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Dharmalingam Venugopal

AS IF to test the tenacity of its unique "one country, two systems" paradigm, Hong Kong has been constantly buffeted by challenges — economic, political and social ever since its reunification with China in July 1997. In the manner, perhaps, of its famous son and brand ambassador, Jackie Chan, the embattled city-state has been warding off the challenges gamely.

Barely a few months after its reunification, Hong Kong was sucked into the South-East Asian crisis, leading to a major stock market crash and a vicious attack on the Hong Kong dollar. Though Hong Kong survived the regional crisis with its currency's value and link to the US dollar intact and its economy the least affected, it is yet to come out of the recessionary aftermath of the crisis, which has been summed up as, "two recessions, five consecutive years of consumer price deflation, a collapse in property prices and a surge in personal bankruptcies".

Recession

Except for a short-lived spurt in 2000, Hong Kong's economy continues to be in the grip of a recession with negligible or negative real GDP growth. The number of jobless has risen to an all-time high of 8.7 per cent. Households living in extreme poverty have increased to an estimated 196,000 earning less than HK$4000 per month.

The once-vibrant property market remains in the doldrums despite historically low interest rates. Property transactions have plunged with prices continuing to fall. According to official statistics, home prices are down 65 per cent from their peak in 1997 and rents are down nearly 50 per cent. About 11 per cent of office space is reportedly lying vacant at present.

The resultant crash in property stocks, coupled with the collapse of hi-tech stocks recently, has left the Hang Seng index hovering around 11,000 points compared to the peak of over 16,000 before the crisis in 1997. Expectedly, the banking sector, which registered double-digit growth year after year in the decade preceding the crisis, has also been languishing since then. Low credit demand from consumers and companies, on the one hand, and competitive mortgage pricing, on the other, has left the banks high on liquidity and low on profits. The monetary authorities have no option but to postpone the long-awaited restructuring of the banking sector to better times.

Hong Kong's exports, which are twice as big as its GDP, have been sluggish or stagnant in the last five years hit by the global slowdown and political disturbances, including the Iran war.

The outbreak of the SARS virus last May added to the woes of a battered economy by hitting its key tourism industry hard. In the 100 days the scourge raged, the airline industry is estimated to have lost $4 billion.

Rating agency Standard and Poor's has predicted that this year's budget deficit would widen to more than 7 per cent of gross domestic product because of the SARS impact. Tourism officials say it would take at least a year for the number of arrivals to reach pre-SARS levels.

The latest to rock Hong Kong was the controversial National Security Legislation (Article 23) which was widely perceived as undermining its democratic credentials.

The Bill sought to impose stiff penalties for the violation of China's national security laws. Hong Kong citizens saw in the provisions of the Bill a direct threat to political, religious and media freedoms. Taking everyone by surprise, over half a million Hong Kongers took to the streets protesting the Bill, leading to the postponement of the legislation.

Problems

Hong Kong's present troubles are partly the result of the South-East Asian crisis which pricked its over-inflated property and stock market bubbles and the continuing global economic slowdown since then.

Despite this, Hong Kong remains one of the most expensive cities in the world. Though property prices have fallen significantly, they are still much higher than other key cities in the region. As a result, multinational corporations continue to shift their bases from Hong Kong to less costlier places such as Singapore, Seoul and Bangkok. Labour costs also continue to rule high. Hong Kong topped a recent survey for managerial pay.

Hong Kong's first self-government, under its China-backed Chief Executive Tung Chee Hwa, has compounded the troubles of the territory by seeking to be more loyal than the Chinese central government itself in infusing an element of nationalism and socialism into the erstwhile British colony.

For instance, Hong Kong has been grappling with the problem of abode-seekers, immigrants from China who had claims to citizenship in Hong Kong, right from 1997. The abode-seekers won a prolonged battle in Hong Kong law courts only to be overruled by China which re-interpreted the statue itself barring their further stay in the territory.

The recent setback in passing of the Securities Bill is also attributed to the unusual hurry and secrecy shown by the Hong Kong Government in pushing the Bill through.

Besides, according to critics, the Government's insistence on mother tongue as a medium of education soon after reunification and the increasingly restrictive immigration policies have lowered the standard of English and led to a shortage of skilled foreign workers, thereby blunting the international competitiveness of Hong Kong.

Hong Kong may also be fast losing its status as the gateway to China trade and business. Prior to reunification nearly half of China's trade passed through Hong Kong. That figure has come down to below 30 per cent. China's ports are now capable of handling its mounting trade at a lower cost. With matching advancements in communication and infrastructure, China's cities such as Beijing, Shanghai and Guongdong, can now attract foreign investments on their own.

In fact, last year, according to the World Investment Report of United Nations Conference on Trade and Development, while China came second as the most popular destination for foreign investment worldwide with investments amounting to $52.7 billion, Hong Kong ranked 15th, receiving 40 per cent less FDI than the year before or $13.7 billion.

Future

Notwithstanding the multiple challenges, analysts believe, Hong Kong's intrinsic strength as an international centre of finance, trade, logistics and tourism is intact and, if nurtured with proper policy support, it can over time offset the over-dependence of Hong Kong's economy on the property sector and the stock market.

However, they feel that the long-term growth of Hong Kong's economy will largely hinge on the extent to which it is able to leverage China's economic growth in the next 10-15 years.

It is in this context that the recently-signed Closer Economic Partnership Arrangement (CEPA) between Hong Kong and the Mainland has raised expectations on both sides. The arrangement, which will take effect from next year, covers three broad areas trade in goods, trade in services, and trade and investment facilitation. China has agreed to charge zero import tariff for 270 products of Hong Kong origin. The list is to be enlarged later. Similarly, a number of concessions have been offered for investments from Hong Kong. Analysts see good business opportunities for Hong Kong under the agreement. The import tariff waiver is likely to attract high value-addition and brand name manufacturing to Hong Kong. Besides, Hong Kong will have a "first mover" advantage when trade in services are liberalised under the WTO aegis. Analysts forecast that all these developments will put the Hong Kong economy back on the growth trajectory from the next year.

With its economy on the rebound and with its newly-gained mass political awareness, there is no reason why Hong Kong should not be on scheduled for 2007, when the Hong Kong people will have the constitutional right, as agreed to in the Basic Law, to directly elect their Chief Executive and the Legislative Council.

The "one country, two systems" formula governing Hong Kong was not born of great deliberations. It was an impromptu offer made by Deng Xiaopeng, the patriarch of modem China, when the UK (which had ruled and built the colony for a century and a half) insisted on a commitment that capitalism and freedom will be maintained in Hong Kong after the handover. History has no clue to any such experiment and few gave the idea more than a fighting chance.

The Basic Law which governs the city-state is categorical that Hong Kong will enjoy a high degree of autonomy to maintain its prosperity and stability. Hong Kong will retain its capitalist economy and social system for at least the next 50 years. The Basic Law has also set out the pace of democratisation in the territory.

China can have little reason to interfere in Hong Kong's affairs at this stage. As the former Chinese President, Mr Jiang Zemin, put it, "the well water does not interfere with the river water".

China would rather want to retain Hong Kong as a barometer of not only its economic progress but also its social and political changes. A strong, autonomous Hong Kong may also be the best bet for China to complete its Greater China ambitions by roping in Taiwan sooner or later under the "one country, two systems" formula.

(The author is an Economist with Indian Overseas Bank, Chennai. He can be contacted at dvenu@vsnl.net)

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