U.S. State Department Geographic Bureaus: East Asia and Pacific Bureau

U.S. DEPARTMENT OF STATE
95/06/06 Testimony: Winston Lord on Hong Kong
Bureau of East Asian and Pacific Affairs

Assistant Secretary Winston Lord

June 6, 1995

Senate Foreign Relations Committee Subcommittee on Asian and Pacific Affairs

Hong Kong's Transition to Chinese Sovereignty: Prospects for 1997

Introduction

Mr. Chairman, thank you for the opportunity to appear before you today to discuss Hong Kong's prospects as it approaches reversion to Chinese sovereignty in less than 800 days. I have just returned from a trip to Hong Kong, where I met with Governor Patten and Chief Secretary Chan, with Amcham and with local opinion leaders. I have included my most recent thoughts and observations in this testimony and would be pleased to further elaborate in the question and answer session. I would also like to include in the record a very important speech on these issues and US policy delivered by our Consul General, Richard Mueller, on May 2, 1995.

I would like to note at the outset, that in my meeting with Governor Chris Patten on May 20, he expressed his appreciation for U.S. policy and lauded the Hong Kong Policy Act report, delivered to Congress in March, as a "balanced and sensible" document. The Governor expressed concern over proposed legislation seeking to reopen the screening process for Hong Kong's 22,000 screened-out Vietnamese in detention camps and his view that this might be misread in the camps. The Administration supports the Comprehensive Plan of Action for Indochinese Refugees as the most humane means to resolve the problem of Vietnamese asylum-seekers in camps in Southeast Asia and Hong Kong.

Foundation of U.S. Policy

The Administration's policy toward the transfer of Hong Kong's sovereignty from the United Kingdom to China on July 1, 1997 is grounded in a determination to help preserve Hong Kong's stability, prosperity, and way of life. Let me review the basis of that policy. This Administration, like previous Administrations, supports the 1984 Sino-British Joint Declaration and the Basic Law, promulgated in 1990, as providing sound principles for the smooth transfer of power and a comprehensive and rational framework for continued stability and prosperity. The Joint Declaration established the concept of "one country, two systems" for Hong Kong and maintenance of local rule, with a "high degree of autonomy." While specific transitional arrangements are being worked out by China and the U.K., under these agreements Hong Kong will be broadly responsible for internal and economic affairs and China will assume responsibility from Britain for Hong Kong's foreign affairs and defense. Clearly, the Joint Declaration and the Basic Law, while granting Hong Kong a high degree of local autonomy, envisioned that China, as sovereign, would have considerable influence in the future Special Administrative Region.

It is in China's interest to implement faithfully the commitments made in these agreements. We strongly hope that it will. If so, Hong Kong will continue to be the vibrant, prosperous center it is today and make even greater contributions to a vibrant and prosperous China of the future.

U.S. Interests

The U.S. stake in Hong Kong's smooth transfer of sovereignty is strong and clear. We have important and longstanding commercial, cultural, and social ties with Hong Kong. U.S. commercial interests and presence in Hong Kong are an important component of Hong Kong's ability to thrive. The U.S. has $10 billion in investments in Hong Kong, making it one of the top five foreign investors. Two-way merchandise trade reached $21 billion in 1994, $11 billion of which was in U.S. exports. The largest American Chamber of Commerce outside the United States is in Hong Kong, and more American than British citizens now live in Hong Kong. Indeed, the 31,000 Americans comprise the second largest foreign presence in Hong Kong -- after Filipinos. Our interests are manifest not only in the size of our investments or of the resident population, but also in our educational exchanges and cultural contacts. An estimated 14,000 Hong Kong students are studying in the U.S. Hong Kong alumni of American universities number in the tens of thousands. We have numerous academic and cultural exchange programs and visits. Ninety thousand new Hong Kong business and tourist visas were issued in 1994. American media have an established and growing presence in Hong Kong. Many Hong Kong residents maintain homes in the U.S. or have emigrated here, enriching our society and strengthening the bonds of friendship between us.

Our official contacts are numerous. In addition to the many members of Congress and their staff who visit Hong Kong annually, in the past 12 months, there have been: -- 4 Cabinet-level visitors to Hong Kong, -- one Supreme Court Justice, -- 6 Assistant Secretary visits, -- an Under Secretary of the Treasury, -- a Federal Maritime Commissioner, -- Exim Bank Chairman, -- and countless other senior USG official visitors involved with various aspects of our multifaceted relationship with Hong Kong.

These bonds reinforce our natural humanitarian concern over the future of the six million people of Hong Kong. It is important that the people of Hong Kong not feel abandoned or isolated as they undergo the reversion to Chinese sovereignty. Their fate is also linked to the broader U.S. interest in ensuring regional security and stability. Just as a problematic transition would have major negative repercussions, so too a successful transition will reinforce confidence in the continued security and stability of the region.

China's Interests

In order to assess Hong Kong's prospects, one also needs to look closely at China's interests and stake in Hong Kong. Hong Kong has long provided China with an open, capitalist, market-oriented window on the world. In the early 1980s, PRC companies in Hong Kong numbered in the dozens. Today, there are an estimated 5,000 mainland companies, many of them state-financed, operating in Hong Kong. As much as two-thirds of foreign investment in China since 1980 has come through and from Hong Kong. Hong Kong companies are said to employ nearly 3 million people in neighboring Guangdong province alone. Hong Kong serves as a center for training and expertise for aspiring Chinese entrepreneurs and professionals. With one of the best harbors in the world and excellent state-of-the-art communications, banking, and shipping facilities, Hong Kong has served and will continue to serve not only as a trading entrepot and a favored place to do business, but also as an engine of growth throughout China.

In addition, China hopes that its resumption of the exercise of sovereignty over Hong Kong in 1997 and Macau in 1999 will serve as a positive example for Taiwan's eventual reunification with the mainland. Although the circumstances are quite different, at a minimum, this means that China has a strong incentive to assure that Hong Kong's reversion goes smoothly.

Requirements for Hong Kong's Continued Success

What then are Hong Kong's prospects? Hong Kong today is a stable and prosperous free port, the engine of South China's astounding economic growth and development, a society with a tradition of civil liberties, and respect for law and order. In recent years, it has taken steps toward the establishment of more representative government institutions. Hong Kong's economic development, which is well-known, hardly requires elaboration. Hong Kong remains one of the economic dynamos of Asia. Its per capita income has overtaken that of the U.K. and is now the second highest in Asia, its tax rates are admirably low (a flat 15 percent), and it runs persistent budget surpluses. Hong Kong's success is a consequence of its position as an entrepot and of enormous foreign investment that has entered in and passed through the territory. That investment was in part attracted by a system of laws and predictability which has grown and matured through the years. Investors rely on Hong Kong's rule of law, its transparent government procurement system, and its stable system of government. The high standards of the professional civil service have reinforced business confidence.

In order to retain this business confidence, Hong Kong, the U.K., and China must maintain conditions that make Hong Kong a continuing ideal address for international business. Implementation of the "high degree of autonomy" stipulated in the Joint Declaration is essential to future stability and prosperity. The PRC's fulfillment of its promise to maintain the free market system and the free flow of capital, for at least 50 years after reversion, is essential to continued business confidence. In addition, investors need to know there will be minimal government interference in business and predictable legal redress of contractual disputes. Continued development of democratic institutions, envisioned in the Joint Declaration and Basic Law, and protection of the rule of law, civil liberties and basic rights, are also essential to maintain local and international confidence in Hong Kong's future and in its importance as a regional base for trade and investment.

Realization of this promised "high degree of autonomy" is a key factor in the future of U.S.-Hong Kong relations and in Hong Kong's future international position. The United States will continue to support Hong Kong's participation in international multilateral fora such as APEC and GATT/WTO, as well as to maintain bilateral agreements such as civil aviation and extradition. Hong Kong's reversion requires that the U.S. and other nations recognize its continuing unique status under the Joint Declaration and the Basic Law -- for instance, by taking steps to continue Hong Kong's legal status as a separate customs territory for purposes of U.S. law. By enacting the U.S.-Hong Kong Policy Act in 1992, the United States has taken the steps necessary to recognize and support Hong Kong's continued enjoyment of a high degree of autonomy. In order to maintain its unique status, Hong Kong must be allowed to retain a high degree of autonomy after 1997.

Areas of Concern

Despite progress in some important areas which I will later discuss, and China's apparent readiness to resolve some outstanding economic and legal issues, let me first mention some problem areas. One main concern is stability in government structures, including the Legislative Council. Because of disagreements over the content of electoral reforms enacted in 1994, China has announced that it will disband the Legislative Council selected in 1995. China has indicated it may establish a provisional legislature after reversion until new elections are held under unspecified rules. The United States views the dispute over the electoral reforms with concern and regret because of the importance of stable governing structures to a smooth transition and to Hong Kong's prospects for continuing prosperity. China has declared its intent in the Joint Declaration and the Basic Law to have the people of Hong Kong govern themselves, an undertaking which included a legislature constituted through elections. It is our hope that, consonant with these promises, China and the current governing authorities in Hong Kong can reach agreement on a maximum degree of continuity. The best way to do this, and to ensure a smooth transition and maintenance of confidence, would be to permit those elected in 1995 to serve their full terms.

There are also two important legal areas in which the two sides have so far been unable to reach agreement: adaptation of local laws and the Court of Final Appeal. On the first -- adaptation of laws -- perhaps 1,000 items of law and 600 ordinances seem to conflict with the Basic Law, the designated 'mini-constitution' of the post-1997 Hong Kong Special Administrative Region. Many of the needed changes are minor, such as dropping reference to the Crown; others are substantive and more difficult. We have urged the negotiators to intensify their efforts to avoid needless uncertainty after the transfer of sovereignty.

According to Hong Kong's Attorney General, "few issues... are of more importance to our legal system and to the rule of law than the establishment of the Court of Final Appeal." The Court, to replace the current system of appeal to the Privy Council in London, is stipulated in both the Joint Declaration and the Basic Law. In 1991, the Sino-British Joint Liaison Group -- or JLG -- decided upon the numerical and national composition of the members of the court. Certain other aspects are still at issue, however, including who will select the five justices who are to be given lifetime appointments. We believe that establishment of the Court of Final Appeal before 1997 would be a crucial step to bolster confidence in Hong Kong's ability to operate an effective legal system after the transition and to avoid a damaging legal vacuum. Accordingly, we strongly urge China and Britain to agree to establish the court soon.

Progress in Transitional Arrangements

Much publicity has been accorded the Sino-British disagreement over transitional issues and the alleged erosion of confidence resulting from the politicization of some problems. To be sure, there is cause for concern. However, positive steps are being taken on some of the important issues that are essential to bolster international business and local confidence in the transition.

First, the Court issue aside, there has been positive movement in ensuring continuation of the legal system that has been an important cornerstone of Hong Kong's successful economic system. The Joint Liaison Group has, for example, registered progress in: -- ensuring that international agreements will continue to apply to Hong Kong after 1997; -- replacing U.K. metropolitan law with Hong Kong law; -- translating and modifying existing Hong Kong code; -- and strengthening links between Hong Kong and Chinese legal authorities.

An important element in Hong Kong's success and efficiency has been its professional and experienced civil servants. Their continued effectiveness is considered important in assuring a smooth transition and uninterrupted, reliable local government and public services. China also recognizes the importance of retaining Hong Kong's civil servants. There is, however, a mixed picture on the future of the civil service. On the one hand, the pace of localization of the civil service has increased, with department heads and senior officials rising from the ranks. Despite rumors there would be mass retirements, so far, there appears to be a normal pattern of turnover for Hong Kong Chinese in the civil service. In late 1993, Mrs. Anson Chan, a Hong Kong Chinese, was named Chief Secretary -- second ranking official in the Hong Kong government and head of the civil service. Later this year, Donald Tsang, a senior Hong Kong Chinese civil servant, will assume the position of Financial Secretary. On the other hand, we note that concerns have recently arisen over China's request to review the personnel files of certain senior civil servants of the Hong Kong government. Senior civil servants have recently been summoned to Beijing for interviews, making many in the career ranks uncomfortable at a time when Beijing should instead be reassuring them.

The JLG has also made considerable progress on treaties, agreements and legal issues. Of the 200 multilateral agreements extended by the U.K. to Hong Kong, agreement has been reached on the continued application of 150 agreements. The JLG has approved Hong Kong's continued participation in 30 international organizations. The JLG has also made progress on approval of bilateral agreements between Hong Kong and other governments.

The U.S. is currently negotiating or discussing with Hong Kong various treaties and agreements. Among the most important, from our perspective, are the extradition agreement, a mutual legal assistance agreement, air services, and a bilateral investment treaty with Hong Kong.

As a dependent territory of the United Kingdom, some of the U.K.'s laws have been extended to Hong Kong. With China's agreement, a program of "localization" of these laws -- separately establishing in Hong Kong law those laws that Hong Kong needs to retain after the transition -- has successfully taken place.

Of 300 laws in this category: -- half are no longer required and will lapse; -- 35 have been localized; -- and 32 have been agreed upon and are pending introduction into the Legislative Council. Sixty-eight more are under study by China.

Finally, a massive translation exercise, under way for several years now, is nearing an end and all laws will be in Chinese as well as English.

In 1988, the China Law Unit was established under the auspices of the Hong Kong Attorney General. The unit promotes understanding and exchanges with China's legal practitioners and is building a comprehensive database on Chinese law. The two sides have established strong relations which have spread to contacts with other legal institutions and agencies in China. Common interests have led to exchange visits between the Chinese Ministry of Justice and the Hong Kong government's lawyers. More exchanges are envisioned between judges, law faculties and law firms.

Conclusion

Hong Kong's reversion is very much a work in progress. These last 800 days of British rule are a very important and sensitive time. In addition to the difficult progress of Sino-British negotiations, China itself is in a state of transition to the post-Deng era. The single most positive element is China's own strong manifest interest in a successful reversion. Let us hope that Beijing will pursue enlightened policies that will promote its interests.

Much remains to be done to ensure a smooth transition and to maintain confidence. We -- and the American business communities in Hong Kong and in China -- believe that the best posture for the United States government at this time is to encourage the governments directly involved to intensify their efforts, to make clear that we have a substantial stake and interest in Hong Kong's future, and to do what we can to bolster local and international confidence. We do not seek to interfere in areas that are properly the responsibility of others and are aware that outside interference could be destabilizing. But we will continue to discuss transition issues regularly with both the U.K. and China, quietly urging maximum flexibility in the interests of the people of Hong Kong and those who do business there.

The transfer of the exercise of sovereignty from Great Britain, with its open society and its strong legal protections, to China, which is going through a process of rapid and unpredictable change, makes any of us hesitant to predict the future. Chinese leaders say that their goals for Hong Kong -- stability, prosperity, and predictability -- are the same as ours. The Administration's policy of comprehensive engagement with China is designed in part to encourage effective and cooperative pursuit of these goals. In addition, our policy seeks to encourage China to achieve a more stable, confident and open society, which in the long term will be the best guarantee of Hong Kong's future as a Special Administrative Region of China.

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