Nervously Awaiting 1997

They're going from British benevolence to Communist control, and the people of Hong Kong are, well…uneasy.


It's often called the Manhattan of the Orient, but Hong Kong is more like Chicago or San Francisco, with a touch of London: superlative architecture, clean streets, a modern and efficient public transport system. It offers dramatic hilltop vistas and restaurants representing every cuisine of the world. Hong Kong is a melting pot where rich meet poor and East meets West, a giant-sized Petri dish in which the world's scientists can observe the culture of almost unadulterated capitalism. And on July 1, 1997, the future of this unique experiment will be entrusted to the largest Communist nation in the world, the People's Republic of China (PRC). Surely the PRC is changing, but the instability of its past raises great uncertainties about Hong Kong's future.

When the PRC raises its flag over Hong Kong, the world will witness one of the strangest peaceful assimilations of vastly different cultures in history. A country that commonly opens and inspects mail, tightly controls and censors the mass media, restricts its citizens' domestic and international travel, refuses to convert its people's currency into foreign exchange, and tells them when they may marry and how many children they may have, will gain sovereignty over a people and territory that currently rank among the freest in the world. The contrast in their economic and human-rights systems could hardly be more dramatic.

A casual observer will see business as usual in Hong Kong these days. The territory remains a shopper's and diner's paradise, and the streets bustle with activity. New construction progresses. A land auction in the New Territories (the relatively undeveloped northern part of the Hong Kong territory) in 1986 brought surprisingly strong prices.

Look more closely, however, and a different picture emerges. The two most noticeable construction projects turn out to be Hong Kong and PRC government projects: the Hong Kong Culture Center and a large Bank of China building. As a subtle warning to the Chinese, Hong Kong newspapers pay much attention to the increasing number of wealthy, professional people leaving the territory. The implication, of course, is that this flight of financial and human capital will only get worse as 1997 approaches unless the Chinese give some assurance that they won't wreck Hong Kong's successful economy.

The uncertainties of 1997 are also reflected in the housing market. One American working and living in Hong Kong told me that his family could not afford to buy, because bankers now treat new mortgages as margin accounts—if property values fall, borrowers must come up with additional payments to compensate banks for the loss of collateral. Since fewer people are willing to purchase housing on such terms, the resultant surge in demand for rental housing has caused rents to skyrocket. They are now about equal to mortgage payments on equivalent housing units, demonstrating a lack of long-term confidence from builders and buyers.

Although the transfer to China is eight years away, many Hong Kong citizens worry about their plight. The few with sufficient financial resources are leaving, or at least planning escapes for themselves and their families should it become prudent. The many, who have no choice, stoically continue with their daily business but openly express their concern to neighbor and visitor alike. The PRC has begun a liberalization program in mainland China, moving slowly toward freer markets and some personal liberties. But if it begins to backslide, and if observers begin to doubt whether China will honor promises to preserve (at least temporarily) Hong Kong's freewheeling system, uneasiness among the residents of Hong Kong could turn to panic as 1997 approaches.

The British-administered territory of Hong Kong consists of Hong Kong Island, Kowloon and the New Territories (attached to the mainland), and 235 other islands. The British have been in place since 1842, when China ceded Hong Kong Island at the end of the 1839–42 Opium War. In 1860, China agreed to cede more territory (Kowloon) following another war. Then Britain acquired the part of Hong Kong that lies to the north of Kowloon—the "New Territories"—in 1898 under a no-charge, 99-year lease. Expiration of the lease on July 1, 1997, proved pivotal in pressuring Britain to return Hong Kong Island and Kowloon to the PRC, as well.

The British have treated Hong Kong as a Crown colony, administering and governing according to its own laws. These laws are well defined and strongly support personal and legal rights and economic freedom. British citizens have always held the key administrative posts, and local political control has been minimal, though this is changing in an attempt to establish a democratic government before the 1997 transfer.

The PRC has always maintained that the cessions of territory to Britain were not legally binding. But the Chinese patiently awaited expiration of the New Territories lease and made clear that they would not extend the term. This could have been ruinous to Hong Kong (among other things, the PRC could close the airport, which lies within the New Territories). Seeking to avoid the military confrontation and to establish better relations with the increasingly trade-oriented PRC, Great Britain agreed to negotiate.

The British offered to give complete sovereignty over Hong Kong to the PRC in 1997, provided they could continue administering the territory for an additional 30–50 years. This proposal was strongly supported by most Hong Kong citizens, who felt that it would ensure a long period of business as usual. But the Chinese refused this offer, and eventually the two governments struck a deal that carries much more risk for Hong Kong citizens.

After transfer in 1997, Hong Kong is to become a Special Administrative Region of China. Hong Kong locals will govern, but the chief executive will be appointed by the PRC. A Chinese defense force will be stationed in Hong Kong, and it appears that Hong Kong locals may be subject to the military draft (right now, Hong Kong has no military). The PRC agreed to leave Hong Kong's capitalism in place for 50 years and not to tamper with the basic rights that citizens currently enjoy, such as the right to property, freedom of assembly, and a free press. (These are now included in a proposed PRC-drafted constitution for Hong Kong, along with an unprecedented "economic, bill of rights." See "Freedom from Communism?" by Alvin Rabushka, REASON, Dec.). After the 50-year period, the PRC is free to treat Hong Kong as it pleases and is widely expected to fully merge the territory and the mainland.

If the Chinese adhere to the Sino-British agreement, Hong Kong should fare quite well. Capitalism and freedom will survive at least temporarily, and the 50-year moratorium on significant change might give Hong Kong enough time to convince the PRC to tolerate its laissez-faire economy permanently. Optimists believe that mainland China itself will be very capitalistic by 2047. Pessimists—and if the exodus of people and capital is any indication, there are many of them—don't believe that the PRC will honor the agreement.

Certainly, it is difficult to imagine a stranger marriage. Mandarin is the official language of the PRC, while Cantonese is spoken in Hong Kong. Under free-enterprise capitalism in Hong Kong, income per capita is $6,000; under what is still predominantly state-planned socialism in the PRC, it is $300. On one recent human-rights ranking, China is in the same league as Bulgaria and Cuba, whereas Hong Kong, although it lacks democracy, rates very well. Marriage partners, goes the old saying, grow to look and act like each other over time. But can the ideology of 5 million Hong Kong residents dominate and reverse the ideology of 1 billion citizens of the PRC? Can the tail wag the dragon?

"The PRC should be more worried than Hong Kong," said a high-ranking official from the British Embassy in Beijing whom I met while traveling in China. His view was basically:

How you gonna keep 'em down on the farm after they see Hong Kong? He believes that cultural and economic interchange between the two will convince all of the superiority of the Hong Kong system.

This opinion is rather self-serving. The British do not want to be accused of selling out Hong Kong (this is the complaint of some locals I talked to). So the British argue that their agreement with China is likely to spread capitalism into the mainland. Perhaps it's already working. The vice-mayor of Dongguan, inside the PRC, decries big government and claims that his favorite economist is Milton Friedman. Chalk one up for the optimists.

Optimists also argue that China would be foolish to kill the goose that lays the golden eggs. Hong Kong is a vital seaport and source for more than a third of China's foreign trade. Its continued economic health is in the PRC's best interest. Pessimists rebuff this argument by suggesting that it is naive to think the Chinese would use free-market, capitalistic criteria in dealing with Hong Kong when these values have never held much sway in the PRC. Why wouldn't the "best" policies for the People's Republic also be the "best" policies for Hong Kong?

Optimists take comfort in the PRC's need to demonstrate that Hong Kong can flourish under its sovereignty if it ever expects to peacefully reunite with Taiwan. But Taiwan is unlikely ever to agree to a peaceful merger. It is an independent country with a sizable military force, not a disarmed administered territory whose fate can be settled by some third party. So if peaceful reunification is not a realistic goal, the PRC will have no reason to use Hong Kong as a showcase.

Pessimists also find it hard to imagine that the paternalistic Chinese would idly sit back and permit a decadent capitalistic enclave in their midst. Hong Kong with its wild discos, topless bars, and tolerant attitudes toward prostitution might be too much for the Central Committee to bear.

Hong Kong found a recipe for success with three essential ingredients: the rule of law, laissez-faire economics, and individual liberty. While traveling in Southeast Asia, I ran into a young man from Hong Kong who was on break from a university in the United States. Discussing the prospects for his country, I asked him whether the PRC's centralized social planning could ruin the economy there as it has ruined the economy of the mainland. His very American reply: "It'd be a piece of cake."

In the final analysis, the prognosis for Hong Kong depends critically upon the direction and magnitude of free-market reforms in China itself. Unfortunately for Hong Kong, many such reforms have stalled, and interventionist policies are regaining ground. A spokesman for the PRC, explaining his government's plans for combating inflation, suggested among other things "strengthening controls over free-market prices."

Deregulation of agriculture in 1980 under the "responsibility system" demonstrated how modernization reforms have engendered such policy reversals despite enormous productivity increases. The government allowed grain prices to rise to their market-clearing levels and gave farmers the freedom to grow whatever products they desired. The Chinese are great lovers of medicinal herbs, and some farmers shifted crop lands into herb production to meet consumer demand. This shift in resources, and the change in absolute as well as relative prices, frustrated the old-line central planners who know the socially "correct" prices and quantities of agricultural outputs.

Rising grain prices also produced a problem because pork prices had not also been decontrolled. With the cost of producing hogs up and their price artificially constrained, shortages of pork developed. Pork is now being rationed, and it appears that the planners will have more influence in mandating farmers' crop selections in the future. These policy reversals point to the fragility of the modernization program in the PRC and must raise the concerns of pessimists over the plight of Hong Kong.

While the outlook for Hong Kong remains uncertain, many people are getting out while the getting's good. A major "brain drain" is underway by yompies—"young outwardly mobile professionals." In 1987, for example, the Hongkong and Shanghai Banking Corporation lost 70 of its 600 executives to emigration.

Canada and Australia now are offering visas to investors. If an entrepreneur can pledge approximately a half million dollars in investments, he can obtain a visa without going through the usual immigration channels. Hong Kong officials hope that the emigrants will return once they obtain foreign citizenship and passports. Some have already, but the number of executives leaving exceeds the number who are returning by 760 percent.

Such a visa is beyond the financial reach of all but a few Hong Kong citizens. So the less well-to-do have had to become more creative. Necessity has given birth to "passport babies"—children born abroad, usually in the United States or Canada. The child becomes a citizen of the country of birth and upon reaching the age of 16 can petition for the immigration of his or her parents. The trick, I was told by one woman whose sister was in Hawaii awaiting her child, is to be as late in term as possible without yet appearing pregnant, because immigration officials will refuse admittance to anyone who is believed to be entering the country solely to have a child.

Although this is an expensive strategy, involving transportation, housing, and medical costs of about $10,000 and the risk of substantially higher outlays if there are complications at birth, I was told that passport babies are becoming quite common among families with one or more professionals. While on a plane to Thailand, I noticed the passports of the Hong Kong couple sitting next to me. Their own passports were Hong Kong, but their three-year-old's was Canadian. In 1997, their child will be 12—close to the 16-year age that would ensure immigration status for his parents. In Hong Kong, "family planning" entails an entirely different strategy from the PRC, where family planning revolves around the state's highly restrictive one-child policy.

Despite the available escape routes, the vast majority (97 percent, by one estimate) of Hong Kong's 5 million citizens lack the resources to leave prior to 1997. And after sovereignty is transferred, passport and visa controls, both in Hong Kong and in other countries, will likely be tightened to make exit even more difficult. Under the circumstances, it is remarkable that the people of Hong Kong are preparing for their fate so calmly—no public demonstrations, no efforts to ally themselves with other global powers that might protect them from the Chinese. It seems most citizens of this prosperous speck of land on the South China Sea are resolved to observe patiently the zig-zag course of reform in the PRC and to hope that, after 1997, the tail can wag the dragon.

Burton Abrams is a professor of economics at the University of Delaware.