiating" attitude towards the "Central Government" under "one country." These have extensive effects on Hong Kong's "one country, two systems" framework, and call for special attention.

(4) The economy performed well but issues of high unemployment rate and financial deficit remain unsolved.

Hong Kong's economy has not been as outstanding as it used to be since the Southeast Asian financial crisis, and Hong Kong people's confidence on the future of the economy is shaken. Despite relatively sound economic growth, unemployment rate continued to rise, and deflation did not improve.

HK government statistics show that the economic growth rate last year was 2.3% and unemployment rate was 7.3%. Compared with an economic growth rate of 0.6% and unemployment rate of 5.1% in 2001, there was evident growth in the economy. High unemployment rate, however, remained the crucial economic problem in Hong Kong. In addition, the HK government's enormous financial deficit is likewise a threat to the economy. In its 2003-04 budget issued in March 2003, the HK government pointed out that unless resolved in time, the vast financial deficit would affect investor confidence and delay economic recovery.

The U.S.-Iraq War and SARS epidemic early this year apparently affected Hong Kong's economy. Especially, the SARS epidemic wreaked havoc on the tourist and service industries, two of Hong Kong's economic pillars. As a result, the HK government lowered its forecast economic growth from 3% to 1.5%. Unemployment can possibly be worsened. According to the statistics of the HK government, unemployment rate in May was at a record high of 8.3%. Whether SARS will have a long-term effect on Hong Kong's economy is worth watching. The viability of the government's response and relief measures and investors' confidence should be keys to economic recovery.

(5) Efficacy of the Closer Economic Partnership Arrangement between the Mainland and Hong Kong is yet to be observed.

In his policy address, Chief Executive Tung Chee-hwa emphasized that Hong Kong will increase economic cooperation with the Mainland and facilitate economic integration with the Pearl River Delta. Toward this end, Hong Kong has actively worked on a Closer Economic Partnership Arrangement (CEPA) with the Mainland. On June 16, the Chief Executive announced that there was substantial development in the CEPA negotiation and that the agreement signed on June 30 will give economic transformation in Hong Kong a fresh start. The CEPA agreement covers three areas: trade in goods, trade in services, and trade in investment facilitation. On trade in goods, zero import tariffs will be applied for many exports from Hong Kong. On trade in services, liberalization in market access for the following will be carried out: advertising, legal, accounting, medical, real estate and transport, tourism, audiovisual, banking, securities, and insurance services. Favorable control and flexible rules will be adopted for issues relating to "rules of origin" and "the definition of a Hong Kong firm" taking into account Hong Kong's position as an international metropolis and the present circumstances.

Hong Kong businesses believe that CEPA will benefit investment and business expansion in the Mainland, and that the service industry will benefit more than the manufacturing industry. Although the arrangement will not attract labor-intensive industries back to Hong Kong, it can attract the return of high value-added industries. Zero tariff is likewise beneficial to Hong Kong's competitiveness. However, some businesses do not entertain high hopes in the short term due to the prohibitive capital and requirements needed to set up companies in the Mainland. They believe CEPA has little help on HK businesses entering the Mainland markets, and it is unknown whether it would help lower Hong Kong's unemployment rate. For these reasons, the CEPA impact on Hong Kong's economic growth is limited. The media also warned that if Hong Kong cannot maintain an independent customs, financial system, HK dollar, as well as an independent status in joining foreign trade organizations, Hong Kong will have very few competitive advantages left in the future. Moreover, the Mainland's administrative procedures lacking transparency, its laws being complicated, and different provinces and cities having different ways of doing things, all these are issues that need to be resolved to enforce closer economic and trade relations between Hong Kong and the Mainland.

(6) Independence of the Hong Kong judiciary is closely watched.

In the past six years, disputes on whether there is independence of the Hong Kong judiciary have occurred frequently. Especially, the National People's Congress (NPC), in its interpretation of the Basic Law in relation to the "right of abode of the children of Hong Kong people in the Mainland," overrule the judgment of Hong Kong's Court of Final Appeal and weakening the credibility of an independent HK judiciary. This has raised questions on whether the NPC would be requested to interpret laws in cases involving "governing power" of the Mainland. Such distrust has extensive adverse impacts on the credibility of HK judiciary. The independence of HK judiciary is further challenged by the legislation of the National Security Bill, as the HK government said that violators would possibly be transferred to the Mainland for trial, or that the NPC might be called upon to interpret the law.

Furthermore, 16 Falun Gong members were charged with "blocking the streets," among six other crimes, for holding a sit-in protest in front of the Central Government's Liaison Office Building, and were later penalized with fines. The Consulate General of Switzerland in Hong Kong expressed surprise over the verdict (some of those charged were Swiss citizens). The vice-chairperson of the House Committee on International Relations of the U.S. Congress also criticized the verdict as an insult to the rule of law, and it reflected a new low in liberty and democracy in Hong Kong.

Analysts say that an open and impartial rule of law is one of the major reasons why Hong Kong is stable and prosperous. Due to the aforementioned controversies that impair the independence of the HK judiciary, HK residents and the international community have become concerned over the future of the HK judiciary.

(7) Self-censorship makes media less credible.

Although the HK media have generally enjoyed press freedom since the handover, the "self-censorship" issue has appeared frequently. This is true especially in cases involving publicized speeches by Mainland leaders and in issues the Mainland believes to be causes of instability, such as political dissidents, Falun Gong activities, and political news related to Taiwan, Xinjiang, and Tibet. In such cases, self-censorship is often brought to attention.

Controversies over the past year that involved press freedom included: The sudden dismissal of Paul Cheung, Metro Radio's managing editor for HK and international news. Cheung suspected that his dismissal might have been caused by his five protests against the top management's handling of negative reports on the HK SAR government (such as Falun Gong). Furthermore, RTHK's planned interview with the R.O.C. vice-president was harshly criticized by Xu Simin of the HK-based Chinese People's Political Consultative Conference, as well as pro-PRC organizations. Although RTHK emphasized its respect of editorial autonomy, the HK government believed that RTHK, being a government department, should follow specific sets of procedures for contacting officials in Taiwan and should obtain prior approval from HK senior officials in accordance with Qian Qichen's "Seven Principles." Scholars and workers in the news media believed that equating RTHK with other government agencies was unreasonable, and Democratic Party legislators criticized the incident as an interference on press freedom. Another incident involved current affairs commentator Albert Cheng, who in his program criticized the HK government for its incompetence in handling and preventing SARS. After subsequently receiving a warning from the HK government, Cheng announced an indefinite leave of absence. All these incidents that affected Hong Kong's press and speech freedoms are worthy of concerns. The Asian Wall Street Journal warned in an article that if there were interference of press freedom in the HK media, there would be a rapid demise of HK's competitive edge in freedom of information, which will be detrimental to HK's long-term economic development.

(8) Increased interactions between the Mainland and Hong Kong led to public security problems.

Since the handover, personnel exchanges, economic and trading cooperation, infrastructure connections, and social developments between the Mainland and Hong Kong have become increasingly integrated. Mutual official visits increased, and according to the HK government, there were 1152 visits made by HK officials in 1997 and 1682 visits in 2002. Likewise, there were 836 visits from the Mainland in 1997, which increased to 1457 in 2002. Secretary for Commerce, Industry, and Technology Henry Tang Ying-yen said that Hong Kong had become the Mainland's primary source of investments and a major service export center. At present, there are 200 thousand people from Hong Kong working in the Mainland. As of the end of 2000, Mainland investments accounted for 31% of total investments in Hong Kong. Tang said that Hong Kong's role of an intermediary had transformed from attracting investments in the past, to a major hub for facilitating international and Mainland capital and business exchanges. The personnel exchanges also increased. According to figures released by the HK Tourism Board, more than 16.56 million people visited Hong Kong in 2002, an increase of 20.7% compared with the previous year. Mainlanders accounted for more than 6.82 million among the visitors, an increase of 53.4% compared with the previous year. However, the Commissioner of Police Tsang Yam-pui said that after the Mainland lifted restrictions to allow its residents to travel to Hong Kong, there has been an increase in crimes committed by two-way permit holders. From 1265 persons two years ago, the number increased to 1860 last year, a drastic increase of 50%. Most crimes involved fake permits, and nearly 200 people were involved in street swindling cases operated by crime syndicates.

The U.S. Consul General in Hong Kong pointed out that as Hong Kong became more dependent on the Mainland's economy, it had experienced the fundamental dilemma on maintaining its political, cultural, and economic individuality. Although Hong Kong's relation with the Mainland had grown closer, it was worried that the systems of Mainland's politics, economy, and society were weak and could collapse, which in turn would impede Hong Kong's development. In Hong Kong, there had been appeals on setting up a "Mainland-HK firewall." As time goes by after handover, it would become more evident to seek a balance between the integration of the Mainland and Hong Kong and the maintenance of individuality of Hong Kong.

(9) The exchanges between Taiwan and Hong Kong have been improving gradually, and communication channels are incorporated into formal mechanisms.

Generally speaking, there had been some breakthroughs in the relationships between Taiwan and Hong Kong. Personnel exchanges between Taiwan and Hong Kong continued to increase in 2002. More than 2.278 million visits were made by the Taiwanese to Hong Kong, an increase of 6.8% compared to that of the previous year. More than 340 thousand visits were made by the people of Hong Kong to Taiwan, an increase of 5.5% compared to that of last year. During the same year, trade between Taiwan and Hong Kong amounted to US$32.65 billion. Hong Kong is Taiwan's second largest export market, and the third largest trading partner. Taiwan, on the other hand, is Hong Kong's fourth largest trading partner.

The HK government announced in late June last year that Special Adviser to the Chief Executive Paul Yip would cease to handle communications with Taiwan's Hong Kong Affairs Bureau in relation to Taiwan-HK affairs; the task was transferred to the Constitutional Affairs Bureau on July 1. Secretary for Constitutional Affairs Stephen Lam said that the HK government continued to pay much attention to its trade relations and cultural exchanges with Taiwan in order to facilitate cross-Strait communications. Lam emphasized that, after the Constitutional Affairs Bureau took over the task, issues on entry to Taiwan, cultural and trade relations with Taiwan, as well as communications with other bureaus would become more convenient and that there was no change in the position of Taiwan organizations in Hong Kong under the new system. When Lu Ping, director of Taiwan's Kwang Hwa Information and Culture Center, came into office on January 23, Secretary Lam said, "We welcome Ms. Lu Ping to give an impetus to Kwang Hwa Information and Culture Center in Hong Kong. We believe this is helpful in promoting the cultural exchanges between Hong Kong and Taiwan." The HK media reacted positively when Lu was issued a work permit. They believed that "issuing a work permit to Lu is the first step toward the normalization of Taiwan-HK relations by HK officials under the accountability system," and "Lu's effort for cultural exchanges creates a win-win situation for Taiwan and Hong Kong." In addition Taiwan's Hong Kong Affairs Bureau director Chang Liang-jen also met officially with Secretary Lam of the Constitutional Affairs Bureau, the SAR agency overseeing HK-Taiwan affairs, due to efforts in SARS prevention. The two discussed the SARS latest developments and the impact of the epidemic on Hong Kong and Taiwan.