Current Issues Brief 33 1996-97

Dr Stephen Sherlock
Foreign Affairs, Defence and Trade Group
23 June 1997

Contents

Major Issues Summary

Introduction

Hong Kong and China: The Legacy of History

Hong Kong's Economic Transition: The Golden Egg?

Hong Kong's Political Transition: Whither Democracy and Human Rights?

Hong Kong and Australia

Conclusion

Endnotes

Major Issues Summary

On 1 July 1997 sovereignty over the British colony of Hong Kong will be formally transferred to China. The handover has raised questions about the capacity of the territory to continue its economic success and maintain the political freedoms and rule of law enjoyed under British rule. This paper examines the issues involved in the transfer and the prospects of Hong Kong's viability after 1997 and the implications for Australia.

Hong Kong was seized from China in the mid-nineteenth century and was established as a free port. The free movement of goods and capital has been the key to Hong Kong's success, both before and after the 1949 Chinese Revolution. Although a separate Hong Kong has been economically important for China, it regards the territory's occupation by a foreign power as a national humiliation and will not countenance anything it sees as interference in China's right to govern Hong Kong as it sees fit.

Hong Kong has been economically transformed over the last thirty years and now has a higher GDP per capita than Australia. Its success has been based on acting as a conduit of expertise and capital between China and the outside world, thus playing a key role in China's recent economic growth. For many years there were fears that when China assumed control it would kill the goose that laid the golden egg. These fears subsided, however, when China developed the principle of 'one country, two systems', under which Hong Kong will maintain its separate economic and political system under Chinese sovereignty. The main concern is not that there will be an abrupt change of policy but that the culture of corruption and guanxi (connections) in China will slowly undermine the open conduct of business and legal affairs in the territory.

While a free market enclave presents few major problems for the Chinese leadership, it is less certain that it will be able to tolerate an autonomous region with a culture of free political expression. The British and Chinese Governments agreed to political autonomy in the Joint Declaration of 1984 whose principles were incorporated by China into its Basic Law for the Hong Kong Special Administrative Region (SAR). The two governments, however, interpreted the principles differently and the Tiananmen Square massacre of 1989 led the people of Hong Kong to press for guarantees of their political freedom after the handover. The last Governor of Hong Kong, Mr Chris Patten, introduced some political reforms in the early 1990s, most notably the introduction of popular elections for the territory's Legislative Council (Legco). The Chinese Government, however, has rejected these reforms as inconsistent with the Joint Declaration and Basic Law and has established an appointed Provisional Legislative Council which will take over from the elected Legco on 1 July 1997. The limited British reforms have proved too belated to make China feel obliged to accept them.

Just as Britain neglected electoral reform until the last moment, it did not extend its generally good record on respect for civil liberties in the territory to include Hong Kong in the international regime for the protection of human rights. Only after the Tiananmen Square massacre was a Bill of Rights enacted in 1991. China is not a signatory to the International Covenant on Civil and Political Rights. The new Chief Executive of the Hong Kong SAR, Mr Tung Chee-Hwa, appointed by China, has foreshadowed various restrictions on political activity, although he appears to have modified his proposals in response to criticism in Hong Kong. China did agree to an independent-minded judge becoming the new Chief Justice.

China will probably send contradictory signals about its intentions on political and legal issues in Hong Kong, because of uncertainty about how to deal with a unique arrangement and because of divisions between reformers and conservatives within the Party and the Army. A lot will depend upon the political adroitness of the Chief Executive in balancing the demands of different factions in Beijing with those of interest groups in Hong Kong.

Australia has a keen interest in the future of Hong Kong because the territory is Australia's tenth largest merchandise trading partner and important for investment and trade in services. There is also a large movement of people between Hong Kong and Australia because of growing migration in recent years (especially professional and business people), including people who maintain business links in the territory, as well as Hong Kong students in Australia and a large two-way flow of tourists. Australia may face the problem of people from Hong Kong overstaying tourist visas after 1997. The controversy about China's installation of an unelected Provisional Legislative Council, and the different position on the issue taken by Australia, Britain and the US, highlights the fact that political problems in Hong Kong after 1997 will not only potentially be a cause of friction between Australia and China but may also have implications for Australia's other relationships in the Asia-Pacific region, particularly with the US.

There is a starkly contradictory character to opinions about the future of Hong Kong after 1997, with most people confident about economic prospects but few sanguine about the chances of preserving existing standards on the rule of law and political freedoms. The best prospects for Hong Kong lie in the fact that continued prosperity in the territory is in China's interest and that the Chinese leadership is keen to use Hong Kong as an example or 'trial run' in its efforts towards reunification with Taiwan and in its general foreign relations. It is critical that Beijing acts in the realisation that the distinct character of Hong Kong means that it must be governed differently from the rest of China or a mass exodus of skilled people and capital will undermine the viability of the territory.

Introduction

On 1 July 1997 sovereignty over the British colony of Hong Kong will be formally transferred to the People's Republic of China (PRC). The territory is being returned to China on that date because the British lease on the so-called New Territories, which make up the majority of the land area of Hong Kong, expires after ninety-nine years. Although sovereignty over Hong Kong Island and Kowloon was ceded to the British Crown in perpetuity in 1841 and 1860 respectively, the British government decided that continued possession of these small territories was not an option on either political or economic grounds and the entire territory of Hong Kong will be handed over to Beijing on 1 July.

The transfer of Hong Kong from British to Chinese sovereignty has raised questions about the capacity of the territory to maintain the economic performance which has seen it develop from a backwater in the 1950s to a wealthy industrialised economy today. Hong Kong has played a key role as a bridge between China and the outside world and an important part in promoting the rapid development of the Chinese economy since the reforms begun in 1978. The question often posed, however, is whether integration into China will undermine the very features, such as the rule of law and a relatively open political system, which have made the territory attractive as a destination for investment. The handover has also aroused fears within Hong Kong and internationally that integration into a China ruled by an authoritarian but increasingly uncertain post-Maoist regime will bring to an end the political freedoms and respect for the rule of law and human rights which the territory has enjoyed under British rule. A deteriorating political and human rights situation in Hong Kong after 1997 could lead to an outflow of refugees and friction between China and other countries in the Asia-Pacific region, especially the US. Such issues are of major importance for Australia because Hong Kong is now a major trade and investment partner and because political problems in the territory would inevitably affect Australia's sensitive relationship with China.

This paper outlines the background to the issues involved in the handover of Hong Kong to China and why it is such an emotive national issue for China. It discusses the importance of Hong Kong in China's economic transformation and the likelihood that the territory will continue to prosper after 1997. It also examines the controversy between Britain and China over the reform of Hong Kong's Legislature and the prospects for the protection of civil liberties and human rights after 1997. It details the importance of Hong Kong for Australia and the implications of any deterioration in the political situation in the territory for Australia and the region.

Hong Kong and China: The Legacy of History

Hong Kong has played a central role in the history of China's relations with the outside world and two particular aspects of that history are crucial for an understanding of the issues surrounding the transfer of the territory to China. The first is that the colony was established as a free trading port, chosen for its deep water harbour and designed not for territorial conquest but to open up trade with the previously closed Chinese hinterland. The second is that Hong Kong was ceded to Britain by force, against the wishes of the then Chinese Empire.

A Free Port: The 'Gateway to China'

The character of Hong Kong as a free trade port was the impetus for British activities in the territory from the very beginning and defined its later roles as an entrepot port, manufacturing site and financial centre. Before the 1840s, British merchants traded in textiles and tea under strict control by Chinese imperial authorities. But since the Chinese Government's ban on opium-smoking made opium a very profitable trading commodity, there was bound to be conflict when the Chinese attempted to suppress its import. Chinese objections were overcome by the British Navy in the 'Opium Wars' of the 1840s and 1850s when the British established Hong Kong as a permanent presence on the Chinese coast. Hong Kong remained a significant trading port for British and other foreign interests well into the twentieth century, but by the 1920s and 1930s was overtaken in importance by Shanghai.

The Chinese Revolution of 1949 confronted Hong Kong with a potential crisis, but when the new Communist government decided, on strategic grounds, not to take back what they regarded as rightfully part of China, the territory underwent a new surge of growth. An influx of wealthy Chinese refugees, especially from Shanghai, provided the capital and expertise for new investment in manufacturing industry. This development was based on exploitation of the continuing stream of cheap Chinese labour and was encouraged by the permissive policies of the British administration, which maintained the free port tradition and imposed no tariffs on the import or export of goods. Hong Kong also became the principal gateway through which Communist China conducted its (limited) financial and trade relations with the outside world. When China began liberalising its economy after 1978, Hong Kong as a free entry point for trade and finance became even more important to China, providing a source of investment capital, technology and marketing skills to help fuel China's rapid economic development and growing foreign trade. In the 1990s, Hong Kong has been the source of between 60 and 80 per cent of total direct foreign investment in China.(1)

Imperialism, 'Unequal Treaties' and Chinese Sovereignty

Whatever its role as a conduit between China and the rest of the world, the continued existence of Hong Kong as a separate territory was regarded by successive Chinese governments, whether Imperial, Nationalist or Communist, as a humiliating imposition forced upon China at a time of weakness and tolerated only because of political and/or economic necessity. The treaties on which British rule was based were, in China's eyes, 'unequal' treaties which had no basis in law or justice.(2) The Nationalist government made Hong Kong the target of anti-British demonstrations during the 1920s and the territory was the scene of mass unrest during China's Cultural Revolution in the 1960s. For diplomatic and commercial reasons, the Communist Government accepted the reality of the British occupation of the territory, but always looked upon Hong Kong as a temporarily separated part of China which would be returned to the motherland at such time as the Chinese people decided to take it back.

The abiding sense of historical injustice which is part of the official Chinese position on Hong Kong helps explain the continuing disagreement and misunderstanding which has marked Sino-British negotiations over the territory in recent years. Many Chinese officials have long distrusted British intentions, in particular harbouring fears that the British would leave Hong Kong stripped of its wealth on their departure or that they were using the territory to subvert the People's Republic and its values. These undercurrents became especially evident when, in 1992, the last British Governor of Hong Kong, Chris Patten, began reforms to introduce a degree of popular representation into the colony's governmental institutions. To the Chinese authorities these changes were, at best, a breach of previous agreements between the two sides to allow a smooth transition to Chinese rule or, at worst, an attempt to provide subversive elements with an entry point into post-1997 Chinese politics. The Chinese government's determination not to allow the reforms to stand after 1997 are a reflection of the fact that it feels no obligation to respect any unacceptable political arrangements established by illegitimate foreign occupiers of what was always rightfully Chinese soil.

The legacy of Hong Kong's history as a free port established by the British against China's will is thus at the heart of the issues which surround transfer of the territory to Chinese sovereignty today. Hong Kong was able to survive as a viable entity separate from China (without financial support from Britain) because its people successfully capitalised upon the needs of the People's Republic for a gateway to the outside world and as a source of capital and expertise. Notwithstanding this role, the affront to Chinese sovereignty implicit in Hong Kong's existence has meant that the political issues involved in the transfer have been difficult to resolve.

Hong Kong's Economic Transition: The Golden Egg?

Hong Kong until the 1950s was something of an economic backwater, but has since grown into a major manufacturing, trade and services centre and was one of the first four 'newly industrialising countries' or 'Asian tigers'(3) which set the standards to which most other Asian developing countries now aspire. In 1995 it had a GDP of over $US150 billion and a GDP per capita of over $US24,000, which is even higher than Australia's. In the last five years annual economic growth in Hong Kong has been around 5 to 6 per cent.(4)

For many years there was concern in Hong Kong and amongst international investors that China, with its languishing command economy, was casting envious eyes on Hong Kong's continuing economic success. The fear was that when Beijing assumed control, its policies would destroy the very features which made the territory so attractive for investment-that it would kill the goose that laid the golden egg.

An Integrated Economy

As July 1997 drew closer, however, anxieties about the economic effects of the Chinese takeover diminished. Just as Hong Kong survived the formation of the People's Republic by becoming its gateway to the world, so the territory has become even more important to China since the economic reforms instituted by Deng Xiaoping from 1978. From the early 1980s Hong Kong manufacturers began to take advantage of China's new openness to establish factories across the border in Guangdong province, making use of China's cheap labour and land. For their part, the Chinese authorities established four Special Economic Zones which provided concessional tax and regulatory regimes aimed at attracting capital, technology and expertise, particularly from Hong Kong, Macao, Taiwan and other 'overseas Chinese' communities. Hong Kong quickly became the largest source of direct foreign investment in China and has continued to play such a role. From 1985 it became China's largest trading partner and was only overtaken by Japan in 1993.(5)

These developments have in the process radically changed the economic structure and role of Hong Kong. While manufacturing was the mainstay of the Hong Kong economy during the 1960s and 1970s, since the 1980s and the transfer of production to China, services have become the most important sector, accounting for over 70 per cent of GDP and employment.(6) Hong Kong is now the world's busiest port, with re-export of goods to and from China predominating. The territory provides a wide range of other services to China as it continues to open to the world economy. As a leading commentator, Michael Yahuda, expressed it:

Thus Hong Kong has been effectively integrated into the economy of China, especially southern China, supplying services crucial for the mainland's transformation from an inward-looking command economy to a major player on the world market.

'One Country, Two Systems'

Given the commitment by the post-Deng Xiaoping government to continuing economic reform and the further integration of China into the world economy, it is highly unlikely that Beijing would take any policy actions which it knew would jeopardise the robust economy of Hong Kong. From the time when the issue of Hong Kong's future status was first raised during discussions with Britain in the late 1970s, the Chinese government has affirmed that it would follow the principle of 'one country, two systems', that is that Hong Kong under Chinese sovereignty would maintain a separate identity, a market-oriented economic system and its distinct 'way of life'. The preservation of the existing economic structure of Hong Kong is important for China because of the contribution the territory makes to China's GDP and because it provides the knowledge and institutions necessary to compete in the world market that China currently lacks. But in addition to the direct economic significance of Hong Kong, it is vitally important to Beijing that integration of the territory is successful because the whole exercise is being closely watched as a 'trial run' for the much more substantial challenge of an eventual reunification with Taiwan. The 'one country, two systems' idea was originally developed as a solution to the Taiwan question and any major economic problems for Hong Kong would hardly make unity with the mainland an attractive prospect for the people of Taiwan.

Hong Kong will also benefit from what appears to be an improving capacity on the part of economic policy-makers in Beijing to control the cycles of the Chinese economy. China's economy since the 1980s has been characterised by huge boom-bust cycles - flurried investment leading to overheating, inflation and bottlenecks, provoking the government to overly-strong corrective measures which induced slumps and excess capacity, leading in turn to expansionary measures which fuelled a further unsustainable boom. In response to the overheating of 1993-94, however, the Chinese government introduced reforms to monetary policy and brought the economy to a 'soft landing' without adversely affecting growth. Inflation, which peaked at 24 per cent in mid-1994, is expected to be less than 6 per cent in 1997, but strong growth rates of around 8 per cent are forecast for the next three years.(8)

Guanxi, Corruption and Cronyism

While the Chinese authorities' intentions appear to be to cause as little disruption to the economic life of Hong Kong as possible, some commentators remain concerned that the closed and often arbitrary culture of decision-making in China will inevitably undermine the relatively open, legally-based system in Hong Kong and that this will have an adverse effect on the territory's economy. In China, in the absence of a clear rule of law, the wheels of economic life are greased by guanxi, (political and family connections), increasingly another name for corruption and cronyism as getting rich has become the dominant credo in post-Maoist China.(9) Family linkages and connections in government were always crucial for money-making in Hong Kong, but the rule of law and permissive rather than prescriptive regulations have made Hong Kong more conducive for local and international business than the mainland. There are signs, however, that with the approach of July 1997 the culture of guanxi and corruption is already becoming a feature of Hong Kong. The Independent Commission Against Corruption (ICAC), established by the Hong Kong administration in 1972, estimated that the cost of 'gifts' and other payments to facilitate business with the mainland added from 3 to 5 per cent to operating costs.(10) One commentator, pessimistic about the long term prospects for Hong Kong, argued that, after 1997:

One Hong Kong lawyer expressed his concern that any deterioration in the legal system would inevitably have adverse effects on business. He argued that if individuals or firms were unable to contest government actions in the courts they would turn to well-connected individuals who could, giving 'enormous employment to Mr. Fix-its' but undermining free and open competition.(12) Thus any potential problems for Hong Kong's currently robust economy in the transition to Chinese rule would appear to lie not in an abrupt change in policy from Beijing or in an end to the territory's role as an entry point for the international market, but in a gradual erosion of the legal and institutional structures and practices which have enabled the territory to take advantage of the opportunities which were historically open to it. The critical issues which will confront Hong Kong after 1997 are therefore unlikely to be strictly economic questions but will take a political, legal and constitutional form.

Hong Kong's Political Transition: Whither Democracy and Human Rights?

We have seen that the special nature of Hong Kong as a free port on the edge of a command economy allowed the territory to carve itself a niche role as China's gateway to the world. Since the reforms begun in 1978, Hong Kong's continued importance to the Chinese economy has ensured that its free market economy will be left intact after 1997. But while the existence of a capitalist enclave presents no major problems for the People's Republic, the government in Beijing will find it much more difficult to tolerate recent trends in the political evolution of Hong Kong. While China has gone through massive economic change in the last two decades, its political structures remain relatively unchanged from the Maoist era. Hong Kong, on the other hand, although ruled by an unelected executive-led government, has long enjoyed a fairly open political culture and a range of civil liberties unknown on the mainland. Contrary to the common perception that the people of the territory are interested only in business, there is a long tradition of grass-roots and activist politics in Hong Kong.(13) The huge outpouring of support for the pro-democracy movement during the events in Beijing in June 1989 was a particular indication that the people of Hong Kong valued political freedom as well as wealth and were worried about their future under Beijing's rule.

The persistent current of independent political activity in Hong Kong, together with belated efforts by Governor Patten to increase popular representation in the Hong Kong legislature, have ignited fears in the authoritarian political establishment in Beijing that the territory is a conduit for dangerous ideas. Hong Kong as a base for subversion has been a longstanding feature of Chinese official attitudes, but the return of Hong Kong is occurring at a time when the debunking of Maoism and popular resentment about corruption and nepotism has left the legitimacy of the Communist Party at its lowest ebb and its leadership fearful of any additional element putting pressure on the brittle and potentially unstable political situation in China.(14)

Hong Kong's New Constitution: The Joint Declaration and the Basic Law

When negotiations between Britain and China on the political future of Hong Kong began in 1982, the British government's initial proposal was that it should retain an administrative role in the territory even after 1997. Such a position outraged the nationalist sensibilities of the Chinese government and its outright rejection caused widespread consternation within the territory about possible unilateral action by the Chinese. During a series of tense negotiations, however, the British conceded to the Chinese position and, in September 1984, an agreement for the transfer of sovereignty was signed in the form of a Joint Declaration. According to the Declaration, China was to draft a Basic Law embodying certain basic policies. These were that on 1 July 1997 Hong Kong would become a Special Administrative Region (SAR) of the People's Republic of China with a government 'composed of local inhabitants'. The SAR would have 'a high degree of autonomy, except in foreign and defence affairs' and its 'current social and economic systems' and 'life-style', including civil liberties, would be as at present. The SAR would retain its status as a free port, a separate customs territory and monetary system and the right to conduct its own economic relations with other countries and with international organisations. Such arrangements were to remain unchanged for fifty years.(15)

From the very beginning, however, the two sides had different ideas about how the process would evolve. The British side saw the drafting of the Basic Law as entirely a Chinese responsibility but did not expect Beijing to begin the task immediately. The British apparently assumed that there would be time between 1984 and 1997 for actual constitutional arrangements in the territory to 'converge' with the provisions of the Basic Law, including any reforms the British government might have introduced. In the Chinese view, on the other hand, the Basic Law should largely reflect the state of political arrangements prevailing in the territory in 1984. A further powerful element was introduced when the negotiations came under intense pressure from the people of Hong Kong following the mass anti-Beijing feeling generated by the Tiananmen Square massacre in June 1989. By the time the National People's Congress of the PRC adopted the Basic Law in 1990, its provisions on the structure of government and on political rights had become the subject of controversy within the territory and disagreement between the Chinese and British governments.(16)

Elected or Appointed Government?

In the first years following the signing of the Joint Declaration in 1984 there were few points of disagreement between Beijing and London. While there were likely to be differences over the amount of popular representation in the Legislative Council, both governments shared the view that an executive-led government of appointed officials would prevail in the territory after 1997 as it had under colonial rule. Both sides also worked with the understanding that the people of Hong Kong were to be largely excluded from negotiations over the transfer of sovereignty.

The British administration in Hong Kong has been based on the effective exclusion of democratic participation in the government of the territory. Supreme executive power is vested in the Governor, advised by an Executive Council (Exco), wholly appointed by the Governor himself, and most policy making is carried out by the powerful civil service. Bills are submitted to a Legislative Council (Legco) which, before 1985, was entirely appointed and contained a majority of civil servants. In the wake of the signing of the Joint Declaration, however, the British administration was concerned to shore up its authority and legitimacy in the final years of its rule and began to introduce an element of elected representation in the Legco. In 1985 indirect elections through an electoral college and functional constituencies (such as business and professional groups) were held for 24 of the 56 seats in the Legco, with the majority remaining official and appointed members. In response to pressure for direct elections for the 1988 Legco elections, the government conducted a review into the issue which revealed a sharp division of opinion between business interests who supported the status quo and liberal professional groups, led by Martin Lee, who argued for at least 50 per cent direct representation. The government's decision, in 1988, to postpone any changes until the 1991 election was, in the view of many commentators, largely swayed by strong pressure from China to desist from further reform.(17)

In the meantime, the Tiananmen Square massacre of 1989 greatly politicised the people of Hong Kong, leading to a collapse in popular confidence about Beijing's intentions towards the territory and increasing pressure on the government to bring about democratic reform and measures to protect civil liberties and human rights. In May 1989 one million people (one sixth of the entire population) took part in a demonstration in support of the pro-democracy movement in China and in June another million-strong demonstration attacked the bloody crackdown and called for an end to the government of Premier Li Peng. These events led to the formation of Hong Kong's first formal political party, the liberal United Democrats of Hong Kong led by Martin Lee.

The Hong Kong administration responded to the rise of popular feeling in ways designed, on the one hand, to boost confidence that the British government was defending the interests of the people of the territory and, on the other, to maintain good relations with the Chinese government. In December 1989, a British government representative paid a secret visit to Beijing where he reassured the Chinese authorities of Britain's commitment to the Joint Declaration and promised that Hong Kong would not be allowed to become a base for anti-Chinese subversion. In 1990 the Hong Kong administration arrested and fined pro-democracy activists for petty offences, invoking authoritarian colonial public order ordinances aimed at quashing independent political activity. At the same time, following secret negotiations between the British and Chinese governments, it was announced that popular representation in the Legco would be increased to 18 directly elected seats in the 1991 election, 20 in 1997, 24 in 1999 and 30 in 2003.(18) A clause reflecting this agreement was incorporated into the Basic Law in 1990.(19) No change, however, was proposed for the executive arm of government. The Executive Council continued as a fully appointed body and the Governor maintained his supreme executive position.

Pressure for political reform increased after the 1991 Legco elections when 18 of the 20 directly elected seats were won by the United Democrats and other liberal candidates. The new (and last) Governor of Hong Kong, Chris Patten, therefore sought to increase popular involvement in the political process while remaining within the framework of the Joint Declaration and the Basic Law. In October 1992 Patten proposed that in addition to 20 directly elected seats, the functional constituencies would be elected by the entire Hong Kong workforce of 2.7 million and there would be direct elections to the territory's municipal bodies. Despite, or perhaps because, the proposals were well-received in liberal political circles in Hong Kong, the Chinese reacted extremely negatively and accused the Governor of breaching the agreement that any new arrangements should 'converge' with the Basic Law and of attempting to magnify British influence and undermine Chinese control after 1997. In a demonstrative move designed to highlight its capacity to determine events in Hong Kong even before 1997, Beijing stalled on arrangements for a huge new airport project by refusing to honour certain contracts, thereby effectively delaying its completion until after the handover. In a further assertion of authority, the Chinese government, in June 1993, established the Preliminary Working Committee (PWC) for the Preparatory Committee of the SAR to be responsible for transitional political, governmental and legal arrangements before and after 1997, the so-called 'second stove'.(20)

Negotiations between Britain and China continued through 1993 but Beijing refused to countenance Patten's plans and abandoned its original agreement for a 'through train' Legco which would remain in place for 2 years after 1997. It declared that the reformed Legco elected in the 1995 elections, where the Democrats emerged as the largest party (including 16 of the 20 directly-elected seats), would not continue after the transfer to Chinese sovereignty. The Chinese government has in fact appointed a parallel Provisional Legislature which will take over on 1 July 1997. Some commentators have suggested that some members of the Legco may be included in a post-1997 Legislature, but it is certain that none of the Democrats or other liberal members would be amongst them, even though such candidates won the highest votes in the poll.(21) Hong Kong will thus revert to the old arrangement of a fully appointed Legislature after July 1997.

The much-publicised efforts by the British administration in Hong Kong to increase democratic participation in the government of the territory therefore seem to be have been too little, too late. Negotiations with China over the transfer of sovereignty began at a time when non-official representation in the Legco was merely token and confined to selected elite individuals. Once agreement had been reached in 1984 to allow the Chinese government to draw up a Basic Law, there was little that could be done to reform the system outside the framework of the Law. The Provisional Legislature will remain in place until 1998 or 1999 and although China is committed to introducing, in two stages, a Legco with half its members directly elected, it remains to be seen how such an arrangement will actually operate in practice. The Chinese Foreign Minister has said that elections would 'embody democratic, free and open principles' and that anyone who met China's criteria would be allowed to stand.(22) Eligibility could be restricted to a number of specific parties or, more likely, candidates could be required to swear allegiance to a restrictive pledge which would rule out anyone likely to be critical of the SAR or Beijing authorities. The future of genuinely elected government in Hong Kong is very much an open question.

Protection of Human Rights

Most commentators have placed considerable stress on the rule of law as one of the key advantages offered by Hong Kong for business investment and thus an important element in its economic success. The codification of laws to protect commercial activity from arbitrary intervention has, however, not been matched by the entrenchment of human rights in Hong Kong's legal framework. Although the Hong Kong government has a good practical record in the application of common law and protecting basic civil liberties, efforts to guarantee these rights by placing the territory within the emerging international human rights regime were, until recent years, deliberately neglected so as to avoid offending Beijing.(23) Unlike its other colonies, Britain excluded Hong Kong from the 1953 European Convention on Human Rights and from access to the European Court of Human Rights. When Britain ratified the International Covenant on Civil and Political Rights (ICCPR) in 1976 it reserved the right to restrict the application of the Covenant in Hong Kong on matters such as imprisonment and deportation, freedom of movement and residence, freedom of speech, association and assembly, universal suffrage, elected legislatures and, significantly, the right of self-determination for non-self governing territories.

Mounting domestic and international concern about the need for safeguards against human rights abuses after 1997 led the British government to have the ICCPR included as an annex to the Joint Declaration of 1984. But it was not until the upsurge of politicisation in Hong Kong after the Tiananmen massacre of 1989 that the British government responded to demands to embody human rights protection in domestic Hong Kong law by passing the Bill of Rights Ordinance of 1991 (BORO). In order to prevent fears about political repression in a future Hong Kong causing a flight of professional people and capital from the territory, BORO, which reflects the provisions of the ICCPR, was made justiciable before Hong Kong's courts and was accorded primacy over other legislation. The Hong Kong administration also appealed or amended colonial emergency powers ordinances which conflicted with BORO.

It is uncertain, however, what practical effect these measures, like the changes to Legco, will have after the transfer to Chinese sovereignty. Any obligation on China's part to respect the provisions of domestic Hong Kong law or international treaties entered into on the territory's behalf by Britain is a matter of interpretation. The British government, for example, considers that the PRC will be obliged by Article 40 of the ICCPR to submit reports to the UN Human Rights Committee on its efforts to protect human rights in Hong Kong. China, however, is not a signatory to the ICCPR and has not confirmed whether it will apply the Covenant in Hong Kong or respect the reporting obligations. Chinese government representatives argued that the introduction of a Bill of Rights was unnecessary because the ICCPR was incorporated in the Joint Declaration and the Basic Law and that therefore the PRC might not recognise the primacy of BORO after 1997.

The possibility of a clampdown on civil liberties after July was strengthened when China's National People's Congress voted, in February 1997, that BORO would not have the power to override legislation inconsistent with the ICCPR. The Congress also voted to modify or repeal recent Public Order and Security ordinances introduced by Governor Patten which liberalised Hong Kong's previously draconian controls on political activity. Following this decision, China's Chief Executive designate for Hong Kong, Tung Chee-Hwa, circulated a paper on proposed legal changes under which police permission would be required to hold demonstrations and which would make it illegal for political organisations to accept overseas funding or support. Tung was reported as saying that the reforms introduced by Governor Patten had been 'very unfortunate'.(24) The justification given for what represented a reversion to colonial controls was that they were necessary to make Hong Kong's post-1997 legislation consistent with the Basic Law. In the face of a strong negative reaction in Hong Kong, Tung later issued a revised draft law which eased some restrictions on demonstrations but which retained the ban on foreign support for parties, although allowing individuals to make contributions. One of the first actions of the Provisional Legislative Council on 1 July will be to pass legislation which will make illegal any demonstration deemed to be a threat to 'national security'.

Many leading political figures in Hong Kong, including members of the elected Legco, fear that there will be little to prevent a gradual erosion of civil liberties and access to legal redress, both because of Chinese intentions and because of an unwillingness to resist on the part of powerful business interests in Hong Kong. Key Chinese leaders have indicated their uneasiness about an environment of free criticism, including Foreign Minister Qian Qichen, who said, in October 1996, that the media could 'put forward criticism, but not rumours or lies. Nor can they put forward personal attacks on the Chinese leaders.'(25) Confronted with such attitudes, many business people have been reluctant to risk the investment climate in Hong Kong by antagonising China over human rights issues. The Chairman of the Hong Kong General Chamber of Commerce, for example, was reported as observing that business cared about 'rule of law for foreign disputes, not for protests and students demonstrating'.(26) Some argue that signs of decline can already be seen in a slow infusion of self-censorship in the territory's media as major media proprietors appoint pro-Beijing consultants to advise on likely official reactions to reports on sensitive issues and previously strident critics of China have fallen silent.(27) In a widely-noted case, a satirical comic strip in the South China Morning Post, 'The World of Lily Wong', which commented on China and its leaders, was removed from the paper in 1995.(28) The issue is whether these developments indicate simply a transitional uncertainty on both sides or are the beginnings of serious and permanent change.

There are factors which may mitigate against a heavy-handed intervention by the Chinese authorities. The first of these depends on the degree of awareness amongst the Chinese leadership that Hong Kong's economic success has been underpinned by political stability and predictability. A nuanced understanding of the operation of a relatively open political and legal environment would allow Beijing to understand that free debate and criticism, along with judicial limits to government action, need not be a threat to the Communist Party's rule and has actually been part of the formula which has made the territory an asset for China. Some commentators have seen the appointment of an independent-minded judge, Andrew Li Kwok-Nang, as the territory's new Chief Justice, rather than a more pro-Beijing candidate, as an encouraging sign. An optimistic view would say that, faced with the possibility that widespread popular discontent with Chinese actions in Hong Kong might jeopardise this asset, Beijing will keep its intervention in the territory's political life to a minimum. Once again, a successful transition in Hong Kong, as seen by the international community and the people of Taiwan, will be important for China in its relations with the Western world, especially the US, and in developing its economic links and political relationship with Taiwan.

Many of China's actions, particularly in the early months and years after the handover, may be uncertain and send contradictory signals about the intentions of the Communist Party leadership. This is partly because Beijing will be dealing with an entirely new political environment, one which confronts few if any other government in the world: exercising authority over a major economic region which is autonomous in most respects and has developed its own political and economic system after a hundred years of separation. Secondly, a degree of inconsistency can also be anticipated as ideological and regional divisions within the Communist Party and the Army lead to policy reversals and differing approaches by various arms of the Chinese state. While reformers and modernisers in the Chinese political establishment can be expected to see the political integration of Hong Kong as an opportunity to strengthen the process of change in China, more conservative elements look upon the territory as a symbol of the subversion of traditional Chinese and Maoist values and as a conduit for ideas undermining the leading role of the Party.

A great deal will depend on the capacity of the Chief Executive of the Hong Kong SAR, Mr Tung Chee-Hwa, to balance the competing demands of the various factions in the Party and the Army against those of Hong Kong's business interests and the popular pressure within the territory for maximum autonomy and the protection of the rule of law and human rights. Tung will be faced with a number of key decisions in the near future which will test his personal strength in asserting the autonomy of the SAR and the extent to which the Chinese authorities are willing to give it real meaning. Decisions on the economy will include fixing the exchange rate of the Hong Kong dollar, relations between Chinese and Hong Kong financial institutions and drawing up a Budget without interference from Beijing. Important political issues will include the independence of the civil service, the suppression of corruption, controls on the press and public demonstrations and elections to the Legislative Council.

Hong Kong and Australia

Australia has immediate and broadbased interests in a successful transfer of sovereignty in Hong Kong. Hong Kong's importance in Australia's trade and investment flows gives Australia a direct stake in the maintenance of healthy economic growth in the territory. Australia cannot afford political unrest during or after the handover or a collapse in confidence in the local or international business community. The issue of Hong Kong is of course intimately connected with Australia's relations with China, one of the country's most important but often difficult relationships and one which inevitably has implications for key regional connections such as the US and Japan.

Trade and Investment

Hong Kong in 1995 was Australia's tenth largest trading partner, accounting for 2.6 per cent of Australia's total merchandise trade, while Australia, as Hong Kong's fourteenth largest partner, accounted for 1.1 per cent of the territory's merchandise trade. Two-way trade has grown substantially in recent years (reaching over $4 billion in 1995) and become more diversified, with a gradual shift away from the predominance of primary products in Australia's exports. Testimony to the economic integration of Hong Kong with China is provided by the fact that an estimated one quarter of Australia's merchandise exports are re-exported to China.(29) An especially important development has been the growth in the trade in services, especially in education and tourism but also in insurance, consultancy, legal services, finance and banking. Estimates of the value of this trade reach as high as $1 billion. In 1996 it was estimated that there were over 12,000 students from Hong Kong in Australian educational institutions. Around 280,000 Australians visited Hong Kong as tourists in 1995 and about 167,000 tourists visited Australia from Hong Kong.(30)

Australian investment in Hong Kong stood at around $3.22 billion in 1995, while Hong Kong investment in Australia had reached $14.5 billion. Hong Kong is Australia's sixth largest destination for overseas investment, with interests in manufacturing, insurance, banking, telecommunications, construction and industrial processing. Hong Kong was the fourth largest source of foreign investment in Australia in 1995, with 90 per cent in portfolio investment and 10 per cent in the form of direct investment.

People-to-People Links and Migration

A key aspect of the relationship which has developed between Australia and Hong Kong in recent years is the two-way movement of people between the territory and Australia. Each year about half a million people travel between Australia and Hong Kong.(31) In addition to tourist visits and the numbers of student who have been coming to Australia for many years, there is a large community in Hong Kong with Australian connections. There are around 30,000 Australian citizens resident in Hong Kong, together with at least 2000 holders of Australian permanent residency.

The question of emigration has become an increasingly prominent topic of discussion in Hong Kong as the time for the handover to China has approached and many people in the territory have acted to secure residence rights in other countries. Australia, along with the US, UK and Canada, has been one of the sought-after destinations for resettlement from Hong Kong. There are at present nearly 90,000 Hong Kong-born Australian citizens and permanent residents in Australia. Numbers steadily increased from 28,000 in 1986, with the peak of arrivals (16,000) occurring from 1990-91 to 1991-92.(32) The majority of migrants from Hong Kong are well-educated and in professional, managerial or business occupations and some of whom have brought substantial amounts of capital for investment in Australia.(33) Some migrants from Hong Kong have settled their family in Australia but continue to work in the territory or maintain close business links there - the so-called 'astronauts'.

Hong Kong and Australia-China Relations

Australia has major interests in the viability of Hong Kong as a special economic and political entity within China, but even greater interests in maintaining and developing close relations with China itself. Balancing the demands of the Australia-China relationship against the interests of the people of Hong Kong will present unique problems for Australian foreign policy.

From the late 1980s, as the economic relationship between Australia and Hong Kong began to enlarge rapidly, Australia developed a policy on Hong Kong which emphasised its separateness from both Britain and China. Australia supported Hong Kong's accession to the General Agreement of Tariffs and Trade (GATT) as a separate contracting party in 1985 and its membership of the Pacific Economic Cooperation Council (PECC) in 1990. Most importantly, Australia played an important role in having Hong Kong, along with Taiwan, granted entry into the Asia-Pacific Economic Cooperation forum (APEC) on the basis that APEC was a group of 'economies' rather than states. Membership of these international organisation was important for establishing a practical framework for Hong Kong's operation as a separate economic region after 1997, as well as bolstering confidence that other aspects of Hong Kong's separateness, notably the rule of law and political freedoms, might also be respected. Australia's closeness to the Hong Kong issue was highlighted when Governor Patten visited Australia in 1994 as part of his tour of a number of Asia-Pacific countries to build regional support for his political reforms in the territory.

Although it appears that maintaining a separate economic relationship with the Hong Kong SAR will not present problems for Australia's relations with China, there is potential for controversy over political and human rights issues which may well emerge after 1997. This has already been made clear over the issue of the China's installation of an appointed Provisional Legislative Council and Australia's attendance at its opening ceremony on 1 July 1997. The British Government criticised China's action in creating the new Council as contrary to the Joint Declaration and the Basic Law and the US State Department called the move 'unjustified and unnecessary'.(34) Australia's response was, however, subdued, with the Minister for Foreign Affairs, Mr Alexander Downer, stating that it was 'disappointing that China and Britain were unable to agree' on arrangements enabling the elected Legco to continue over the handover period.(35) The US and Britain have also announced that they will not be officially represented at the ceremony while the Australian Government has decided to attend. There are no indications that other countries in the region, such as Japan or ASEAN members, or any European countries will boycott the ceremony.

Critics have argued that the Australian Government's position is contrary to its stated commitment to promote human rights internationally and that the observance of human rights in China would assist its integration into the region.(36) This criticism was given weight by the fact that the leader of the most widely-supported party in Hong Kong, Mr Martin Lee, condemned the decision to appoint a Provisional Legislative Council and after appealing to the Australian Government to join a boycott of the opening ceremony, said that the decision to attend had 'sacrificed Hong Kong for trade with China'.(37) A public opinion poll taken in Hong Kong in mid-June found that only 7 per cent of respondents thought that the appointed Council would serve their interests better than the elected Legco.(38) Other commentators have contended that the Australian Government was pushed into such a position because some ill-considered policy actions affecting China during 1996 jeopardised the relationship with the Chinese Government.(39) They argue that the Government has been forced to go to extreme lengths to placate China, thus reducing the space for a flexible response on sensitive issues relating to Hong Kong.(40) The Government's stance on the issue, according to Mr Downer, is that it was 'not in Australia's interest or in Hong Kong's interest' for the handover ceremonies to be affected by such a controversy and that China was more effectively engaged by a cooperative approach.(41) The Chinese Government has agreed to an Australian proposal to conduct a regular dialogue on human rights between the two countries, the first meeting of which is planned for August.

The controversy about the opening of the Provisional Legislative Council, although arguably not a major issue in itself, is symbolic of the kind of difficulties which may develop if there are significant political problems in Hong Kong after the handover. If major unrest grows in the territory and Beijing reacts by arresting pro-democracy campaigners or suppressing demonstrations and other protests, severe strains might be placed on Australia's policy of not directly criticising China on human rights. As the Provisional Legislative Council question showed, such matters have the capacity not only to affect relations with China but also to reveal differences with the US, Australia's other key partner in the region. President Clinton's emphasis on human rights issues has been moderated in his second term, but stills stands in contrast to the Australian Government's more low-key approach.(42)

The possibility that political repression or violence might cause a flood of refugees from Hong Kong has haunted discussions about the territory for many years. For many Hong Kongers, the prospect that they might have to flee the territory is clearly still in their minds. The June opinion poll found that 4 out of 10 respondents would seek to leave if conditions in the territory deteriorated. The number of people in a position to emigrate is uncertain, with between 300,000 and 500,000 having valid travel documents. Surveys have shown that up to 20 per cent of the territory's population of over 6 million have overseas family connections which could allow them entry into other countries.(43) Australia would be a preferred destinations for many emigrants and a problem for the Australian Government could develop if significant numbers of Hong Kong residents were to enter Australia on tourist visas and remain in the country illegally after their visas expired. A large outflow of people from the territory could potentially become a major regional problem, with implications for China's integration into the region and its relations with Australia, the US and other countries in the Asia-Pacific and Europe.

Conclusion

There is a starkly contradictory character to opinions about the future of Hong Kong after 1997. Business people and economists, looking at Hong Kong's continuing integration into a booming Chinese economy and all the signs that Beijing will not tamper with the territory's market economy, are optimistic about future growth and prosperity. On the political front, however, there are few people who are sanguine about the prospects for preserving the same standards on freedom of speech, rule of law and general respect for human rights that Hong Kong enjoyed under British rule. Given recent Chinese moves, many people are also pessimistic about the chances of maintaining the limited democratisation which was introduced by the British Government in its final years of authority. Even leading business people, who speak confidently about the future so long as Beijing's ground rules are observed, are said to keep their foreign passports close at hand. The June opinion poll found that 92 per cent of respondents thought that corruption would adversely affect Hong Kong's economic performance after the handover.(44)

The strongest argument in favour of a successful economic and political transition is that it is in the interests of the Chinese Government for Hong Kong to remain prosperous and politically stable. Hong Kong is still very important for the Chinese economy and demonstrated success in the Hong Kong example is crucial for China's plans to effect an eventual reunification with Taiwan and Macau. China is also aware that the eyes of regional countries such as Japan, the US and the international community as a whole will be focused closely on the new Hong Kong SAR after July 1997. The provisions in the Basic Law which guarantee Hong Kong's separate identity under the 'one country, two systems' formula indicate that the Chinese leadership understands the importance of protecting the territory's institutions in maintaining its viability.

The principal source of concern about the future of Hong Kong relates not to the immediate prospects for the maintenance of economic growth but to the protection of political freedoms and respect for legal institutions such as an independent judiciary and the rule of law. Such arrangements are foreign to the political culture of Beijing and are regarded in many quarters as dangerous and subversive. This applies not only to conservatives who resent the displacement of pure Maoist ideology with the worship of wealth and consumerism, but also to reformers who fear that the leading role of the Party (including the privileged position of themselves and their families) is coming under threat from the liberal ideas championed in Hong Kong.

There is clearly an awareness within ruling circles in China that the political distinctiveness of Hong Kong must be recognised for symbolic reasons and because of perceptions in Taiwan, the US and elsewhere. On the other hand, the idea that the legal and political institutions and culture in the territory have been genuinely important in underpinning Hong Kong's economic achievements does not appear to be universally accepted, particularly given China's recent economic growth under an authoritarian regime. Hong Kong, however, has been separated from China for over a century and cannot be governed as if were just another Chinese city. An upsurge in unrest in the territory due to political repression would unsettle its image as a secure place for investment and any major instability would see a flood of emigration and a loss of the skills, expertise and capital which is the territory's main resource. Integrating Hong Kong will be one of the key tasks facing the Chinese state as it attempts to deal with the social and political effects of the country's continuing economic transformation and will challenge the political will of the reformers who may find the issue being used by conservative elements in the Party and the Army to regain political ascendancy.

The coming months and years will be a critical time for Hong Kong and will call for close attention from policy-makers in the countries of the Asia-Pacific region and beyond. In Australia's case, it has significant interests in the Hong Kong's viability and relations with China are becoming a increasingly central part of the country's foreign policy, at both the bilateral and regional level. Hong Kong will be one of the major tests for the Australian Government's efforts to develop an independent diplomatic position in Asia, balancing demands created by issues in trade, human rights and security.

Endnotes

1. Michael Yahuda, Hong Kong: China's Challenge, London, 1996, p.24.
2. According to a recent Chinese account, the handover of Hong Kong was 'a scene of humiliation and agony inflicted by foreigners that has seared into the hearts of all 1.2 billion Chinese people'. See Liu Shuyong, 'History of Hong Kong: A completely objective account of how Hong Kong was stolen from China', China Today, Feb. 1997, pp.29-32.
3. Along with South Korea, Taiwan and Singapore.
4. DFAT, Country Economic Brief. Hong Kong: November 1995, pp.8-11.
5. Yahuda, op. cit., p.24.
6. Clyde Haulman, 'Asia-Pacific Economic Links and the Future of Hong Kong', Annals of the American Academy of Political and Social Science, no.547, Sep 1996, pp.154-55.
7. Yahuda, op. cit., p.25.
8. East Asia Analytical Unit, China Embraces the Market: Achievements, Constraints, Opportunities, Canberra, 1997, pp.128-31. Sydney Morning Herald, 11 April 1997.
9. Bruce Bueno de Mesquita, David Newman, Alvin Rabushka, Red Flag Over Hong Kong, Chatham NJ, 1996, pp.137-38.
10. Yahuda, op. cit., p.129.
11. Haulman, op. cit., pp.160-61.
12. Business Week, 9 June 1997, p.51.
13. Michael Degolyer & Janet Lee Scott, The Myth of Political Apathy in Hong Kong, Annals of the American Academy of Political and Social Science, 547, Sep 1996, pp.68-78.
14. Lo Shui Hing, 'Democracy Movement in Hong Kong and Its Implications for South China', Journal of Contemporary Asia, vol. 27, No. 2, 1997, pp.198-216.
15. Paul Bowers, Hong Kong: The Final Stages, Research Paper 96/104, House of Commons Library, 1996, Text of the Joint Declaration, reproduced as Appendix 1
16. Frank Ching, 'Toward Colonial Sunset: The Wilson Regime, 1987-92', in Ming Chan (ed.), Precarious Balance: Hong Kong between China and Britain 1842-1992, New York, 1994, pp.176-182.
17. Brian Martin, Hong Kong in Transition, Parliamentary Research Service Research Paper No. 9, 1994, pp.13-14.
18. ibid., pp.16-17.
19. Annex II to The Basic Law of the Hong Kong Special Administrative Region of the People's Republic of China, in International Legal Materials, Vol. XXIX, No. 6, Nov. 1990.
20. The 'second stove' referred to a metaphorical tale in which a newly-married young couple set up a second stove in the parental kitchen as a way of asserting their independence.
21. Bowers, op. cit., p.20.
22. Dow Jones News/Retrieval World Report, 23 May 1997.
23. Nihal Jayawickrama, 'The Bill of Rights', in Raymond Wacks (ed.), Human Rights in Hong Kong, Oxford, 1992, pp.63-65.
24. Sydney Morning Herald, 7 May 1997, p.21.
25. Bowers, op. cit., p.14.
26. Business Week, 9 June 1997, p.51.
27. Business Week, 9 June 1997, pp.50-53.
28. Khergamvala, 'Media, asked to bend, chose to crawl', The Hindu (Madras), 10 June 1997.
29. Joint Standing Committee on Foreign Affairs, Defence and Trade, Hong Kong: The Transfer of Sovereignty, Canberra, 1997, p.104.
30. ibid., p.105.
31. Canberra Times, 23 May 1997, p.7.
32. Figures supplied by the Department of Immigration and Multicultural Affairs.
33. Joint Standing Committee on Foreign Affairs, Defence and Trade, Hong Kong: The Transfer overeignty, Canberra, 1997, p.113.
34. The Age, 23 December 1996, p.4.
35. Sydney Morning Herald, 23 December 1996.
36. Age, 17 June 1997, p.15. Australian, 17 June 1997, p.14.
37. Australian, 13 June 1997, p.1. Weekend Australian, 14 June, 1997, p.10.
38. Sydney Morning Herald, 18 June 1997, p.8.
39. For an account of the friction in Australia-China relations during 1996 see Stephen Sherlock, Australia's Relations with China: What's the Problem, Parliamentary Information and Research Services Current Issues Brief, No. 23, 1996-97.
40. See for example, Ian McPhedran, 'Policy now rests on kowtowing', Canberra Times, 16 June 1997.
41. Age, 14 June 1997, p.2.
42. For a discussion of US-China relations see Frank Frost, The United States and East Asia: Containment or Engagement?, Parliamentary Research Service Current Issues Brief No. 5, 1996-97.
43. Joint Standing Committee on Foreign Affairs, Defence and Trade, Hong Kong: The Transfer of Sovereignty, Canberra, 1997, pp.111-112. Florence Chong, 'Passports proliferate as HK residents ponder 1997', Australian, 7 May 1997, p.66.
44. Sydney Morning Herald, 18 June 1997, p.8.