[Congressional Record Volume 144, Number 108 (Tuesday, August 4, 1998)]
[Extensions of Remarks]
[Pages E1544-E1546]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


  THE FOURTH QUARTERLY REPORT OF THE SPEAKER'S TASK FORCE ON THE HONG 
                            KONG TRANSITION

                                 ______
                                 

                           HON. DOUG BEREUTER

                              of nebraska

                    in the house of representatives

                        Tuesday, August 4, 1998

  Mr. BEREUTER. Mr. Speaker, this Member rises today to submit the 
Fourth Quarterly Report of the Speaker's Task Force on the Hong Kong 
Transition. It has been slightly more than one year since Hong Kong 
reverted to Chinese sovereignty on July 1, 1997. Prior to that historic 
event, and at your request, Mr. Speaker, this Member formed the House 
Task Force on Hong Kong's Transition. In addition to myself as 
chairman, the Task Force is bipartisanly balanced in its membership, 
including Representative Howard Berman (D-CA). Representative Sherrod 
Brown (D-OH), Representative Eni Faleomavaega (D-AS), Representative 
Alcee Hastings (D-FL), Representative Jay Kim (R-CA), Representative 
Donald Manzullo (R-IL) and Representative Matt Salmon (R-AZ).
  To date, the task force has prepared four quarterly reports assessing 
how the reversion has affected Honk Kong. The fourth report, which I 
submit today, covers the period of April through June, 1998, during 
which there was no actual visit to Hong Kong by the Task Force. (A 
visit had been scheduled during the July 4th district work period, but 
scheduling difficulties forced cancellation of the visit.) Despite a 
number of concerns about the ailing economy, as well as concerns in the 
areas of freedom of expression, the independence of the media, and the 
protection of intellectual property rights, we continue to describe the 
situation as ``so far, so good.'' Most notably, Hong Kong held 
remarkably successful elections for the first post-reversion 
Legislative Council.
  Mr. Speaker, this Member submits the Task Force report and asks that 
it be printed in full in the Record.

 The Speaker's Task Force on the Hong Kong Transition: Fourth Report, 
                             July 23, 1998

              (Presented by Hon. Doug Bereuter, Chairman)

       The following is the fourth quarterly report of the Task 
     Force on the Hong Kong Transition. It follows the first 
     report dated October 1, 1997, the second report dated 
     February 25, 1998, and the third report dated May 22, 1998. 
     This report focuses on events and development relevant to 
     United States interests in Hong Kong between April 1, 1998, 
     and June 30, 1998--the fourth quarter following Hong Kong's 
     reversion to China.
       It has been one year since Hong Kong reverted to Chinese 
     sovereignty on July 1, 1997. Looking back at those last few 
     weeks of June, 1997, we recall that the reversion was viewed 
     with a mixture of excitement and trepidation. Many observers, 
     both in Hong Kong and abroad, worried aloud that Beijing 
     might be unable to resist the temptation to meddle in Hong 
     Kong's internal affairs, despite China's commitment in the 
     Joint Declaration to ``one-country, two-systems'' and its 
     agreements to grant Hong Kong autonomy over all matters 
     except foreign affairs and defense for fifty years. Skeptics 
     questioned whether Hong Kong would continue its traditions of 
     freedom of expression and were concerned about the apparent 
     roll back in democratization of the new electoral system. 
     Businessmen wondered whether Hong Kong would maintain the 
     rule of law upon which its international commercial 
     prominence is based. Other observers, concerned with security 
     issues, questioned Hong Kong's continued ability to maintain 
     effective export controls.
       The fourth quarter following revision can briefly be summed 
     up as both ``good news and bad news.'' The good news was that 
     Hong Kong's citizens confounded political pundits by turning 
     out in record numbers for the first post-reversion election 
     of its Legislative Council. The bad news was that the 
     financial crisis which had engulfed much of southeast Asia 
     from mid-1997 finally, unfortunately, made its impact on Hong 
     Kong.


     Political Participation--A Surprisingly Enthusiastic Populace

       On May 24, Hong Kong held its first election for its 
     Legislative Council (LegCo) under the new, controversial 
     election law adopted by the post-reversion, Beijing-appointed 
     legislature. The new law rolled back key provisions of 
     election reforms finally instituted by the last British 
     colonial governor, Chris Patten, in 1995. For example, it

[[Page E1545]]

     maintained the original formula of twenty LegCo members to be 
     directly elected by popular vote, thirty to be elected by 
     ``functional constituencies'' (initiated by the British in 
     1985), and ten to be chosen by an Election Committee. 
     However, the ``functional constituent'' electorate was 
     reduced from approximately 2.7 million voters under the 1995 
     British reforms to about 180,000 voters. Of course, the 
     widespread view in Congress is that direct election is 
     preferable to functional constituencies and that the members 
     elected by the special Election Commission make the process 
     less than fully democratic.
       Because of the complex and cumbersome electoral system, 
     many observers predicted voter apathy and a low turnout. 
     Happily, these predications proved wrong. Despite torrential 
     rains, a record 53.3 percent of eligible voters cast ballots, 
     compared to 35,8 percent in 1995. The Democratic Party and 
     its allies won 65 percent of the popular vote, but were held 
     to only 20 of the 60 seats because of the complex elections 
     rules. The Democratic Party alone won 43 percent of the 
     popular vote and will be the largest party in the new LegCo. 
     In effect, Hong Kong's voters have created the first 
     opposition bloc in the history of communist-ruled China.
       Following the election, seven parties crossing ideological 
     lines and representing 41 of the 60 members of the new 
     legislature agreed on a blueprint to create jobs and revive 
     Hong Kong's ailing economy. In an extraordinary challenge to 
     C.H. Tung's notion of executive-led government, the coalition 
     threatened to block all of the administration's legislation 
     and funding unless it played ball. The two sides averted a 
     showdown by agreeing to a dialogue aimed at finding solutions 
     to Hong Kong's economic troubles.
       Many Hong Kongers now hope that the high voter turnout and 
     strong showing of the Democrats and their allies will hasten 
     the pace toward full universal suffrage. President Clinton 
     buoyed those hopes during his July 1-3 visit to Hong Kong 
     (the first by a sitting president), when he called for ``more 
     democracy, not less, and faster, not slower, strides toward 
     political freedom.'' Accelerating the pace toward universal 
     suffrage, however, would require amendment of the Basic Law, 
     Hong Kong's mini-constitution, which stipulates that a fully 
     directly elected LegCo will not be considered before the year 
     2007. Amendment, however, requires approval by both the chief 
     executive and China's National People's Congress, and thus is 
     viewed as highly unlikely.


                   Rule of Law--Freedom of Expression

       As we have noted in earlier reports, international 
     confidence in Hong Kong is based on the commitment of Hong 
     Kong's authorities to the rule of law inherited from the 
     British. An integral part of this is the ``check'' on the 
     abuse of authority provided by the free expression of 
     opinion. During this quarter, we find again that the 
     people of Hong Kong largely continue to express themselves 
     without restraint. On June 4, for example, more than 
     16,000 protesters held the first commemoration of the 
     Tiananmen Incident since reversion. While the crowd was 
     lower in number than in 1997, the high turnout belied 
     skeptics who had predicted interference. Similarly, 
     political activists protesting Japan's occupation of the 
     Diaoyu Islands (Senkakus) have operated freely. Hong Kong 
     authorities report that it has not denied any application 
     for a demonstration permit since reversion and that the 
     number of demonstrations has actually increased from an 
     average of 80 per month prior to reversion to between 150 
     and 160 per month.
       Hong Kong's media also continues to practice its 
     traditional vibrant style of journalism without overt 
     interference from authorities in Hong Kong or Beijing. 
     Nonetheless, concerns of self-censorship continue. The Hong 
     Kong Journalists Association, in its recently issued annual 
     report, noted that self-censorship was ``nor worse'' than in 
     the year prior to reversion. It noted, however, that concerns 
     were on the rise about the self-censorship of reporting on 
     independence-related activities in Tibet, Taiwan or Xinjiang. 
     Recently, for example, the Western media gave considerable 
     attention to a local Hong Kong television reporter who 
     claimed that his report on the independent movement in 
     Xinjiang was kept off the air for political reasons.
       This aspect of freedom of expression and how it applies to 
     expressions about certain sovereignty issues in China is 
     especially important because Hong Kong's Legislative Council 
     will soon be considering a measure to define subversion. 
     Moreover, Chief Executive Tung has widely stated that he 
     believes Hong Kong people should not be freely expressing 
     their support for independence for places like Taiwan, Tibet 
     and Xinjiang. Therefore, a crucial test of Hong Kong's 
     adherence to free expression will be whether mere expressions 
     of support for independence for those areas will be 
     punishable under law.
       Beijing authorities, however, continue to bend over 
     backward to avoid the appearance of direct interference. At 
     the time of Chinese Prime Minister Zhu Rongji's early April 
     visit to France, a senior Chinese foreign minister official 
     rebuked a Hong Kong television reporter accompanying the 
     visit after the reported asked Zhu what he felt about the 
     demonstrators. The subsequent uproar over this perceived 
     threat to press freedom led premier Zhu to publically 
     criticize the Chinese diplomat for having a ``bad attitude.'' 
     The controversy eventually died down.
       A fair and independent judiciary is another critical 
     element of international confidence in Hong Kong. In general, 
     the Hong Kong judiciary continues to operate independently 
     and without taint of political influence. During the past 
     quarter, we noted no new instances, as we did in the previous 
     quarter, which would call into question the judiciary's 
     independence or its vulnerability to Chinese influence.
       On a more positive note, the Hong Kong government clarified 
     in April that the first official post-handover human rights 
     report to be submitted to the United Nations by the SAR 
     government will not be amended by Beijing. This report is 
     submitted under the International Covenant on Civil and 
     Political Rights and the International Covenant on Economic, 
     Social and Cultural Rights. The report will be submitted 
     through Beijing, but will not be subject to Beijing's review.


                         Economic Developments

       Ironically, the greatest immediate threat to Hong Kong's 
     prosperity stems not from its reversion to China but from the 
     external events of the Asian Financial Crisis. It just posted 
     its second quarter of negative growth following a 2% 
     contraction in the first quarter of 1998. It is now clear 
     that Hong Kong is in a recession for the first time in 13 
     years. Almost no one (including Hong Kong officials) predicts 
     an early turnaround.
       This negative growth led to an unemployment rate of 4.5 
     percent in for the months April-June, a 15 year high, 
     concentrated in the retail, restaurant and transport sectors. 
     Retail sales dropped 16 percent in April over April 1997, due 
     largely to reduced tourism, a marked correction in the asset 
     markets and reduce local consumer demand. Additionally, Hong 
     Kong's real estate bubble has burst and commercial and 
     residential property prices at the end of June were 40% below 
     their bubble-priced highs of 1997, returning to their 1996 
     levels. The Hang Seng Index has followed the real estate 
     downward slide, falling at one point to 40% below its all 
     time high of August last year. It ended June at 8,543 points. 
     The market did not respond positively to the government's 
     stimulus package (described below), and also remained 
     concerned about the Japanese economy, China's commitment to 
     maintaining the renminbi, and regional economic woes. 
     Finally, Hong Kong's tourism industry has been badly affected 
     by the decline in visitors from the flagging economies of 
     East Asia, and Hong Kong is now projecting a minus six 
     percent growth in tourist arrivals and a decline of eight 
     percent in tourism revenues in 1998.
       The positive news in Hong Kong is that the Hong Kong 
     Government is responding. Chief Executive Tung proposed a 
     stimulus package of $5.67 billion U.S. dollars in June. The 
     multi-part package is aimed in part at easing the credit and 
     liquidity crunch by immediately exempting interest income 
     earned locally from profits tax and setting up a credit 
     guarantee system for small to medium businesses. The 
     government also suspended all land sales until next March--
     thus reducing the downward pressure on the real estate 
     market--while at the same time increasing assistance for new 
     home buyers. It also imposed a freeze on pay raises for top 
     civil servants. The stimulus package will force the highly 
     efficient civil service to wipe out an anticipated budget 
     surplus and to run a deficit of $2.7 billion U.S. dollars in 
     1998-1999--the largest deficit since the early 1980s. In 
     earlier measures, the government eased travel requirements 
     for travelers from both Taiwan and the mainland in an effort 
     to boost tourism. Confidence in the Hong Kong dollar remained 
     high, with the ratio of Hong Kong dollars to total bank 
     deposits in May unchanged from April's 57.7 percent, and the 
     ratio of foreign currency to total bank deposits ending the 
     month of May at a healthy 42.3 percent.
       Despite its considerable economic woes, Hong Kong still 
     maintains the third largest holding of foreign currency 
     reserves in the world. With $96.2 billion U.S. dollars, they 
     are behind only Japan and China in that category. Moreover, 
     Hong Kong has not jettisoned its free market ideology and 
     ranks 2d on the competitiveness rankings of the World 
     Economic Forum and 1st in the Heritage Foundation's ranking. 
     Negative economic growth and rising unemployment has put 
     strong pressure on authorities to ``untie`` the ``peg'' that 
     has bound the Hong Kong dollar to the U.S. dollar at HK $7.8 
     to one U.S. dollar for the past 15 years. Hong Kong 
     authorities have repeatedly assured skeptics that they have 
     both the foreign exchange reserves and the political will to 
     maintain the U.S./Hong Kong dollar linked exchange rate 
     system.


                              Trade Issues

       While the Asian Financial Crisis has seriously jolted and 
     hurt Hong Kong's economy, it has also highlighted Hong Kong's 
     serious and unhealthy dependence on entreport trade between 
     the United States and China. Entreport trade is one of the 
     few economic areas still registering positive growth as 
     compared, for example, to exports from domestic manufacturing 
     in Hong Kong.
       For Hong Kong, its reliance on entreport trade is both good 
     and bad. The United States is still growing and buying more 
     and more Chinese manufactured goods. This provides an 
     excellent export market for Hong Kong. Nevertheless, the bad 
     news for Hong Kong is that our current trade deficit with 
     China ($50 billion last year and projected to be $60 billion 
     this year) is politically and economically unsustainable. And 
     if the

[[Page E1546]]

     China trade deficit issue is not addressed by increased 
     market access for U.S. firms to China, then Hong Kong could 
     get hit with collateral damage from a frustrated America and 
     the U.S. Government--even if it does everything right.
       The pirating of movies, audio and software compact discs 
     continues to be the most serious bilateral trade issue 
     between the United States and Honk Kong. In recent months. 
     Hong Kong has stepped up its anti-piracy enforcement efforts 
     and implemented a new copyright law. The new law, among other 
     things, gives officials greater enforcement capabilities 
     against illicit production facilities. Hong Kong customs 
     authorities, which have had primary jurisdiction for 
     enforcing IPR legislation, were recently joined by Hong 
     Kong's highly respected Independent Commission Against 
     Corruption (ICAC), which combats corruption and triad-related 
     crime. The ICAC in April carried out a ``mega-raid'' that 
     netted over eight million video compact discs in the course 
     of an investigation against one of Hong Kong's most senior 
     customs officials (subsequently charged with tipping off a 
     pirating syndicate about planned raids). Not long after, 
     customs followed with a raid which yielded an additional 2.2 
     million compact discs. Further productive raids were made in 
     June.
       Despite these efforts, the intellectual property rights 
     (IPR) situation in Hong Kong remained sufficiently 
     troublesome of warrant its designation by USTR on the Special 
     301 Watch List for the third year in a row on may 1, 1998. 
     The ongoing IPR problem was demonstrated again when a pirated 
     pre-release version (``beta version'') of ``Windows 98'' 
     appeared on Hong Kong streets well before the official 
     release of the software in the United States. The local media 
     reports that Hong Kong authorities are considering stronger 
     measures to combat piracy, including applying the Organized 
     and Serious Crime Ordinance to violators (which would allow 
     their assets to be seized) and punishing landlords who lease 
     shops to retailers of pirated material.
       Money laundering also remains a very serious concern in 
     U.S. bilateral relations with Hong Kong. As we have noted in 
     earlier reports, the same favorable factors that make Hong 
     Kong one of Asia's most important financial centers also make 
     it attractive to criminals wishing to conceal the source of 
     their funds through money laundering. It is important that 
     Hong Kong work harder with the international community to 
     improve its laws and enforcement in this vital area. We note, 
     in that regard, that Hong Kong is a member of the Egmont 
     Group (the international group which combats money 
     laundering) and that Taiwan joined in June. Some observers 
     expect Taiwan's inclusion to create a new dynamic in East 
     Asian efforts to fight money laundering.


                      Security and Related Issues

       There are three primary security related issues with Hong 
     Kong--ship visits, PLA activities and export controls. First, 
     the U.S. Navy continues to enjoy an excellent relationship 
     with Hong Kong in terms of ships visit. With the loss of 
     Subic Bay as a major installation, these port-of-call visits 
     have become extremely important for the effective functioning 
     of our naval forces in East and Southeast Asia. The 
     relationship with Hong Kong port authorities since the 
     reversion has been outstanding. We are unaware of any 
     security problems in the 65 port calls since the reversion. 
     As an added benefit, the resident People's Liberation Army 
     (PLA) officials certainly have developed a better 
     appreciation of the power and flexibility of the U.S. Navy.
       The second security concern is related to the influence of 
     the PLA and the Chinese defense industries in Hong Kong 
     business. Certainly, there is concern regarding the PLA's 
     surreptitious acquisition of militarily sensitive 
     technologies. We have no evidence to date of direct 
     involvement by PLA entities in Hong Kong (estimated at nearly 
     200 companies) in acquisition of sensitive technology. Yet to 
     the extent that PLA entities operating in Hong Kong are 
     engaged in arms trading or acquisition of Western technology, 
     Hong Kong's relations with the U.S. will be put at risk. 
     Their activity, or lack thereof, will be an important 
     determinant in future congressional attitudes.
       The implementation of export controls is a third area of 
     security-related concern. We are pleased to note no new 
     incidents of export control violations to report this 
     quarter. Hong Kong continues to exercise autonomy as a 
     separate customs territory within China and to demonstrate 
     vigorous enforcement of its strict export control regime. 
     United States officials continue to conduct pre-license and 
     post-shipment inspections. Moreover, U.S. and Hong Kong 
     customs officials continue their close cooperation and, in 
     July, will hold the second in the most recent series of 
     consultations on licensing, enforcement and the exchange 
     of information.


                                 Macao

       The Portuguese colony of Macao will revert to Chinese rule 
     on December 20, 1999, after 442 years. Like Hong Kong, this 
     territory of 500,000 people, 95 percent of whom are ethnic 
     Chinese, will become a Special Administrative Region with a 
     ``one country, two systems'' formula for the next 50 years. 
     As we noted in our previous quarterly report, however, a 
     number of the transition issues for Macao are very different 
     from those faced by Hong kong. Unlike Hong Kong, for 
     instance, the legislature elected under colonial rule will 
     remain in place.
       While U.S. interests in Macao are not nearly as large as 
     those in Hong Kong, they nonetheless require our continued 
     attention. For example, the transhipment of textiles through 
     Macao continues. But primary among our economic concerns is 
     Macao's role as a manufacturing center for pirated goods, 
     particularly pirated compact discs. To date, Macao has yet to 
     develop adequate legislation, enforcement mechanisms and 
     manpower to tackle this problem. Macao also lacks legislation 
     on money laundering. It is in U.S. interests to press Macao's 
     authorities to move forward expeditiously to correct those 
     shortcomings.
       As we noted in our third quarterly report, Macao's 
     Portuguese administrators have still not made adequate 
     arrangements to replace themselves with local Macanese 
     officials and are well behind where the British were 18 
     months before the handover of Hong Kong. They have also 
     allowed the law and order situation to deteriorate. 
     Throughout the spring, news reports of gangland slayings and 
     attacks on public officials repeatedly filled the news, 
     seriously affecting Macao's tourism. China and Portugal 
     exchanged frequent barbs accusing each other of contributing 
     to the growing spiral of public violence. Finally, following 
     the early May firebombing of police chief's car, authorities 
     performed a massive crackdown, netting two dozen suspected 
     triad society members, including Macao's most notorious 
     gangster, ``Broken Tooth'' Wan. Local police have now been 
     reinforced by 20 criminal investigation experts from 
     Portugal. We applaud strengthened measures against organized 
     crime. It will be difficult for the territory to complete 
     smooth transition unless it brings the intolerable situation 
     under control.


                               Conclusion

       The Hong Kong Transition Task Force has ended our previous 
     three quarterly reports with the assessment ``so far, so 
     good.'' This time, we cautiously repeat that assessment, but 
     with a few caveats. On the economic front, we recognize that 
     the external forces affecting Hong Kong are beyond its 
     control and complicate the transition in unexpected and 
     unpredictable ways. We were encouraged by the demonstration 
     of support for democratic institutions shown in the May 
     election and applaud those elements pressing to accelerate 
     the move toward universal suffrage. We continue to be 
     satisfied with the restraint shown by the Chinese government 
     in its handling of Hong Kong, at least to the extent visible 
     to outside observers. We are concerned, however, by what 
     appears to be growing self-censorship, although we admit that 
     the phenomenon of self-censorship is difficult to document or 
     quantify. Undoubtedly, the coming months will bring new 
     challenges to Hong Kong and the region. It is important that 
     the international community and Congress continue to closely 
     monitor developments there.